Year 1 Year 2 Total % Year 1
Revenue 500 2,000 2,500 100% 600
R&D 700 - 700 28% 450
Design of product 115 85 200 8% 105
Manufacturing 25 275 300 12% 110
Marketing 160 340 500 20% 150
Distribution 15 60 75 3% 24
Customer service 50 325 375 15% 45
Total costs 1,065 1,085 2,150 86%
### 884
Profit 350 14%
Year 2 Total % Year 1 Year 2 Total %
900 1,500 100% 1,000 600 1,600 100%
- 450 30% 240 - 240 15%
15 120 8% 76 20 96 6%
100 210 14% 165 43 208 13%
120 270 18% 208 240 448 28%
36 60 4% 60 36 96 6%
105 150 10% 220 388 608 38%
376 1,260 84%
### 969 727 1,696 106%
240 16% (96) -6%
Problem 2:
PV of 3 years 2.486
Running cost 99,440 150,000 249,440 100,338
PV of 2 years 1.735
Running cost 104,100 100,000 204,100 117,637
Problem 3:
Years Given Life NPV Probability
3 20 (101,000) 0.08 (8,080)
4 50 (33,000) 0.20 (6,600)
5 100 29,000 0.40 11,600
6 70 86,000 0.28 24,080
7 10 137,000 0.04 5,480
250 26,480
R&D Expenses 1,000,000 Option a)
Clinical trials 2,108,000
Price
Sales volume
Cost Fixed Costs Variable cost/Unit Revenue
Manufacturing 5,000,000 68 R&D Expenses
Packaging 380,000 20 Clinical trials
Distribution 1,125,000 6.5
Advertising 2,280,000 12 Costs:
Manufacturing Fixed
Selling Price/Unit 235 Variable
Annual Sales Voume 3,000,000 Packaging Fixed
Discount Rate 10% Variable
Distribution Fixed
Fixed Costs Variable cost/Unit Variable
b) Manufacturing 1,500,000 80 Advertising Fixed
Variable
c) Patent S 300,000,000 25000000 for 5 years Sub-total Costs
Total Costs
Operating Revenue
Option b) Option c)
235 Price 235 Sales 300,000,000
3,000,000 Sales volume 3,000,000
705,000,000 Revenue 705,000,000 Sales 25,000,000
Years 5
1,000,000 Option a) 1,000,000
5-year
2,108,000 0 2,108,000 annuity 3.791
value
Costs:
5,000,000 ManufacturFixed 1,500,000 PV 94,775,000
204,000,000 Variable 240,000,000
380,000 Packaging Fixed 380,000 Total Sale 394,775,000
60,000,000 Variable 60,000,000 proceeds
1,125,000 Distributio Fixed 1,125,000
19,500,000 Variable 19,500,000
2,280,000 AdvertisingFixed 2,280,000
36,000,000 Variable 36,000,000
328,285,000 Sub-total Costs 360,785,000
331,393,000 Total Costs 363,893,000
373,607,000 Operating Revenue 341,107,000
Decimals reduced in this sheet. All other figures are same as mentioned in Pr.4
R&D Expenses 1,000 Option a)
Clinical trials 2,108
Price
Sales volume
Cost Fixed Costs Variable cost/Unit Revenue
Manufacturing 5,000 68 R&D Expenses
Packaging 380 20 Clinical trials
Distribution 1,125 6.5
Advertising 2,280 12 Costs:
Manufacturing Fixed
Selling Price/Unit 235 Variable
Annual Sales Voume 3,000 Packaging Fixed
Discount Rate 10% Variable
Distribution Fixed
Fixed Costs Variable cost/Unit Variable
b) Manufacturing 1,500 80 Advertising Fixed
Variable
c) Patent S 300,000 25000000 for 5 years Sub-total Costs
Total Costs
Operating Revenue
Option b) Option c)
235 Price 235 Sales 300,000
3,000 Sales volume 3,000
705,000 Revenue 705,000 Sales 25,000
Years 5
1,000 Option a) 1,000
5-year
2,108 0 2,108 annuity 3.791
value
Costs:
5,000 ManufacturFixed 1,500 PV 94,775
204,000 Variable 240,000
380 Packaging Fixed 380 Total Sale 394,775
60,000 Variable 60,000 proceeds
1,125 Distributio Fixed 1,125
19,500 Variable 19,500
2,280 AdvertisingFixed 2,280
36,000 Variable 36,000
328,285 Sub-total Costs 360,785
331,393 Total Costs 363,893
373,607 Operating Revenue 341,107
Original problem Original problem- Remo
Option (a) Option (b) Option (a)
Price 400 Price 370 Price
Sales volume 400,000 Sales volume 440,000 Sales volume
Revenue 160,000,000 Revenue 162,800,000 Revenue
R&D and Design Costs 10,000,000 R&D and Design Costs 10,000,000 R&D and Design Costs
Costs: Costs: Costs:
Manufacturing Variable 60,000,000 ManufacturVariable 66,000,000 Manufacturing
Variable-Batch 4,800,000 Variable-B 4,800,000
Fixed 18,000,000 Fixed 18,000,000
Marketing Variable 12,800,000 Marketing Variable 14,080,000 Marketing
Fixed 10,000,000 Fixed 10,000,000
Distribution Variable 7,000,000 0 Variable 7,000,000 Distribution
Fixed 7,200,000 Fixed 7,200,000
Customer service Variable 6,000,000 customer sVariable 6,600,000 Customer service
Sub-total Costs 135,800,000 Sub-total Costs 143,680,000 Sub-total Costs
Operating Revenue 24,200,000 Operating Revenue 19,120,000 Operating Revenue
(b) 7.36% (b)
Original problem- Removing thousands
Option (b)
400 Price 370
400 Sales volume 440
160,000 Revenue 162,800
10,000 R&D and Design Costs 10,000
Costs:
Variable 60,000 ManufacturVariable 66,000
Variable-B 4,800 Variable-B 4,800
Fixed 18,000 Fixed 18,000
Variable 12,800 Marketing Variable 14,080
Fixed 10,000 Fixed 10,000
Variable 7,000 0 Variable 7,000
Fixed 7,200 Fixed 7,200
Variable 6,000 customer sVariable 6,600
135,800 Sub-total Costs 143,680
24,200 Operating Revenue 19,120
7.36%
Original problem Original problem- Remo
Option (a) Option (b) Option (a)
Price 400 Price 370 Price
Sales volume 400,000 Sales volume 440,000 Sales volume
Revenue 160,000,000 Revenue 162,800,000 Revenue
R&D and Design Costs 10,000,000 R&D and Design Costs 10,000,000 R&D and Design Costs
Costs: Costs: Costs:
Manufacturing Variable 60,000,000 ManufacturVariable 66,000,000 Manufacturing
Variable-Batch 4,800,000 Variable-B 4,800,000
Fixed 18,000,000 Fixed 18,000,000
Marketing Variable 12,800,000 Marketing Variable 14,080,000 Marketing
Fixed 10,000,000 Fixed 10,000,000
Distribution Variable 7,000,000 0 Variable 7,000,000 Distribution
Fixed 7,200,000 Fixed 7,200,000
Customer service Variable 6,000,000 customer sVariable 6,600,000 Customer service
Sub-total Costs 135,800,000 Sub-total Costs 143,680,000 Sub-total Costs
Operating Revenue 24,200,000 Operating Revenue 19,120,000 Operating Revenue
(b) 7.36% (b)
Original problem- Removing thousands
Option (b)
400 Price 370
400,000 Sales volume 440,000
160,000 Revenue 162,800
10,000 R&D and Design Costs 10,000
Costs:
Variable 60,000 ManufacturVariable 66,000
Variable-B 4,800 Variable-B 4,800
Fixed 18,000 Fixed 18,000
Variable 12,800 Marketing Variable 14,080
Fixed 10,000 Fixed 10,000
Variable 7,000 0 Variable 7,000
Fixed 7,200 Fixed 7,200
Variable 6,000 customer sVariable 6,600
135,800 Sub-total Costs 143,680
24,200 Operating Revenue 19,120
7.36%
Machine A
Initial costs 19,000 13,000
Less: Scrap Value 3000 0.32 (960) 3000 0.56 (1,680)
18,040 11,320
PV of total annual cost 2000 6.81 13,620 2600 4.36 11,336
Overhaul cost 4000 0.47 1,880 2000 0.68 1,360
PV of cash outflow 33,540 24,016
Capital recovery factor 0.14684287812 0.15 0.229358 0.23
Equivalent annual costs 4,925 5,508
Note:
To arrive at equivalent costs, we can follow the method given in illustration (3) in institute study material
PV of cash outflow 33,540 24,016
PV factor for an annuity 6.81 4.36
Equivalent PV of annual cash outflow 4,925 5,508
Delta if any - -
PV factor/PV Interest factor
10% for 10 years Value
Period
0 year 1/(1)^1 1 1 1.000
1 year 1/(1+0.1)^1 1.1 1 0.909
2 years 1/(1+0.1)^2 1.21 1 0.826
3 years 1/(1+0.1)^3 1.331 1 0.751
4 years 1/(1+0.1)^4 1.4641 1 0.683
5 years 1/(1+0.1)^5 1.61051 1 0.621
PV Interest factor for an annuity
for 5 years at 10%
(1+0.1)^5 1.61051 1 0.621 0.38 3.791
33540 33540
0.146843 6.81
4925.11 4925.11
24016 24016
0.229358 4.36
5508.257 5508.257
Costs Benefits
Int on capital for modifying production facilities 150,000 Int oninvestment on released funds
(1000000X15%) ((4000000-1000000)X15%)
108,000
77,000
335,000
(290,000)
450,000
33,000
22,000
120,000
625,000
Current policy JIT with Yash co., JIT with Ram co.,
Interest costs 15 15.005 14.5
Carrying costs 10 10 9
Total carrying costs per unit per annum 25 25.005 23.5
Average Inventory 1200/2 600 50 50
Carrying costs per annum 15,000 1,250 1,175
Cost per tape 150 150.05 145
Qty required 15,600 15,600 15,600
Cost of tapes 2,340,000 2,340,780 2,262,000
Ordering costs 13 times 260 3,120 3,120 15600 100
Carrying costs 15,000 1,250 1,175
Stock out costs - 400 3,600
Inspection costs 0 0 780
Customer returns costs 7,800 15600 2%
Grand Total 2,355,260 2,345,550 2,278,475
156
312 25
