CAP 2 SFMA ASSESSMENT 2010

Just thinking about the suggestion of getting a question on variance analysis...

We don't really have enough information to complete a question on this. For this we need the actual cost and the standard cost in order to compare. We don't have a budget for the French project just some financial analysis.

I think if we're asked a management accounting question on the French project, it will be on relevant costing... or am I missing something here?

I agree, do not see where Variance analysis fits in. If you look at page 33 on the management accounting CAP 1 toolkit there is a costing question very similar to the one in the assignemnt. The solution is on page 125.

I worked out the costing part to get a loss of €36,000. Anyone agree?

For the acquisition and currency risk part, would anyone have any ideas on what calculation questions they could ask here?

For the WACC mine worked out to be 15.34%. Did anyone work out the effect of the 3 possible sources of finance? i.e. replacing the redeemable debentures, issuing 70m ordinary shares and the rights issue

i got a profit of €5000. Don't forget anything that's reapportioned isn't a relevant cost i.e. anything that would have to be paid whether the project went ahead or not. Like the estimation costs have to be paid whether the project goes ahead or not so I didn't include them as a relevant cost...

Below is what I got, any of yours different?

Material CX = 10,000
Material FG = 25,000 Replacement cost
Material NF = 170,000 Replacement cost
Skilled Labout = 0 As it is idle if project does not go ahead
Unskilled Labour = 76,000 400*40 + 400*150
Variable O/H's 12,000 Relevant as they are incremental
Fixed OH's = 18,000 stepped cost
Estimation costs = 0 Sunk cost
Engineering fees = 25,000
Head Office = 0

That should be -10,000 for material CX because they're saving the cost of disposal if the project goes ahead...

For material FG, that should be €20,000 replacement cost because they will get a scrap value of €1 per kg if the project goes ahead... so the replacement cost is €4 per kg.

For the unskilled labour... the contribution per hour is worked out using the hourly rate so you just used the contribution to calculate it... So it should be €60,000.

For the Unskilled labour you also have to take into account the cost of it to this project i.e. 400 hours at €40 an hour. = €16,000

The contribution forgone from taking the labour away from the the other contract is €60,000 like you said.

Total cost is the €60,000 + €16,000 therefore €76,000. That's the way I did it!

Oh yeah, that makes sense, then I still end up making a loss

lol! ye me too! Some xmas this is!

For the WACC part of the question; I was wondering will they ask us the impact of the three financing options on the company's share price and gearing etc. Not sure will it be a straight forward WACC question?

wannabe_auditor

Masjanja wrote: »

Ke = 18.45%
Pref.Shares = 5%
Kd = 8%
Redeemable = 12.46%
WACC = 15.44%

Guys dont foreget to apply tax at all times!

how are u applying the tax do get this figure? i'm getting the 11.95%

flashtash

John_P_C wrote: »

lol! ye me too! Some xmas this is!

For the WACC part of the question; I was wondering will they ask us the impact of the three financing options on the company's share price and gearing etc. Not sure will it be a straight forward WACC question?

Yeah, that's what I thought too. Can't imagine it will be straight forward. But in saying that, they did promise no suprises. (I take no responsibilty if that is not the case!)

My WACC is only 13.82%, with Ke=18.6%; Kp=5%;Irred=8%; Redeem=12.6%. what MV's are you guys using?

Coldplayer

Guys for the second point on Material FG

Is it not just the scrap value that we use. If you look at the wording it says "could have been used" not "could be used" as a replacement material for another contract.

The opportunity to plug it in at €5 per kg is gone surely?/

Coldplayer

Material CX (4000 Kg) -10,000.00
Materials FG (5000 Kg) 5,000.00
Materials NF (10000 Kg) 170,000.00
Skilled Labour (200 Hours) -
Unskilled Labour 76,000.00
Variable Overheads 8,000.00
Fixed Overheads 18,000.00
Contract estimation -
Engineers Fees 25,000.00
Headquarter Costs -
Total Projected Cost 292,000.00
Income Proposed 300,000.00
Expected (Loss)/Gain 8,000.00

Thats what i got,

Headquarters cost is already incurred

I got the following for the WACC

Oridnary Shares 18.67%
Pref Shares 5%
Irredeemable Debs 8%
Redeemable Debs 13.78%

Overall WACC 15.72%

The costings of the new machine

Point 1 -10000
Point 2 25000
Point 3 170000
Point 4 0
Point 5 60000
Point 6 8000
Point 7 18000
Point 8 0
Point 9 25000
Point 10 0

Overall cost 296000

Would appreciate your comments

flashtash wrote: »

thats what I did too. here are my calcs (briefly!)

Ke=(0.25(1+.1199)/4.20)+0.1199
= 18.65%

Kp=0.3/6
=5%

Kd=8(1-.2)/80
=8%

Redeem Deb:
NPV5% NPV10%
IRR Y0 97 97
Y1+2 (13-2.6) 1.859 (19.33) 1.736 (18.05)
Y2 (100) 0.907 (90.7) 0.826 (82.6)

Totals: -13.03 -3.65

IRR= 0.05 + (-13.03(0.05))/(-13.03+3.65)
=11.95%

WACC MV % Cost Total
Issued 1000mill 52% 18.65% 9.698
Pref 200 mill 10% 5% 0.5
Irred 440 mill 23 8% 1.84
Redeem 290 mill 15 11.95 % 1.79

WACC=13.828

Anyone else agree/disagree?

Your growth of 11.99%. I used 12% as i got the figure to be 11.999915.

Hence my cost of debt 18.67 v 18.65

flashtash wrote: »

thats what I did too. here are my calcs (briefly!)

Ke=(0.25(1+.1199)/4.20)+0.1199
= 18.65%

Kp=0.3/6
=5%

Kd=8(1-.2)/80
=8%

Redeem Deb:
NPV5% NPV10%
IRR Y0 97 97
Y1+2 (13-2.6) 1.859 (19.33) 1.736 (18.05)
Y2 (100) 0.907 (90.7) 0.826 (82.6)

Totals: -13.03 -3.65

IRR= 0.05 + (-13.03(0.05))/(-13.03+3.65)
=11.95%

WACC MV % Cost Total
Issued 1000mill 52% 18.65% 9.698
Pref 200 mill 10% 5% 0.5
Irred 440 mill 23 8% 1.84
Redeem 290 mill 15 11.95 % 1.79

WACC=13.828

Anyone else agree/disagree?

I think you may need to look at some of your MVs

Ordinary share 2,100 ie 4.20 x 500 (not 1000 thats book value)
Pref 240 ie 6 x 40 (not 200 thats book value)
Irred 400 (not 440 as that includes interest)
Redeem 290 (thats what I used)

Would like an opinion on this..........

flashtash

MAX72 wrote: »

I think you may need to look at some of your MVs

Ordinary share 2,100 ie 4.20 x 500 (not 1000 thats book value)
Pref 240 ie 6 x 40 (not 200 thats book value)
Irred 400 (not 440 as that includes interest)
Redeem 290 (thats what I used)

Would like an opinion on this..........

Appreciate that Max. I wasn't sure of the MV's. I was using the 1000 for the Ord Share so that was my main confusion. The other figures you used were the same as mine (I've since corrected the others from what I posted first). My WACC is now 15.54%. My Redeem Debs are only 12.6% v your 13.7%.

flashtash

MAX72 wrote: »

The costings of the new machine

Point 1 -10000
Point 2 25000
Point 3 170000
Point 4 0
Point 5 60000
Point 6 8000
Point 7 18000
Point 8 0
Point 9 25000
Point 10 0

Overall cost 296000

Would appreciate your comments

You forgot the 16000 for the unskilled labour (Point 5) and the var o/h should be 12000 (600 hours total). What you think?

flashtash wrote: »

You forgot the 16000 for the unskilled labour (Point 5) and the var o/h should be 12000 (600 hours total). What you think?

Thanks for that. That would result in a loss. Does that mean that point 2 should read 5,000 as the words used are 'could have been used'.... This would result in a small profit. Otherwise if its sill 25k, its a bigger loss!!