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Kit Question BPP

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Kit Question BPP

  • This topic has 1 reply, 2 voices, and was last updated 5 months ago by John Moffat.
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  • January 21, 2022 at 7:43 pm #647233
    James124
    • Topics: 124
    • Replies: 97
    • ☆☆☆

    Great Southern Co manufactures hairdryers for the hotel industry, which it sells for $12 each. Variable
    costs of production are currently $6 per unit. New production technology is now available which would
    cost $250,000, but which could be used to make the hairdryers for a variable cost of only $4.50 per
    unit.
    Fixed costs are expected to increase by $20,000 per year, 75% of which will be directly as a result of
    installing the new technology. Great Southern charges depreciation at 20% and seeks a return on its
    investments of at least 10%.
    The new technology would have an expected life of 5 years and a resale value after that time of
    $60,000. Sales of hairdryers are estimated to be 50,000 units per year.
    The management accountant has started preparing a spreadsheet to calculate the NPV of the project,

    In Question the sales contribution was asked to be calculated.
    The answer was given as $6- $4.5 = $1.5
    $1.5* 50,000 units= $75000.

    Why it is calculating benefiting extra contribution (6-4.5=1.5) instead of contribution after project which is 12-4.5= 7.5)? It is saying contribution after project so how can we get that it is either asking for benefiting extra contribution or the real contribution which is Sales – Marginal cost.

    January 22, 2022 at 10:06 am #647256
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49583
    • ☆☆☆☆☆

    The spreadsheet is being used to calculate whether or not the project is worthwhile. It will be worthwhile if the NPV of the extra cash flows is positive – they are considering spending $250,000 and need to know if the extra contribution (less the extra fixed costs) justifies spending the $250,000.

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