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Manufactures car alarms Essay

Costs:
Materials: direct, variable1,600
Labour: direct, variable960
Labour: indirect, fixed280
Other production overheads: variable400
Other production overheads: fixed640
Selling overheads: variable480
Selling overheads: fixed360
Distribution overheads: variable280
Distribution overheads: fixed120
Administration overheads: fixed600
(5,720)
Net profit for the year1,480

Anhad is planning next year’s activity and its forecasts for the year ended 31 October 2014 are as follows: 1.A reduction in selling price per car alarm to RM8 per alarm is expected to increase sales volume by 50%. 2.Materials costs per unit will remain unchanged, but 5% quantity discount will be obtained. 3.Hourly direct wage rates will increase by 10%, but labour efficiency will be unchanged. 4.Variable selling overheads will increase in total in line with the increase in sales revenue. 5.Variable production and distribution overheads will increase in line with the 50% increase in sales volume. 6.All fixed costs will increase by 25%.

You are required to do the following:
a)Prepare a budgeted profit statement for the year to 31 October 2014 showing total sales and marginal costs for the year and also contribution and net profit per unit.
b)Calculate the break-even point for the two years and explain why the break-even point has changed. Comment on the margin of safety in both years.
c)Calculate the sales volume required (using the new selling price) to achieve the same profit in 2014 and in 2013.
d)A director comments that ‘with these figures, all we have to do to work out our budgeted profit is to multiply the net profit per unit by the units we want to sell”. Why is this statement incorrect?

Satnam Berhad is considering diversifying their business activities and they are currently reviewing two proposals. Proposal A is to launch their own television station whilst Proposal B is a joint venture with Kaboor Limited to launch a satellite that would enable the African region to receive advertisements for both company’s products.

The available data is follows:

Proposal A – TV Station
Initial set-up costs: RM250 million
Annual running costs: RM100 million
Estimated life of project: 5 years
Value of assets released at the end of the project: RM40 million Increased sales as a result of advertising products: RM60 million in the first year, growing cumulatively by 50% each year for the following four years.

Project B – Satellite
Initial set-up costs: RM700 million
Annual running costs: RM50 million
Value of assets released at the end of the project: RM10 million (Note: all the above to be shared 50/50 with Kaboor Limited)

Estimated life of the project is 6 years.

Increased sales for Satnam Berhad as a result of advertising their products in the African continent: RM80 million in the first year, growing cumulatively by 20% each year for the following five years.

Funding for both projects would be at a cost of capital of 6%.

Relevant discount factors at 6% p.a. are:

Year Cumulative

10.9430.943
20.8901.833
30.8402.673
40.7923.465
50.7474.212
60.7054.917

Required:

a)Using the net present value method of investment appraisal, critically evaluate the two proposals and make your recommendation to Satnam Berhad.
b)What other considerations should Satnam Berhad take into account in deciding which Project to pursue?


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