Test 5B (repeat 1) 16 August 2023 Engineering Business Management (EBM307B)
Time 60Min
Question1
13 Marks
Benny Company produces three products—A, B, and C. Data concerning the three
products
follow (per unit):
Product
Selling price
Variable expenses:
Direct materials
Other variable expenses
Total variable expenses
Contribution margin
A
$ 80
B
C
$ 56 $ 70
34
34
68
$ 12
15
37
52
$4
21
40
61
$9
The company estimates that it can sell 500 units of each product per month. The
same raw material is used in each product. The material costs $3 per pound with a
maximum of 5,000 pounds available each month.
Required:
Develop an Excel spreadsheet that will advise the company on:
A) Which orders the company should accept first, those for A, B, or C? Which
orders second? Third?
(6)
B) What is the maximum contribution margin that the company can earn per
month if it makes optimal use of its 5,000 pounds of materials?
(7)
………………………………………………………………………………………………
Question2
24 Marks
Benny Company has an opportunity to pursue a capital budgeting project with a
five-year time horizon. After careful study, Benny estimated the following costs and
revenues for the project:
Cost of new equipment needed
Installation of new equipment
Sale of old equipment no longer needed
Working capital needed
Equipment maintenance in Year 3
Equipment maintenance in Year 4
420,000
80,000
$40,000
$25,000
$24,000
$28,000
Annual revenues and costs:
Sales revenues (the information in question 1 apply here) but installing this
equipment makes 30% more raw material per year available.
Variable expenses (the information in question 1 apply here ). Assume 12 months in
a year.
Test 5B (repeat 1) 16 August 2023 Engineering Business Management (EBM307B)
Time 60Min
The new piece of equipment mentioned above has a useful life of five years and a
salvage value of $10000. At the end of the project’s 5-year life the equipment will be
converted to $10000 cash.
The old piece of equipment mentioned in the table above would be sold at the
beginning of the project and there would be no gain or loss realized on its sale.
Benny uses the straight-line depreciation method for financial reporting and tax
purposes.
The company’s tax rate is 30% and it’s after tax cost of capital is 16%.
When the project concludes in five years, the working capital will be released for
investment elsewhere within the company.
Required: Develop an Excel spreadsheet to model the cashflow of this
problem. As part of the evaluation calculate:
A) the annual income tax expense for each of years 1 through 5 that will arise as
a result of this investment opportunity.
(10)
B) the net present value of this investment opportunity.
(5)
C) the Internal Rate of Return in this project
(5)
D) Should they continue with the investment? Explain
(4)