“Happy Your Self" ( HYS) Co. is evaluating an investment proposal to manufacture GB pen drives, which has performed well in test marketing trials conducted recently by the company’s research and development division. The following information relating to this investment proposal has now been prepared. Initial investment GH¢ 2 million Selling price (current price terms) GH¢ 20 per unit Expected selling price inflation 3% per year Variable operating costs (current price terms) GH¢ 8 per unit Fixed operating costs (current price terms) GH¢ 170,000 per year Expected operating cost inflation 4% per year The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of GB pen drives. Year 1 2 3 4 Demand (units) 60,000 70,000 120,000 45,000 It is expected that all units of GB pen drives produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of GB pen drives is planned to end. Required: Determine the relevant cash flows to be used to appraise the proposal of the manufacture of the GB pen drive.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
“Happy Your Self" ( HYS) Co. is evaluating an investment proposal to manufacture GB pen drives, which has performed well in test marketing trials conducted recently by the company’s research and development division. The following information relating to this investment proposal has now been prepared.
Initial investment GH¢ 2 million
Selling price (current price terms) GH¢ 20 per unit
Expected selling price inflation 3% per year
Variable operating costs (current price terms) GH¢ 8 per unit
Fixed operating costs (current price terms) GH¢ 170,000 per year
Expected operating cost inflation 4% per year
The research and development division has prepared the following demand
Year 1 2 3 4
Demand (units) 60,000 70,000 120,000 45,000
It is expected that all units of GB pen drives produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. No terminal value or machinery scrap value is expected at the end of four years, when production of GB pen drives is planned to end.
Required:
Determine the relevant cash flows to be used to appraise the proposal of the manufacture of the GB pen drive.
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