Question Tag: scrap value

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  • 20 Marks

MI – May 2015 – L1 – SB – Q2 – Costing Methods

Prepare process accounts, normal loss account, and abnormal gain account for Maputo Nigeria Limited for Process 2 and Process 3.

MAPUTO NIGERIA LIMITED manufactures its product through three processes. The following data relates to Process 2 and Process 3 for the month of October:

  • 100,000 units at N10 each were transferred from Process 1 to Process 2.
Cost Components Process 2 (N) Process 3 (N)
Direct Materials 100,000 114,000
Direct Labour 135,000 100,000
Variable Expenses 30,000 53,500
Production Overhead 250,000 200,000
  • Normal output: 90% for Process 2 and 80% for Process 3
  • Actual output: 85,000 units for Process 2 and 70,000 units for Process 3
  • Scrap value of loss: N3 per unit for Process 2 and N2 per unit for Process 3

Required:
a. Prepare Process 2 and Process 3 accounts (16 Marks)
b. Prepare the Normal Loss account (2 Marks)
c. Prepare the Abnormal Gain account (2 Marks)

MAPUTO NIGERIA LIMTED
PROCESS 2 ACCOUNTS

a

i)

PROCESS 3 ACCOUNTS

ii)

b) NORMAL LOSS ACCOUNT

 

c) ABNORMAL LOSS ACCOUNT

ABNORMAL GAIN ACCOUNT

 

 

 

  • 14 Marks

MA – Nov 2018 – L2 – Q1a – Discounted Cash Flow

Assess the financial desirability of producing designer ceramic tiles by calculating the net present value in real terms.

Mawuena Ltd, a manufacturer of building materials, has recently suffered falling demand due to economic recession, and thus has unutilised capacity. Management has identified an opportunity to produce designer ceramic tiles for the home improvement market. It has already paid GH¢1.5 million for development expenditure, market research, and feasibility studies.

A new machine, with a useful life of four years, could be bought at GH¢6.5 million, payable immediately. The scrap value of the machine is expected to be 5% of the cost, recoverable a year after the end of the project.

The research and development division has prepared the following demand forecast:

Year 1 2 3 4
Demand (units) 110,000 130,000 150,000 145,000

The selling price is GH¢50 per box (at today’s price). Estimated operating costs, largely based on experience, are as follows:

Cost per box of tiles (at today’s price) GH¢
Materials cost 12.00
Direct labour 5.00
Variable overhead 2.50
Fixed overhead (allocated) 3.50
Distribution (Variable) 5.50

In addition to the initial cost of machinery, investment in working capital of GH¢0.2 million will be required in year two. Mawuena Ltd pays tax one year in arrears at an annual rate of 30% on returns from the project. Mawuena Ltd shareholders require a nominal return of 14% per annum after tax, which includes allowance for generally expected inflation of 5.55% per annum. (Ignore Capital Allowance).

Required:
Assess the financial desirability of this venture in real terms, computing the net present value offered by the project. (14 marks)

You should recognize that the proposed venture is to be assessed in real terms rather than money terms. This involves deflating the money terms discount rate and applying this to uninflated cashflows. You should also take care to include only relevant cashflows and to include the stated rate of taxation.

The real rate of return is calculated as:
(1+m)=(1+r)×(1+i)
Where m = money rate, r = real rate, i = inflation

In the case of this project, this becomes:
(1 + 0.14)=(1 + r)×(1 + 0.0555)
r= 8%

Allocated overheads are not relevant to this analysis as they will arise regardless of the decision being made.

The relevant operating costs per box are calculated as follows:

GH¢
Materials cost 12.00
Direct labour 5.00
Variable overhead 2.50
Distribution, etc 5.50
Total 25.00

Year-by-year cash flows and their discount factors:

Year 0 1 2 3 4 5
GH¢’000
Sales revenue 5,500 6,500 7,500 7,250
Variable cost 2,750 3,250 3,750 3,625
Contribution 2,750 3,250 3,750 3,625
Tax (30%) (825) (975) (1,125) (1,087.5)
Net Contribution 2,750 2,425 2,775 2,500 (1,087.5)
Initial investment (6,500)
Scrap value 325
Working capital (200) 200
Free Cash Flow (6,500) 2,750 2,225 2,775 2,700 (762.5)
Discount Factor (8%) 1.00 0.926 0.857 0.794 0.735 0.681
Present Value (GH¢’000) (6,500) 2,546.5 1,906.83 2,203.35 1,984.5 (519.26)

Net Present Value (NPV): GH¢1,621.92 million
As the net present value is positive, the project should be taken on.

Note: Initial research costs are sunk costs and should be excluded.

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