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Advising them of calculation and interpretation of net present value & payback for auto-applicator

Busbrush question Busbrush Ltd is a company that specialises in the covering of buses with advertising displays. The company's management accountant has just left for a new job, but before leaving had estimated revenues and costs for the next six months to be: Sales price per bus covered £650 Variable costs per bus Materials £300 Labour £175 Fixed costs per month Salaries £5,300 Overhead £5,700 The marketing manager forecasts activity for the next six months to be: Forecast buses to cover January 50 February 55 March 60 April 65 May 70 June 75 You have agreed to provide management accounting support to Busbrush until they find someone to fill the role permanently.


Required

a. Work out the expected contribution per bus, the breakeven number of buses per month and the monthly profit or loss for the next 6 months as well as the total anticipated profit (or loss) for the period. (25% of question marks)


b. Eastern Bus Company has recently enquired about placing an order for a total of 50 of their buses to be covered over the next six months. Eastern have never placed an order with Busbrush before and any work for them would be additional to the forecast above. However Eastern has indicated that it would only be willing to pay £575 per bus and the production manager informs you that, whilst all other costs would be unaltered, there would be one additional cost of £1,000 of fixed costs in the first month if this order was accepted. Advise Busbrush concerning this extra order, including both financial and non-financial factors.(35% of question marks)


c. The production manager wants to buy an auto-applicator machine for £200,000. The machine is expected to have a life of five years and to reduce variable costs by £70 per bus and fixed costs by a further £15,000 per annum. The marketing manager advises you that it would be relatively safe to assume a volume of 720 buses per annum for each of the next five years. A look back at the management accountant's previous capital expenditure calculations suggests that a cost of capital of 12% is used and that company policy is to work out both payback and net present value. Write a brief report for the board of Busbrush.


i. Advising them of the calculation and interpretation of net present value and payback for the auto-applicator. (30% of question marks)

ii. Explaining why you would recommend carrying out a sensitivity analysis before approving the scheme and the ways in which this might be done. (10% of question marks

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