Ma Mock

Another one from me please! If we have OWIP 200 units (70% complete), 2650 units fully completed and 500 units of CWIP (40% complete), why do we have only 2710 EU of production? We are not given any indication in terms of FIFO or ADVCO method, therefore i would have calculated the 70% of OWIP completed, then added up the complete units and the 40% of CWIP that has been completed to get to the total EU of production. Effectively this would be 140+2650+200 =2990 but solutions seem to suggest 140-2650+200 instead? why are we subtracting OWIP? thanks

First question: The average profit is easily calculated as follows: The net cash inflow each year is 120,000 - 30,000 = 90,000. The depreciation each year is (300,000 - 20,000) / 5 = 56,000. Therefore the profit is 90,000 - 56,000 = $34,000 per year. The average capital employed is (300,000 + 20,000) / 2 = $160,000 Therefore the ARR = 34,000/160,000 = 21.25%

Second question: If 2,650 units were completed during the period, then this must include the 200 opening WIP because these will have been completed during the period. Therefore only 2,450 were completed from start to finish. So the effective units are (30% x 200) + 2,450 + (40% x 500) = 2,710