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LCH manufactures product X which it sells for RM5 per unit. Variable costs of production are currently RM3 per unit, and
fixed costs RM0.50 per unit. A new machine is available which would cost RM90,000 but which could be used to make
product X for a variable cost of only RM2.50 per unit. Fixed costs, however, would increased by RM7,500 per annum as
a direct result of purchasing the machine. The machine would have an expected life of 4 years and a resale value after
that time of RM10,000. Sales of product X are estimated to be 75,000 units per annum. LCH expects to earn at least 12%
per annum from its investments. Ignore taxation.
You are required to decide whether LCH should purchase the machine.Hi – thanks for your question & hope you are enjoying our CIMA resources.
We dont generally answer questions directly like this – previously we have been used as a homework-resource, where students post the full question and expect us to answer.
We assume you will have an answer in your textbook and you may then have a query or clarification needed based on the answer given.This seems very long for a CIMA BA2 question also- plus CIMA questions all in dollars – so not sure about the RM currency.
However, top tips to approach this question will be that only the future, INCREMENTAL costs and savings will be relevant.
So when you create your NPV calculation ( please use the videos for BA2 – ch19) make sure you only include the cashflows such as the 50 pence saving on the variable cost for example RM3 less 2.50 ( not the full RM2.50)
Hope that helps
Cath
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