Question 1

ABC Limited is considering the introduction of a new product: Telegram Wings (TW).
a) TW were developed at an R&D cost of $1M over past 3 years
b) New machine to produce TW would cost $2M
c) New machine lasts for 15 years, with salvage value of $50,000
d) New machine can be depreciated linearly to $0 over 10 years
e) TW need to be painted; this can be done using excess capacity of the painting
machine, which currently runs at a cost of $30,000 (regardless of how much it is used)
f) Operating cost: $40,000 per year
g) Sales: $400,000, but cannibalization would lead existing sales of regular widgets to
decrease by $20,000
h) Working Capital (WC): $250,000 needed over the life of the project
i) Tax rate: 34%
j) Opportunity cost of capital: 10%.

Required:
What do you think, whether ABC Limited should continue with this project or not. You can
employee any of the project evaluation technique, here Net present value is suggested.
Note: You are required to provide explanation why any of the above cost should not be
considered while evaluating the project.

Question 2
Standard costs and other date for two component parts used by General Manufactures are
presented below:

Part-A Part-B
Direct materials ($) 0.40 8.00
Direct labor ($) 1.00 4.70
Factory Overhead ($) 4.00 2.00
Standard Cost per unit ($) 5.40 14.70
Per year requirement (unit) 6,000 8,000
Machine hour per (unit) 4hours 2hours
Unit cost if purchased 5.00 15.00

In past year, General Manufacturer has manufactured all of its required components;
however, in the current year only 30,000 hours of otherwise idle machine time can be
devoted to component production. Accordingly, some of the pars must be purchased from
outside suppliers. In producing parts, factory overhead is applied at $60 per standard machine
hour. The fixed capacity cost, which will not be affected by any make –or –buy decision,
represents 60% of the applied factory overhead.

Required:
1. The relevant unit production cost to be considered in the make –or buy decision to
schedule machine time.
2. Potential cost saving per machine hour.
3. The units of Product A and B that General Manufacturer should produce if the
allocation of machine time is based on potential cost saving per machine hour.
Question 3
Northland's major towns and cities are maintained by local government organisations (LGO),
which are funded by central government. The LGOs submit a budget each year which forms
the basis of the funds received.
You are provided with the following information as part of the 20X2 budget preparation.
Overheads
Overhead costs are budgeted on an incremental basis, taking the previous year's actual
expenditure and adding a set % to allow for inflation. Adjustments are also made for known
changes. The details for these are:
Overhead cost category 20X1 cost Known changes Inflation adjustment
$ between 20X1 and
20X2

Property cost 120,000 None 5%

Central wages 150,000 Note 1 below 3%
Stationery 25,000 Note 2 below 0%

Note 1: One new staff member will be added to the overhead team; this will cost $12,000 in
20X2
Note 2: A move towards the paperless office is expected to reduce stationery costs by 40%
on the 20X1 spend
Road repairs
In 20X2 it is expected that 2,000 metres of road will need repairing but a contingency of an
extra 10% has been agreed.
In 20X1 the average cost of a road repair was $15,000 per metre repaired, but this excluded
any cost effects of extreme weather conditions. The following probability estimates have
been made in respect of 20X2:

Weather type predicted Probability Increase in repair cost

Good 0·7 0
Poor 0·1 10%
Bad 0·2 25%

Inflation on road repairing costs is expected to be 5% between 20X1 and 20X2.

New roads
New roads are budgeted on a zero base basis and will have to compete for funds along with
other capital projects such as hospitals and schools.

Required
1. Calculate the overheads budget for 20X2.
2. Calculate the budgets for road repairs for 20X2.
3. Explain the problems associated with using expected values in budgeting by an LGO
and explain why a contingency for road repairs might be needed.
4. Explain the process involved for zero based budgeting.