Question

A young college student John, decides to make computers in a small workshop. A single computer consists of the following components, that cost the amounts given: Components Cost in $ per computer Picture tube for monitor: 20 Bare chassis 15 Passive resistors 25 Active IC’s 70 Cabinet 40 Speakers /accessories 20 Other Costs and Expenses: In addition to the above part and component costs: John has one engineer (whom he cannot do without), and pays $ 24,000 a year for his services. This engineer has been employed on a five year contract, that cannot be breached. John also has rented the workshop with a ‘lease’ that cannot be broken, paying $6,000 a year as rent. Assume John’s venture has no other annual costs. As initial investment, John has also spent $ 100,000 on manufacturing plant and equipment that should be usable for a period of five years

Q4: What should John price the computer at if he wishes to make a profit of 10%, as a percentage of sales. [ This is also simply referred to as markup or markup on sales]. John is selling 300 computers in a year

Q7: Assume the production level of 1400 computers per year. John finds that he has to maintain an average component inventory equal to 2 month’s production, finished goods in warehouses amount to three month’s production, payments are made by dealers and distributors two and a half months after purchase. The annual rate of interest relevant to John’s business is 10%. Now what is the break even price for John?

Q8: John plans to introduce a product in the Florida market – to do this he expects to invest $ 300,000 on a building that has a resale value of $ 200,000 after five years, his revenues are expected to be $ 100,000 per year and costs are $40,000 by the end of the first year, $ 45,000 for the next year, and $30,000 per year for the remaining three years. Calculate the NPV of the Florida project, if the discount rate or rate of interest is 10% annually.

Answer 1

4..Components Cost per computer
Picture tube for monitor	20
Bare chassis	15
Passive resistors	25
Active IC's	70
Cabinet	40
Speakers/accessories	20
Total components (variable) cost/unit	190
Other fixed costs:
Engineer's salary(24000/300)	80
Rent(6000/300)	20
Equipment depn.(100000/5/300)	67
Total fixed cost/unit	167
Total cost/unit	357
Add: Mark-up(357/90*10)	40
Selling price	396
ANSWER:
If he wishes to make a profit of 10%, as a percentage of sales
John should price the computer at $ 396
(rounding-of diff. may pl. be excepted)

7…
Components Inventory reqd.	1400/12*2*190=	44333
Finished goods inventory reqd.	(1400/12*3*357)=	124950
Accounts receivables	(300*396/12*2.5)=	24750
Total amt. locked up in current assets		194033
Opportunity cost of interest lost on the above funds	(194033*10%)=	19403
Total production (units)		1400
Cost/unit	19403/1400=	14
So,
Total fixed cost now comes to	167+14=	181
So, the Break-even price will be
Variable cost/unit+Contribution/unit reqd. to cover the fixed costs
ie. 190+181=
371
So, the ANSWER is:
Break even price for John= $ 371

8.NPV of the Florida project:

NPV=Initial investment+PV of the 5 yrs.' revenues-individual PVs of the 5 yrs.' costs+PV of the resale value at end yr.5

-300000+(100000*(1-1.1^-5)/0.1)-(40000/1.1^1)-(45000/1.1^2)-(30000/1.1^3)-(30000/1.1^4)-(30000/1.1^5)+(200000/1.1^5)=

68052