Question

2. NEW IDEA Lid New Idea Lid is considering a proposal to manufacture an innovative handheld computer incorporating an in-built options, futures & derivatives calculator, organiser and worldwide clock. The new product would be targeted at the modern professional trader operating in slobal financial markets. A Management Consultant has been hired at a cost of £20,000 to conduct market research/feasibility study. The manufacture of this new product would require the use of an existing machine, which although having no alterative use, has a net book value in financial accounts of £100,000. This machine has a disposal value of £50,000 if the proposal was rejected. A new production line would have to be set up at an initial investment of £350,000. Maintenance costs for the production machinery are expected to total £60,000 pa. All of the above equipment will be sold at the end of the product life cycle for £100,000. A special promotional campaign will be mounted for the first year of the project at a cost of £250,000 with an additional advertising budget of £50,000 per annum for the remainder of the project's life. Estimated unit selling price and costs (excluding production machinery & promotion): Per Unit Selling Price 120 Less: Direct Materials Direct Labour Variable Overheads General Fixed Overheads (absorbed using direct labour hours Surplus £85 Specific fixed costs relating to distribution of the computer will be £30,000 p.a... Required Identify and discuss the relevant costs and revenues associated with the management decision to commence production of the new computer.

Answer 1

Statement of Relevant Cost Management Consultant £20,000 Machinery Copportunity cost 150,000 Invertment 350,000 60,000 Maintenance Cart Promotional Expenses. 250,000 50,000 Advertisement Expensed fixed costs £210,000 30,000 Surplus - Las