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Dear F5 Professor
Hello sir
I might look silly…. but i dont know why the answer is
The $2500 additional monthly running costs of a new machine to be purchased to make an establiahed product. Since the new machine will save o labour time, the fixed overhead to be absorbed by the product will reduce by $100 per month.
So i answered like this . Please look at below
2500-100=2400
I regard a new machine as a cash flow and saving money should be deducted.
But the correct answer is just 2500
I dont know the specific reason.
Regard Benjamin
This is really relevant to Paper F9 rather than Paper F5.
Fixed overheads are only relevant if the total for the company changes.
Simply absorbing overheads means sharing the same total between various projects – it does not mean that the overall total for the company changes.
I do stress this in my F9 lectures on investment appraisal. (The lectures are a complete free course for Paper F9 and cover everything needed to pass the exams well)
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