Management of ANZ Limited is planning to add a New Product to its existing product mix. Som
nformation related to “New Product” is given below;
The management has spent Rs. 100,000 to determine its acceptability among target market.
It will involve unused capacity of an existing machine, which was acquired three years ago f
Rs. 1,850,000, along with acquisition of a new machine costing Rs. 2,290,000 with
economic life of four years and expected to have no salvage value.
10,000 units per annum will be produced which will be sold at price Rs. 480 per unit.
Skilled labor from existing production will be used to get benefit of its experien
Contribution margin of labor at present is Rs. 23 per hour.
Direct materials cost will be Rs. 120 per unit.
Direct labor cost will be Rs. 125 per unit (5hrs @ Rs.25/hour).
Fixed cost including depreciation will be Rs. 115.
Cost of capital will be 18%.
Being Finance Manager, you are required to:
1. Calculate Net Contribution Margin (Net CM) considering the opportunity cost. (7 Marks)
2. Calculate Net Present Value (NPV) (6 Marks)
3. Determine the feasibility of “new product” whether this project is viable or not. Also give reasons to support your decision. (2 Marks)
Sale Price per unit = 480
Direct Material per unit = 120
Direct Labor per unit = 125
Fixed cost per unit = 115
Less Opportunity cost = -10
Total cost = 350
Contribution margin 130 per unit
Total contribution per year = 130 x 10000 = 1,300,000
1300000/1.18+1300000/(1.18^2)+1300000/(1.18^3)+1300000/(1.18^4)-2290000 = 1,207,080.35
C) NPV is positive and the product is feasible