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Q2. BFG Limited is investigating the financial viability of a new product the S-pro. The S-pro is a short-life product for which a market has been identified at an agreed design specification. The product will only have a life of 12 months.
The following estimated information is available in respect of S-pro:

(1) Sales should be 1,200 units in the year. An average selling price of $1,050 per unit is expected. All sales are for cash.

(2) An 80% learning curve will apply for the first 700 units after which a steady state production time will apply, with the labour time per unit after the first 700 units being equal to the time for the 700th unit. The cost of the first unit was measured at $2,500. This was for 500 hours at $5 per hour.

(3) Variable overhead is estimated at $2 per labour hour.

(4) Direct material costs will be $514,000 for the year. All purchases are made for cash. A target net cash flow of $350,000 is required in order for this project to be acceptable.

a. Prepare detailed calculations to show whether product S-pro will provide the target net cash flow. (4 marks)

b. if four units take 1700 hours to produce, calculate actual rate of learning (2 marks)