Strategic planning is the process of setting or changing the long-term objectives or strategic
target of a organization. These would include such maters as the selection of products and
markets, the required level of company profitability, the purchases and disposal of subsidiary
companies or major fixed asset. And so on. A notable characteristic of strategic planning is
as follows;
a. It will generally be formulated in writing, and only after much discussion by
committee (the board).
b. It will be (or should be) circulated to all interested parties within the organization and
perhaps even to the press.
c. It will trigger the production not of direct action but of a series of lesser plan for sales.
Production, marketing, and so on.
Operational planning work out what specific tasks needs to be carried out in order
to achieve the strategic plan. For example a strategy may be to increase sales by 5% per
annum for at least five years, and an operational plans to achieve this would be
sales reps? weekly sales target. (Note: we use the word „strategic? and
„operational? in the sense implied in the well-known work of Robert Anthony).
Notable characteristic of operational planning are the speed of response to changing
conditions and the use and understanding of non-financial information such as data about
customer orders or raw material input.
ii)
1. Unrealistic operational plan will force staff to try hard with too few resources.
Mistakes and failure are almost inevitable. This means poor quality products; costs
include lost sales arranging for returns, and time wasted dealing with complaints and
rectification work. Over ambitions plan may also mean that more stocks are produced
than an organization could realistically expected to sell (meaning the costs of written offs,
opportunity costs of wasted production resources and unnecessary stock holding
cost are incurred.
2. Inconsistent strategic planning and operational planning goals may mean that
additional cost are incurred. For example, an operational plan may require additional
inspection point in a production process so as to ensure that quality products are
delivered to customers. The resulting extra costs will be at odds with the strategic
planning goal of minimum costs.
3. Poor communication between the senior management who set strategic goals and lower
level operational management could mean that operational manager are unaware
of the strategic planning goal of sustaining competitive advantage at minimum cost
through speedy delivery of quality products to customers. Some operational managers
may therefore choose to focus on quality of products while others attempts to
produce as many product as possible as quickly as they can; still others will simply
keep their heads down and do as little as possible. This will lead to lack of coordination;
there will be bottlenecks in some operational areas, needing expensive
extra resource in the short term, and wasteful idle time in other areas.
4. Inadequate performance measurement will mean that the organization has little idea of
which area is performing well and which need attention. If quality of products and speed
of delivery are the main source of competitive advantage a business needs to know how
good it is these thing. For example, if an organization measures only conventional
accounting results it will know how much stock it has and how much it has spent on
„carried out?. It will not know the opportunity cost of cancelled sales though not
having stock available when need or not being able to deliver it on time.
Equally, the quantity of products need to be measured in terms not only of sales
achieved, but also in terms of customers complaints and deed back; again the costs is
the opportunity cost of cost sales.
Otherwise, repairs and maintenance cost of machinery would vary with the level of
activity but machines would still need a certain level of maintenance even if they were
not being used,(the company might, one the other hand, be considering selling the
machinery, accounts of which may not have been taken). The estimate of direct
attribute fixed costs may be subjective judgments, such as deciding which supervisor
salaried would be avoidable if the service were contracted out. The variable costs may
be based on past data that does not take account of potential reduction or increases in
productivity due to factors such as untrained staff or new machines.
Finally, the costs of buying in may also be high subjective. Accounts may not have
been taken of costs such as increases or decreases in tie spent delivering the
components (from abroad perhaps) or complaints or costs resulting from badly made
component. It is therefore obvious that the behavior of costs associated withy a
decision must be fully understood and their relevance to that decision ascertained
before the decision is finally made.
Kavungya answered the question on May 10, 2021 at 05:59
- Decision-making situations under short-term conditions require consideration of;
i. The cost classifications which the management accountant should use or ignore,
and
ii. Factors which may affect the behavior...(Solved)
Decision-making situations under short-term conditions require consideration of;
i. The cost classifications which the management accountant should use or ignore,
and
ii. Factors which may affect the behavior of costs and hence the accuracy of the
cost analysis and the relevance of the decision making.
Required
In the context of the above statement, discuss whether a company should make
quantities of a component used in a manufacture of a product or buy in the component
from an outside supplier or out source.
Date posted: May 10, 2021. Answers (1)
- Kenya Charity Organization has been holding annual dinner and dance for the last 100 years
with the primary intention of raising funds.
This year, there is a...(Solved)
Kenya Charity Organization has been holding annual dinner and dance for the last 100 years
with the primary intention of raising funds.
This year, there is a concern that an economic recession may adversely affect both the
number of persons attending the function and advertising space that will be sold in the
programme published for thee occasion.
Based on past experience and current prices and quotations, it is expected that the following
costs and revenues will apply for the function:
Required:
(a) Calculate the expected value of the profit to be earned from the dinner and dance this year.
(b) Recommend, with relevant supporting financial and cost date, whether or not the
Kenya Charity should spend Shs 500 on the market research enquiry and indicate the
possible benefits the enquiry could provide.
Date posted: May 10, 2021. Answers (1)
- It has been established that the reasons for the variances for the period ended 31
December 2002 are as follows;
i.80% of the extra material used is...(Solved)
It has been established that the reasons for the variances for the period ended 31
December 2002 are as follows;
i.80% of the extra material used is due to purchasing from the cheaper
source. The balance off extra material usage is due to the amended
processing method, which was introduced.
ii.60% of the extra hours used is due to the amended processing method, the
balance of extra hours id due to the change to a cheaper material source.
Required
i. Prepare a schedule of costs for the four alternative strategies, which incorporate
different combinations of existing and amended material sources and conversion
process methods and hence determine the profit maximizing strategy.
ii. Prepare a report which discusses ways in which the alternative decision making
focus in each off sections (a) and (b) of the question has contributed to a change in
decision making strategy by the company.
Date posted: May 10, 2021. Answers (1)
- Tumbo Limited makes and sells executive towels to which the following standard
information relates:
i. Raw material is purchased at Shs 5.00 per square metre on a...(Solved)
Tumbo Limited makes and sells executive towels to which the following standard
information relates:
i. Raw material is purchased at Shs 5.00 per square metre on a just-in- time basis. The
purchasing manager has the responsibility for the servicing of raw material.
ii. The executive towel is made in a conversion process in which the variable conversion
cost per product unit of output is estimated at Shs 12.50 (a half hour at Shs 25.00 per
hour). The conversion process manager is deemed responsible for material usage and
conversion process efficiency and expenditure variances.
The actual events for the period ending 31 December 2002, which may be considered as a
representative
of future periods, are as follows:
i. 27,000 square metres of raw material purchased at Shs 4.50 per square metre is used to
produce 8,000 units of the executive towels. The purchasing manager has made the
decision to0 buy from a cheaper source.
ii. 4800 hours of conversion process time at a variable cost of Kshs 20.00 per hour is
used to a achieve the output of Shs 8, 000 units of the executive towels. A charge in
the processing method was implemented at the start of the period.
Production capacity is available in order to produce in excess of 5,000 units of the executive
towels if the demand dictates.
Required:
i. Calculate standard cost variances for material usage and price and for
conversion process efficiency and expenditure for the period ended 31 December 2002.
ii. Suggest, giving your reasons, whether decisions should be based on:
1. The variances over which each manager has control or
2. The effect of each material cost variance and conversion cost variance
Date posted: May 10, 2021. Answers (1)
- Chemex limited manufactures three garden furniture products A B and C. The budgeted unit cost and resource requirements of each of these items are detailed...(Solved)
Chemex limited manufactures three garden furniture products A B and C. The budgeted unit cost and resource requirements of each of these items are detailed below.
These volumes are believed to equal the market demand for these products. The fixed
overhead costs are attributed to the three products on the basis of direct labour hours. The
labour rate is Shs 40 per hour. The cost of the timber is Shs 20 per square metre. The
products are made from a specialist timber.
A memo from the procurement manager advises you that because of a problem with the
supplier it is to be assumed that this specialist timber is limited in supply to 20,000 square
metres per annum.
The sales director has already accepted an order for 5,000 A, 1,000B and 1,500C, which if
not supplied would incur a financial penalty of Shs 20,000. These quantities are included in
the market demand estimates above.
The selling prices of the three products are:
A = Shs 200
B = Shs 500
C = Shs 400
Required
a) Determine the optimum production plan and state the net profit that this should
yield per annum.
b) Calculate and explain the maximum prices, which should be paid per square metre in
order to obtain extra supplies of the timber.
Date posted: May 10, 2021. Answers (1)
- SIMTON Limited has been operating a standard cost system and has accumulated the following information in relation to variances in its monthly management accounts:
ii. Out...(Solved)
SIMTON Limited has been operating a standard cost system and has accumulated the following information in relation to variances in its monthly management accounts:
ii. Out of category B, connective action has eliminated 70% of variances, but the
remainder has continued.
iii. The cost of investigating averages is Shs 3,500 and that of connecting variances
averages Shs 5,500.
iv. The average size of any variance not connected is Shs 5,250 per month and the
company‟s policy is to assess the present value of such costs at 24% per
annum for a period of five months.
Required
(a) Prepare two decision trees, to present the position if an investigation is;
(i) Carried Out
(ii) Not carried
(b) Recommend, with supporting calculations, whether or not the company
should follow a policy of investigating variances as a matter of routine.
(c) Explain briefly two types of circumstances that will give rise to variances in category A
and two to those of category B.
(d) Mention any one variation in the information used that you feel would be beneficial to
the company of you wised to improve the quality of the decision making rule
recommended in (b) above. Explain briefly why you have suggested it.
Date posted: May 10, 2021. Answers (1)
- SPL Agencies specializes in the distribution of pharmaceutical products. They buy from pharmaceutical companies and resells to each of three different markets.
Required:
(a) Compute the August...(Solved)
SPL Agencies specializes in the distribution of pharmaceutical products. They buy from pharmaceutical companies and resells to each of three different markets.
Required:
(a) Compute the August 2003 gross – margin percentage for each of its three distribution
markets and SPL Agencies operating income.
(b) Compute the August 2003 rate per unit of the cost allocation base for each of the five
activity areas.
(c) Compute the operating income of each distribution market in August 2003 using the
activity based costing information. Comment on the results.
Date posted: May 8, 2021. Answers (1)
- Majimbo Ltd. Is a multi-divisional company operating in several countries. Division X wants
to buy component for its final product. Suppliers outside Majimbo Ltd. Have given...(Solved)
Majimbo Ltd. Is a multi-divisional company operating in several countries. Division X wants
to buy component for its final product. Suppliers outside Majimbo Ltd. Have given two bids
for sh.30,000 and 31,800. The supplier who bid sh.31,800 will in turn buy some raw
materials for sh.4,500 from Division Z of Majimbo Ltd. Which has spare capacity that will
increase A‟s contribution to overall company profits by sh.3,000. The supplier who
bids sh.30,000 will not buy any materials from Majimbo Ltd.
Required:
a) Prepare a diagram of the cash flow for both alternatives.
Does the use of the international market prices lead to optimal decision for Majimbo Ltd.? Explain
b) Suppose Division Y is working at full capacity and can provide the needed part to
Division X or to an outside customer at an assumed market price of sh.31,800. if market
pricing were the rule, division Y would have to meet the sh.31,000 bid. Further, assume
that the outlay costs to Y of filling the order were sh.22,500. Finally assume that Y,
unlike the outside suppler does not buy from Z because Majimbo Ltd is so large and
communications are so bad that the division Y management is unaware of this alternative.
c) Will the use of sh.31,800 as a transfer price lead to optimal decisions for Majimbo
Ltd? Show the net effects on cash flows.
Date posted: May 8, 2021. Answers (1)
- Racquet Sports produces a variety of racquets for the sports industry. It makes racquets for tennis, squash and badminton. The table below presents the relevant...(Solved)
Racquet Sports produces a variety of racquets for the sports industry. It makes racquets for tennis, squash and badminton. The table below presents the relevant data for the products produced.
Required:
a) (i) Determine the contribution percentage on each shillings of sales for each of the
products produced and sold.
(ii) What is the overall contribution that each sales shillings provides toward covering
the firm‟s fixed costs, that is overall break-even point in shillings sales?
(iii) Determine the profits if the plants operates at 70 per cent of the plant capacity.
b) Explain the limitations of the techniques you have used to solve part (a) above.
Date posted: May 8, 2021. Answers (1)
- Paul Akili, an aggressive entrepreneur, is working on some make – or – buy decisions and a
related inventory system. For one such product, he decides...(Solved)
Paul Akili, an aggressive entrepreneur, is working on some make – or – buy decisions and a
related inventory system. For one such product, he decides to use the classic economic – lot
– size model with no stockouts to determine an optimal order quantity. He initially
predicts that annual demand will be 2000 units, that each unit will cost sh.2,565, that the
incremental cost of processing each order (and receiving the ordered goods) will be Sh.3,819
in this case, and the incremental cost of storage will be sh.342 per physical unit per year.
Assume that the inventory cycle precisely repeats every year.
Required:
a) What is the optimal order quantity?
b) What are the total relevant costs of inventory from following your policy in (a) above?
c) Suppose that Paul Akili is incorrect in his sh.3,819 incremental – costs – per order
prediction but is precisely correct in all other predictions.
State and solve the equation to predict the maximum amount Paul Akili should pay to
discover the true incremental cost per order if:
(i) This true costs is sh.1,881 per order and
(ii) In the absence of any knowledge to the contrary, Paul Akili implement the
solutions in (a) above and will not alter it for one full year.
a) What happens t your answer in (c) above if we admit that Paul Akili has also made
errors in predicting demand price and the cost of storage?
d) Suppose Paul Akili implements the solution in (a) above for two years.
e) Further supposes that all of his initial predictions were, and are, correct except that the
actual incremental cost of storage is sh.1,140 per average unit.
If it costs Akili a total of sh.228 to alter his inventory policy, state the equation to
determine the cost of prediction error of not changing his inventory policy at the
beginning of the second year.
Date posted: May 8, 2021. Answers (1)
- Africa 1 and Kenya 1 are competing importers of lightweight industrial pick-up truck, the
“Miracle”. Market research suggests that there is demand for such vehicles of
about...(Solved)
Africa 1 and Kenya 1 are competing importers of lightweight industrial pick-up truck, the
“Miracle”. Market research suggests that there is demand for such vehicles of
about 1,200 units per year evenly spread over the year and that bearing in mind the
facilities available on the truck, its price should be around Sh.550,000 but discounts may be
available. The price to the dealer is about Sh.400,000 depending upon exchange rates.
The management Accountant at Africa 1 has the task of determining the price to charge for the
vehicle that will give the greatest monthly profit from the sale of Miracles. Past experience
suggest that Africa1‟s market share and profit will give the greatest monthly profit
from the sale of Miracles. Past experience suggest that Africa1‟s market share and
profit depends not only on the price it charges, but also the price that Kenya 1 charges.
The following pattern seems to have emerged;
If both companies share the same price, then Africa 1 secures about 45% of the market and
Kenya 1 , 55%.
When Kenya 1 has a lower price, then Africa 1 loses about 3% market share for every
Sh.10,000 price difference. On the other hand, when Kenya1 has a higher price, then Africa
1 gains 2% market share over and above the 45% per sh.10,000 price difference. From
africa1‟s point of view, kenya1 normally changes its prices monthly.
Africa1‟s Management Accountant has ruled out trial and error pricing an has
decided to develop a simulation model to investigate price behaviour patterns based on
monthly periods.
Required:
a) Develop a simulation model from Africa1‟s point of view, using algebra, showing:
i An expression for monthly profits;
ii An expression for market share when Kenya1‟s price is the same as Africa 1‟s;
iii An expression for market share when Kenya1‟s price is higher than Africa1‟s;
iv An expression for market share when Kenya1‟s price is lower than Africa1‟s.
b) Draw a flow diagram to show how the model would be used to simulate pricing and
demand behaviour using a computer.
Date posted: May 8, 2021. Answers (1)
- Peter Oloo is a fishmonger in Kisumu. As a result of adverse business changes in the region,
the supply and demand for fish are subject to...(Solved)
Peter Oloo is a fishmonger in Kisumu. As a result of adverse business changes in the region,
the supply and demand for fish are subject to random variations making it difficult to
project the next day‟s business.
Management accounts in relation to the previous 300 days reveal the following mode of behaviour:
Peter Oloo buys each fish at Sh.40 and sells it for Sh.60 if sold on the same day; if the fish is
sold the following day it will fetch only Sh.20. If not sold during the second day its value
drops to zero and Peter Oloo do nates it to children‟s home. Peter Oloo‟s Policy is to
satisfy the days demand from the fresh fish first; and any further demand will be satisfied
from the stock of fish from previous day. Failure to satisfy demand costs Peter Oloo Sh.20
for every fish supplied to the customer. There are no back orders in the business.
Required:
a) Simulate Peter Oloo's operations for 8 days clearly indicating profits made each day.
b) What are the average daily profits for Peter Oloo?
Use the following random numbers
573423709751483681320931644925928345
Date posted: May 8, 2021. Answers (1)
- LP Ltd. produces two products, K-A and K-B by a joint process. One unit of input
X processed in Department 1 total will yield three units...(Solved)
LP Ltd. produces two products, K-A and K-B by a joint process. One unit of input
X processed in Department 1 total will yield three units of product K – A and two units
of K – B. The variable operating costs in Sh.2.50 per unit of input X processed. Each
unit of product K-A can either be sold at the split-off point for Sh.10 per unit or
processed further in Department 2 to for product K-C. One unit of product K-A is
needed to produce one unit of K-C. Variable processing costs incurred in Department 2
amount to Sh.7.50 per unit of K-A processed and each unit of K-C can be sold at a
price of Sh.22.50 product K-B can be sold at Sh.8.75 per unit at the split-off point.
Highly skilled labour is required in each of the two departments and the total available
labour force is limited to 80,000 hours per week. To process one unit of X requires 1.5
direct-labour hours. If K-A is processed further, three hours per unit of K-A processed
are needed. Furthermore raw material X can be acquired up to a maximum quantity of
40,000 units per week.
The company „s market survey shows that the maximum weekly demand for product K-A is
40,000 units and for product K-C is 5,000 units. The survey further concludes that virtually any
amount of product K-B can be sold immediately without difficulty. Weekly production does not
have to be equal to weekly sales for any of the company‟s products.
However, since all three products are perishable, any unsold quantity at the end of the
week will be discarded.
Required:
(i) Formulate a linear programe to determine the optimal weekly production mix for
LP Ltd. that maximizes profits subject to the various production, market and technology constraints.
Do not solve for optimal values but clearly define your variables.
(ii) Independent of (a) above, assume that at the optimum, the marginal values
associated with the maximum market demand for K-A constraint, the maximum
market demand for K-C constraint and the maximum supply of X constraint are
Sh.10, Sh.15 and Sh.15 respectively. Assume further that all other constraints have
zero marginal values.
What is the maximum achievable contribution? Show calculations.
Date posted: May 8, 2021. Answers (1)
- Briefly give five examples of business applications of linear programming.(Solved)
Briefly give five examples of business applications of linear programming.
Date posted: May 8, 2021. Answers (1)
- Through the end of 1993, Viatu Ltd., a shoe manufacturer had always sold its products
through distributors. In 1993, the turnover was Sh.87,500,000 and net profit...(Solved)
Through the end of 1993, Viatu Ltd., a shoe manufacturer had always sold its products
through distributors. In 1993, the turnover was Sh.87,500,000 and net profit was 10 per cent
of turnover. Total fixed expenses (manufacturing and selling) were Sh.17,500,000.
During 1993, a number of Viatu's competitors had begun selling their products
through distributors. Viatu's marketing research group was asked to predict the effects of
eliminating distributors from the channels of distributors and selling direct to retailers.
The group was instructed to predict both changes in sales volume and changes in selling
expenses, under the provision that the selling price per unit would remain unchanged.
The marketing analysis yielded the following predictions:
Turnover in1994 would drop 20 percent from the 1993 figures, but net profit for 1994
would rise to Sh.9,100,000 owing to savings in selling expenses.
This net savings in selling expenses from eliminating the “middleman” was
impressive, since total fixed expenses manufacturing and selling) would increase to
Sh.18,900,000 because of the additional warehouse and delivery facilities required:
If the 1993 distribution system were continued, however, 1994, results would replicate 1993.
Required:
a) What was the breakeven point (turnover) under the original situation prevailing in 1993?
b) What would be the breakeven point (turnover) under the proposed situation for 1994?
c) On the basis of this analysis, Viatu Ltd, adopted the new direct-distribution plan for
1994, and reduced 1994 production on the 70,000,000 turnover level. Unfortunately, it
became clear by early December 1994 that sales would reach only 66,500,000 and
Viatu cut back productions so that no ending inventory remained.
Variable costs per unit and total fixed costs were as predicted.
Compute the cost of Viatu‟s prediction error.
Assume that sales would have been Sh.87,500,000 if the 1993 distribution system had
been continued.
Date posted: May 8, 2021. Answers (1)
- Mitumba Ltd. has set the following standards:
Required:
Comprehensive computation showing the yield, mix and price variances.(Solved)
Mitumba Ltd. has set the following standards:
Required:
Comprehensive computation showing the yield, mix and price variances.
Date posted: May 8, 2021. Answers (1)
- Uchunguzi Ltd. plans to conduct a questionnaire survey. The table below shows the tasks involved, the immediately proceeding tasks and for each task duration the...(Solved)
Uchunguzi Ltd. plans to conduct a questionnaire survey. The table below shows the tasks involved, the immediately proceeding tasks and for each task duration the most likely estimate (L), optimistic estimate (O) and the pessimistic estimate (P).
Using the project evaluation and review technique (PERT) the meantime, M and standard
deviation O. for the duration of each task are estimated from t he most likely (L), Optimistic
(O) pessimistic (P) estimates by using the formulae:
M = 0.08333 (4L + O + P)
O = 0.08333 (P – O)
Required:
a) Compute the mean duration and standard deviation for each task.
b) The project is budgeted to cost Sh.500,000. Actual costs per day are Sh.10,000.
Can the project be implemented within the budget?
Date posted: May 8, 2021. Answers (1)
- Mwendandamu Company Ltd. can produce a product using either labour-intensive or machine-intensive operations. Cost of each method are as follows:
Required:
a) Develop probability tree to show...(Solved)
Mwendandamu Company Ltd. can produce a product using either labour-intensive or machine-intensive operations. Cost of each method are as follows:
Required:
a) Develop probability tree to show the possible profits from labour-intensive and
machine-intensive production.
b) Determine the following for each production method:
i Expected profits;
ii Probability of at least breaking even;
iii Probability of profits of at least Sh.1,000,000.
c) Which production method do you prefer and why?
d) Discuss other factors that Mwendamu Company Ltd.'s management should
consider before deciding on the production method.
Date posted: May 8, 2021. Answers (1)
- The Hatari Weapons Ltd. desires to submit a tender for 32 “string-to-surface”
rockets required by Vita Ltd. it is estimated that each rocket will cost approximately
Sh.40,000,000...(Solved)
The Hatari Weapons Ltd. desires to submit a tender for 32 “string-to-surface”
rockets required by Vita Ltd. it is estimated that each rocket will cost approximately
Sh.40,000,000 for material and variable overhead costs. Total fixed costs will amount to
approximately Sh.1,600,000 over the two years it will take to build the rockets all of which
would have to be recovered against this contract.
The company, as a result of past experience, anticipates it could expect a 75 per cent learning
curve and that the steady state would not be achieved during this production run. Building
the first rocket would require approximately 400,000 hours of direct labour at a direct labour
cost of Sh.150 per hour. Variable overhead costs which vary with direct labour amount to
Sh.50 per direct labour hour.
Eight rockets will be built during the first year of the contract and the remaining 24 will be
completed during the second year. The Hatari Weapons Ltd. always adds 25 per cent profit
margin to the estimated costs of the contract for which they tender.
Required:
a) Calculate the total labour hours that will be required to build the 32 rockets.
b) Draw up a quotation showing the total price to be quoted, with details of the constituent
parts of the cost structure and the profit added.
c) Assuming the contract is awarded to the company, and no costs are deferred over the
two-year period, draft estimated income statements for the first and second years of the
contract life. Revenue is to be recognized on the basis of completed rockets. Fixed costs
are incurred equally each year.
Date posted: May 8, 2021. Answers (1)
- Chakula Engineering Company Limited (CECL) recently sent their chief designer to the
USA and UK to review developments in the American and British Markets. He has...(Solved)
Chakula Engineering Company Limited (CECL) recently sent their chief designer to the
USA and UK to review developments in the American and British Markets. He has now
returned with details of a new type of food mixer that is being developed over there. CECL
are considering the design and manufacture of a liquidizer gadget attachment to be used as
an extra gadget for the new mixer when it is sold in Kenya. The chief designer‟s notes
show that 10% of the experts he questioned in both the UK and USA believed the new
mixer would reach the Kenyan market in a year‟s time, whereas 30% thought it
would be launched in four year‟s time, and the remainder suggested a five-year delay
before it reached Kenyan.The presents value (PV) of net cash flows form making and selling
the liquidizer are estimated by the company to be sh.8 million, if the market develops one
year from now and sh.3.2 million if it develops five years from now.
CECL have not developed a liquidizer before, and whilst it immediate development would
cost Sh.2 million, they feel they have only a 50% chance of a successful development at
present. A number of alternative courses of action present themselves. The company could
abandon the whole project, or wait for one year to see if the mixer has penetrated the
Kenyan market. They would then abandon or develop the liquidizer at a PV cost of Sh.1.8
million, with a 70% chance of success, but they would be late into the market and the PV of
their receipts they estimate at Sh.4.8 million, including the expenditure of Sh.400,000 on
acquiring extra product data during the second year of delay, and the chance of a successful
development would be 90%. At this point, however, the mixer could only come on the
market at the four or five year point from now.
Required:
Using a decision tree approach, advise the company on the course of action to adopt.
Date posted: May 8, 2021. Answers (1)