Caroline plc is evaluating a potential new product, the grinder, with which the following costs are connected: Each grinder requires 0.5 hour of skilled labour and 2 hours of unskilled labour; the company expects to have a surplus of skilled labour for the next year (which the company would still pay at a full wage), sufficient for production of the grinders but all other labour requirements will be hired at a cost of £4 per hour for skilled and £2.50 per hour for unskilled labour. Three materials are required: 2 kg of Material A, 0.5 Kg of Material B, and 1.5 kg of Material C. The company does not have any of A, but has enough B to meet the entire production requirements; B is not used in the company any more. C is used regularly in other products and the company has 10,000 kg in inventory. Costs are as follows: A B C Cost of inventory £2.00 £0.70 Current market price £1.40 £2.20 £0.80 Resale value £1.10 £1.80 £0.65 Variable overheads, which represent an additional cash expense, are incurred at the rate of £1.40 per skilled labour hour. A new building will need to be rented at a cost of £20,000 pa and will be paid at the start of each year. General administration overheads will be absorbed into the project at a rate of £0.75 per unskilled labour hour. The company estimates it will make and sell 12,000 per annum for the first three years at a price of £20, but then will have to drop the price to £15 and will still only sell 8,000 in the fourth year. Specialised machine will be bought for the project at a cost of £250,000 and sold for an estimated £50,000 after four years. The company has a straight line depreciation policy. Caroline estimates its cost of capital as approximately 15%. The company has already spent £40,000 on researching the market and on design costs; it still owes a further £10,000 to a market research company which it has not yet paid. Calculate the Net Present Value of the proposal and hence advise whether it should proceed. Work to the nearest £1,000 throughout.

Caroline plc is evaluating a potential new product, the grinder, with which the following costs are connected: Each grinder requires 0.5 hour of skilled labour and 2 hours of unskilled labour; the company expects to have a surplus of skilled labour for the next year (which the company would still pay at a full wage), sufficient for production of the grinders but all other labour requirements will be hired at a cost of £4 per hour for skilled and £2.50 per hour for unskilled labour. Three materials are required: 2 kg of Material A, 0.5 Kg of Material B, and 1.5 kg of Material C. The company does not have any of A, but has enough B to meet the entire production requirements; B is not used in the company any more. C is used regularly in other products and the company has 10,000 kg in inventory. Costs are as follows: A B C Cost of inventory £2.00 £0.70 Current market price £1.40 £2.20 £0.80 Resale value £1.10 £1.80 £0.65 Variable overheads, which represent an additional cash expense, are incurred at the rate of £1.40 per skilled labour hour. A new building will need to be rented at a cost of £20,000 pa and will be paid at the start of each year. General administration overheads will be absorbed into the project at a rate of £0.75 per unskilled labour hour. The company estimates it will make and sell 12,000 per annum for the first three years at a price of £20, but then will have to drop the price to £15 and will still only sell 8,000 in the fourth year. Specialised machine will be bought for the project at a cost of £250,000 and sold for an estimated £50,000 after four years. The company has a straight line depreciation policy. Caroline estimates its cost of capital as approximately 15%. The company has already spent £40,000 on researching the market and on design costs; it still owes a further £10,000 to a market research company which it has not yet paid. Calculate the Net Present Value of the proposal and hence advise whether it should proceed. Work to the nearest £1,000 throughout.

Principles of Cost Accounting

17th Edition

ISBN:9781305087408

Author:Edward J. Vanderbeck, Maria R. Mitchell

Publisher:Edward J. Vanderbeck, Maria R. Mitchell

Chapter10: Cost Analysis For Management Decision Making

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3. Caroline plc

Caroline plc is evaluating a potential new product, the grinder, with which the following costs are connected:

Each grinder requires 0.5 hour of skilled labour and 2 hours of unskilled labour; the company expects to have a surplus of skilled labour for the next year (which the company would still pay at a full wage), sufficient for production of the grinders but all other labour requirements will be hired at a cost of £4 per hour for skilled and £2.50 per hour for unskilled labour.
Three materials are required: 2 kg of Material A, 0.5 Kg of Material B, and 1.5 kg of Material C. The company does not have any of A, but has enough B to meet the entire production requirements; B is not used in the company any more. C is used regularly in other products and the company has 10,000 kg in inventory. Costs are as follows:

	A	B	C
Cost of inventory		£2.00	£0.70
Current market price	£1.40	£2.20	£0.80
Resale value	£1.10	£1.80	£0.65

Variable overheads, which represent an additional cash expense, are incurred at the rate of £1.40 per skilled labour hour. A new building will need to be rented at a cost of £20,000 pa and will be paid at the start of each year. General administration overheads will be absorbed into the project at a rate of £0.75 per unskilled labour hour.
The company estimates it will make and sell 12,000 per annum for the first three years at a price of £20, but then will have to drop the price to £15 and will still only sell 8,000 in the fourth year.
Specialised machine will be bought for the project at a cost of £250,000 and sold for an estimated £50,000 after four years. The company has a straight line depreciation policy.
Caroline estimates its cost of capital as approximately 15%.
The company has already spent £40,000 on researching the market and on design costs; it still owes a further £10,000 to a market research company which it has not yet paid.

Calculate the Net Present Value of the proposal and hence advise whether it should proceed. Work to the nearest £1,000 throughout.

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