P.9.19 Welcome Limited is considering the manufacture of a new product.

They have prepared the

following
estimate of profit in the first year of manufacture:
Sales, 9, units ! "s #$ "s. $,%%,
&ost of goods sold:
La'our (, hours ! "s #.) per hour "s 1,(,
*aterials and other varia'le costs +),
,epreciation (),
$,),
Less: &losing stoc- $), $,$),
.et profit +#,
The product is e/pected to have a life of four years. 0nnual sales volume is e/pected to 'e
constant over the period at 9, units. Production which was estimated at 1, units in the first
year would 'e only 9, units each in year two and three and %, units in year four. ,e'tors at
the end of each year would 'e $ per cent of sales during the year1 creditors would 'e 1 per cent of
materials and other varia'le costs. 2f sales differed from the forecast level, stoc-s would 'e ad3usted
in proportion.
,epreciation relates to machinery which would 'e purchased especially for the manufacture
of the new product and is calculated on the straight line 'asis assuming that the machinery would
last for four years and have no terminal scrap value. 4i/ed costs are included in la'our cost.
There is high level of confidence concerning the accuracy of all the a'ove estimates e/cept the
annual sales volume. &ost of capital is $ per cent per annum. 5ou may assume that de'tors are
realised and creditors are paid in the following year. .o changes in the prices of inputs or outputs
are e/pected over the ne/t four years.
5ou are re6uired to show whether the manufacture of the new product is worthwhile. 2gnore
ta/es.
Recommendation:
Since the .P7 is positive the manufacture of new product is worthwhile.