Section A

Question 1
To: Chief Financial Officer
From: Jenny Joshua

Subject: Advise on the finding to plan for future production

Dear Chief,
I am writing this email to you with regard to give you a clear distinction between sunk
cost and opportunity cost, the minimum price to charge for the proposed contract such
that it would be neither better nor worse off as a result and the other factors that needs to
be considered before fixing the final price.

A) Distinction between sunk cost and opportunity cost;

Sunk Cost is a cost that has already been incurred and that cannot be recovered and
the Opportunity Cost is the value of a benefit foregone when one course of action is
chosen in preference to another.
An example of sunk cost from the scenario is the 10 units that were previously bought
for £160 per unit. It does not have any effect of the price increase as it will be applied
to future purchases.
An example of opportunity cost from scenario is if the order is accepted, all necessary
labour will have to be transferred from existing work. As a result, other orders will be
lost. The amount of orders £41 per hour lost would be the opportunity cost.

B) The minimum price to charge for the proposed contract

Material/ Labour Costs £ Working

Component X 480 Old price per unit =
160/10 = £16 per unit
New Price = 16 * 125%
 = £20 per unit
Unit Required = 3 units
per robotics
Total Price = 20 * 3 * 8=
£480
Component Y 0 Per Unit Price = 6500/25
= £25 per unit
As this component is not
regularly used and has no
alternative use, its scrap
value is 0 so the relvant
cost will also be £0
Component Z 920 = 5*23 = £115 * 8 = 920
Assembly Labour 2897 Relevant cost is
Opportunity cost = 41 per
hour
Hours required for each
unit = 25 Hours per unit
Total opportunity cost –
41*25 = £1025*8 = 8200
Plus, extra labour cost
1 unit = 12per hour* 23
hours = £276
2 units = 12* 22 = £264
3 units = 12* 21 = £252
4 units = 12* 20 = £240
5 units = 12* 19 = £228
6 units = 12* 18 = £216
7 units = 12* 17 = £204
8 units = 12* 16 = £192
 Total Relevant Cost =
1025 + 1872 = £2897
Inspection Labour 1075 6 hours per unit @ (£16
per hour + £16 *0.4
overtime) = £134.4 *8 =
£1075
Other Items 375 Given
Minimum Price 5747

The minimum price for eight robotics units should be £5747 as it would be neither better
nor worse off.
C) The factors to consider before fixing the final price
One of the directors has argued that the decision to produce the robotic units should
not depend entirely on financial considerations. There are other factors that needs to
be considered before finalizing a final price;
 Cost of Production: The cost of production is the most important factor in
pricing. No company can sell its products or services for less than their
production costs. Thus, prior to price fixing, it is necessary to compile and
keep in mind data relating to production costs. There are two kinds of costs:
Fixed and Variable costs. At the very least, the price should be able to recover
the variable cost, as the fixed cost is incurred whether or not production
occurs.
 Demand: Before setting prices, a thorough examination of market demand for
products and services should be conducted. If demand outnumbers supply, a
higher price can be set.
 Competitors Price: Prior to setting the price, it is necessary to consider the
prices of competing firms' products. In the face of fierce competition, it is
preferable to keep prices low.
 Purchasing Power of customers: What is the customers' purchasing power,
and how much and at what price can they buy? It should also be taken into
account.
 I hope I am able to advise you clearly on the above three issues clearly. Let me
know if you any further questions.

Regards,

Jenny Joshua.

Section B

Question 2

(a) Part on excel

(b) Issues that arise from the use of a standard costing system are as follows;
i. Standard costing variance reports that are prepared monthly and released many
days after the period may be ineffective.

ii. Standard cost variances are too broad and unrelated to specific product lines or
manufacturing batches. This makes determining the causes of variances and the
individuals responsible for the variances difficult.

iii. Standard costing encourages employees to conceal negative variances. Traditional

standard costing places an undue emphasis on direct labour, which is rapidly
becoming a minor factor of production.

iv. Standard costing measures performance in terms of the difference between actual
and expected costs. However, non-financial measures such as quality maintenance
and improvement, on-time delivery, customer satisfaction, and the like are equally
important in performance evaluation.

v. Because products have shorter life cycles, standards are only relevant for a limited
time.
vi. Simply meeting standards is not enough; continuous improvement may be
required to thrive in today's competitive environment.
Despite the aforementioned issues, standard costing has evolved into an extraordinary and
extremely useful tool, contributing significantly to the provision of various types of cost data for
a wide range of purposes.

Question 3 A and B on Excel

C)

To: Dr. Kessie

Date: 26/05/2022

Subject: Recommendation on choice of Scan Machine

Dear Dr Kessie,

By taking into consideration of the calculation of NPV and ARR in the part ‘a’ and ‘b’, we have
the following results;

Quick and Easy CT Scan Full Precision CT Scan

NPV 1035336.6 906338.3
ARR 209% 159%

A positive NPV indicates that the expected earnings from a project or investment exceed the
anticipated costs. It is assumed that a positive NPV investment will be profitable. When
comparing the NPV of two projects, the investor should choose the one with the highest NPV,
and in this case NPV of Quick and Easy CT scan was higher.

On the other hand, project is acceptable if the ARR is equal to or greater than the required rate of
return. In this case, both the projects are acceptable but the project with highest ARR will be
preferred.

Therefore, based on the aforementioned factors, you should invest in Quick and Easy CT Scan
Machines.

Thank You!
Q3 d

NPV ARR Payback Period

Advantages i. The primary i. Because ARR is The simplicity of the
advantage of using based on payback method is its
NPV is that it takes accounting data, most significant
into account the no other special advantage. It's a simple
concept of the time reports are way to compare several
value of money. To required to projects and then choose
determine an calculate ARR. the one with the shortest
investment's ii. The ARR method payback time.
viability, the NPV is simple to
calculation considers calculate and
the discounted net understand.
cash flows. iii. Because the ARR
ii. It facilitates the method is based
decision-making on accounting
process for profit, it measures
businesses. It not the profitability of
only aids in the an investment.
evaluation of
similar-sized
projects, but it also
aids in determining
whether a particular
investment is
profitable or loss-
making.
iii. If you want to pick
one project out of
 many, NPV is a
good indicator of
profitability.
Disadvantages i. It may become i. ARR disregards i. The payback
difficult to calculate time value of method's most
the opportunity cost. money. serious
This opportunity ii. The ARR method disadvantage is
cost is particularly disregards the that it ignores the
important in the cash flow from time value of
initial outlay. As a investment. money. Cash
result, iii. The ARR method flows received in
underestimating the does not take into the early years of a
initial outlay will account the project are given
distort the outcome. project's final more weight than
ii. The corporate value. cash flows
finance team may received later in
struggle to determine the project's life.
the rate at which ii. The largest cash
cash flows should be flows for some
discounted. A firm projects may not
should not use occur until after
WACC as a discount the payback period
rate, but rather the has ended. These
project's rate of projects may
return, and thus provide higher
incorrect estimation returns on
may result in higher investment and
or lower NPVs. may be preferable
iii. NPV is based on the to projects with
assumption that you shorter payback
can accurately assess periods.
 and predict future iii. A project's
cash flows. profitability is not
iv. It is an intuitively determined solely
difficult concept for by its short
some to grasp. payback period. If
the cash flows stop
or are drastically
reduced before the
payback period, a
project may never
return a profit,
making it an
unwise
investment.
iv. Some businesses
require capital
investments to
exceed a certain
rate of return;
otherwise, the
project is turned
down. The
payback method
does not take into
account a project's
rate of return.