[Navinda]

50% after failed many times – still can’t believe it. I have made a small donation – Thank you ever so much John. You’re the best.

[Navinda]

Thank you ever so much Cath for taking time explaining it.

Sorry but I am just so confused because on the BPP revision kits says that “Residual income is calculated after deducting both depreciation on non-current assets and notional interest on the division’s capital employed.”

From the above am I wrong in thinking that the capital employed of $2.7 m then needs to be deducted by depreciation to arrive the net capital employed?

Many thanks for your time.
Navinda

[Navinda]

Hello John,
Could you possibly shed some light on this please?

A division is considering investing in capital equipment costing $2·7m. The useful life is 50 years, with no resale value. The forecast return on the initial investment is 15% per annum before depreciation. The division’s cost of capital is 7%

Answer :
Divisional profit before depreciation = $2·7m x 15% = $405,000 per annum.
(Less) depreciation = $2·7m x 1/50 = $54,000 per annum.
Divisional profit after depreciation = $351,000
Imputed interest = $2·7m x 7% = $189,000
Residual income = $162,000.

I don’t quite understand as to why the depreciation of $54,000 is only deducted to arrive the net profit but not Imputed interest? I thought it should be ($2.7 – $54,000) x 7% = $185,220 ?
Also if this was to calculate ROI, do we need to deduct depreciation to arrive the net capital employed?

Many thanks in advance

[Navinda]

Thank you ever so much! :))

[Navinda]

Hello John,

Could you possibly explain the route to arrive the answer in Part B (Robber Co.) please?

I understand that the labour hours is a limiting factor , therefore use labour hours for each unit of each products to find the contribution per limiting factor. Before I looked at the answer I only thought that I had to find the contribution per limiting factor. Because there is no Sale in the question, so I can’t find the contribution. Could you explain why we use saving from making in stead of contribution/unit in this question to find the priority of making please?

Many thanks for your help in advance
Navinda

[Navinda]

Will do and Thank you ever so much ?

[Navinda]

Hello John,

Another question for Wind Station.

Wind station :
A wind station can generate 1,750 gigawatts of electricity per year. It has a lifecycle cost of $55,000 per gigawatts and an average operating cost of $40,000 per gigawatts over its 20- years life.

If volt Co set a price to earn operating margin of 40% over the life a wind station , what will be the total profit per station (to the nearest $m)?

Solution :
Selling price = $40,000/60 = $ 66667
Life profit per gigawatts = $11,667( $66667- $55,000 )
Total lifetime profit = $408m ( 1,750* 20yrs * $11,667.

I’m terribly sorry to ask (it must be very easy) but I can’t get my head around as to why we divide $40,000 by 60%, would you mind explaining please?

Many thanks
Navinda

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