1. Improving business performance breakeven analysis

Breakpoint Company is considering launching a new product to sell at $100 per unit. The CEO has come to you with the following strategy proposals;

A. Buy machine A to make the product. Fixed costs would be $800,000 per year, but variable operating costs would be only $20 per unit.

B. Buy machine B. Fixed costs would be only $500,000; however the variable cost per unit is $60.

Required prepare a report to management highlighting the following;

1. Calculate the breakeven points using both machines

2. If the production and sales in the first year are10,000 units. Calculate the profit before tax using i) machine A and ii) machine B.

3. If forecast production and sales in the second year is 15,000 units. Calculate the profit before tax using Machine A and Machine B.

4. Which machine represents the high risk strategy and why?

2. Business Financing Decisions

Financial statement information is presented below for benchmark Ltd, a manufacturer. Benchmark is considering a change in its capital structure. Management has proposed issuing $150million of additional non-current debt. The non-current debt would be used to repurchase the company's ordinary shares. This purchase would reduce the company's equity by $150million. The interest expense on addition debt would be 9$million. The company's tax rate is 30% of pre-tax profit.

Required prepare for management a report which

a) Calculate Benchmarks return on equity for 2007 as reported.

b) Calculate what Benchmark's return on equity would have been in 2007 if the company had issued the additional debt and had repurchased ordinary shares before the year began.

c) Based on these calculations, would the change in capital structure be good for Benchmarks shareholders? Explain your reasoning.

3. Relevant information for decision making special Order

Lansing Camera Company has received a special order for Photographic equipment that it does not normally produce. The company has spare capacity, and the order could be manufactured without reducing the production of the firm's regular products.

As the company's Operating Manager prepare a report for discussion at the management discussing calculating the cost of the special order and if the considering the following items;

1. Equipment used in producing the order has a book value of $2000. Lansing Camera has no other use for this equipment. If the order is not accepted, the equipment will be sold for $1500. If the equipment is used in producing the order, it can be in three months for $800

2. If the special order is accepted, the operation will require some of the storage space in the company's plant. If the space is used for this purpose, the company will rent storage space temporarily in the nearby warehouse at a cost of $18000. The building depreciation allocated to the storage space in producing the special order is $12000.

3. If the special order is accepted, it will require a sub assembly. Lansing can purchase the sub assembly for $24 per unit from an outside supplier, or the company can make it for $30 per unit. The $30 cost per unit was determined as follows

Direct materials                               $10.00

Direct Labour                                  $6.00

Variable costs                                 $6.00

Allocated fixed overhead                   $8.00

Total unit cost for sub assembly         $30.00

4. Sustainability

Freaky Furniture Ltd is looking at two alternatives for disposing of an annual production of 300 kilolitres of waste paint, both of which are acceptable to the Victorian Environment Agency.

1. Freaky can pay paint recyclers to remove the waste paint at a cost of $50 per kilolitre. The recycler would then process the waste into 5 kilograms of solid waste compound and dispose of this in landfill.

2. Rent a recycling machine which strips the residues and produces 10 kilograms of waster compound per kilolitre, which then needs to be disposed of in landfill. The annual rent of the machine is $15,000 and the operating cost is $0.30 per kilolitre

Required

1. Which alternative is superior on financial grounds?

2. List five alternative and social factors that Freaky may need to consider before selecting and alternative.

3. Are there any implications of this decision for the broader economy? Explain your answer.