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Hi John
Please could you help strengthen my understanding of investment appraisal here. In Charm co question (June 06) fixed costs are dealt with as, well….fixed costs!! Although this makes sense in part, why do we not use the absorbed rate stated each year of $4 per game? Has this something to do with the relevant cash flow? Why are we taking the first years sales for all years for the fixed cost of the project?
Also the tax saving on the $800,000 investment. There is no mention of capital allowance. Does this mean that the rule of thumb is if capital allowance rates are not mentioned we should assume tax allowances on depreciating assets should be returned in full (here 30%)?
This question is from an exam that was 16 years ago and I only keep exam questions for the last 15 years!
However, by definition, total fixed costs do not change with the level of activity. Therefore unless told otherwise the total fixed costs will be the same each year.
As fas as capital allowances are concerned, questions always tell you how capital allowances are to be calculated, and having looked at a previous reply by me to a question in 2013 it seems that this question did also.
See https://opentuition.com/topic/acca-june-2006-q5-charm-plc-re-npv/but this question is there in kaplan exam kit charm ink 251
srry sir..but i didnt understand..can u make it more clear sir?
the production (units) for yr 1 -150 .yr 2-70 , yr 3 and 4 -60
fixed cost is $4 per game
therefore fc must be 150*4=600 for yr1 and year 2- 70*4=280 n yr 3&4- 60*4=240 ryt??
but they have taken 600 as fc for all 4 years..why??It may be in the Kaplan Kit, but I only have the BPP Revision Kit and they removed it many years ago.
It is as I explained before. Total fixed costs (by definition) do not change with the level of activity. The total was 600 in the first year and will therefore stay in total at 600 whether they produce more or less. For costing purposes they absorbed it as being $4 per unit in the first year (and the absorbing itself is revision from Paper MA), but total fixed costs do not change unless you are specifically told that they change for some reason other than changes in the level of activity.
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