Worldwide Limited is involved in transportation and distribution. The company is considering purchasing a new delivery lorry. The new lorry will reduce annual rental expenses by RM100,000. Two latest models “Super Rider” and “Rough Rider” are available in the market. The information relating to these two models is given: Super Rider Rough Rider Purchase Price RM200,000 RM230,000 Operating costs per year RM15,000 RM20,000 Overhauling costs in year 3 RM12,000 - Overhauling costs in year 4 - RM14,000 Salvage value RM20,000 RM30,000 Useful life 5 years 5 years The company has decided to capitalize overhauling expenses and include them as part of the cost of the lorry in the year it is incurred. The company use staright line method to depreciate its vehicles. The corporate tax rate is 25%. The firm costs of capital is 15%. Required: Calculate the initial outlay
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.
Worldwide Limited is involved in transportation and distribution. The company is considering purchasing a new delivery lorry. The new lorry will reduce annual rental expenses by RM100,000.
Two latest models “Super Rider” and “Rough Rider” are available in the market. The information relating to these two models is given:
|
|
Super Rider |
Rough Rider |
|
Purchase Price |
RM200,000 |
RM230,000 |
|
Operating costs per year |
RM15,000 |
RM20,000 |
|
Overhauling costs in year 3 |
RM12,000 |
- |
|
Overhauling costs in year 4 |
- |
RM14,000 |
|
Salvage value |
RM20,000 |
RM30,000 |
|
Useful life |
5 years |
5 years |
The company has decided to capitalize overhauling expenses and include them as part of the cost of the lorry in the year it is incurred. The company use staright line method to depreciate its vehicles. The corporate tax rate is 25%. The firm costs of capital is 15%.
Required:
- Calculate the initial outlay
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