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relevant cost

AAmrit4y ago
Sir, I got nothing left other than texting you full question.... i desperately need help on finding the answer of B and C thank you in advance ? Mrs Glam wants to expand her clothes shop. Mrs Glam has commissioned a market research company at a cost of $3,000 to research her options for her. The company have offered two options: Option 1 Remain in her the current premises and undertake an advertising campaign at a cost of $2,000 to increase the profile of the shop in the area. It is estimated that revenue will increase by 10% from its current level of $50,000 per year. The contribution earned on revenue is 30%. Option 2 Move the shop to a more central location and undertake an advertising campaign to both increase the profile and the move to new premises. This more extensive campaign would cost $4,000 but revenue would be expected to increase by 18% from its current level. The level of contribution earned on revenue is not expected to change. There would be further costs involved in moving location which have been estimated: ? Moving costs are estimated to be $1,500. This includes the cost of refitting the shop, and would be payable immediately ? New shop fittings will be required costing $2,500. These will be depreciated on a straight line basis. ? Rates of $4,000 will be payable yearly in advance. This cost is 15% higher than Mrs Glam currently pays, due to the location. Other information ? Mrs Glam uses a cost of capital of 10% ? The expansion is to have a life of 4 years. Required: (b) Calculate the present value of the INCREMENTAL contribution cash flow that will arise if option 2 is compared to option 1. (c) Calculate the present value of the cash flows relating to the INCREMENTAL rates that will arise if option 2 is compared to option 1
John MoffatJohn MoffatTutor4y ago#1
You must have an answer to this question in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about. For part (b) you need to calculate the extra (which is what incremental means) cash flows if the do option 2 instead of option 1. For part (c) you need to discount the extra cash flows in the normal way. However, it is not possible for this question to be asked in Paper MA because of the format of the exam.
AAmrit4y ago#2
It is in Kaplan specimen exam question And I literally didn’t get that Could you please elaborate it sir !
AAmrit4y ago#3
Incremental contribution is asked there So I am confused of the word CONTRIBUTION, can we include incremental fixed costs here or not
John MoffatJohn MoffatTutor4y ago#4
It is very odd for the Kaplan example to have used the term 'contribution cash flow' because it is pretty meaningless. I can only assume that they are meaning you to ignore the fixed costs in part (a). Is the question in the Study Text or in the Exam Kit? Because, again, this question could not possibly be asked in the real exam because the format of the exam no longer allows questions like this to be asked. (I assume that you are using current editions of the books? Most important is to attempt questions in the Exam Kit because they are representative of the types of questions that can be asked in the exam.)
AAmrit4y ago#5
its september 2020 to august 2021 thank you for the information John. ?
John MoffatJohn MoffatTutor4y ago#6
You are welcome :-)
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