Reggie Ltd Recently, a Company Approached Reggie Ltd

question 55

Multiple Choice

Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: $\begin{array}{lr}\text { Direct materials } & £ 2,400 \\\text { Direct labour } & 960 \\\text { Factory overhead (30\% variable) } & 1,800 \\\text { Selling expenses }(50 \% \text { variable) } & 900 \\\text { Administrative expenses (10\% variable }) & 840 \\\text { Total per unit } & \underline{£6,900}\end{array}$ Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Assume there is additional capacity for 60 more units and the firm has to reduce regular customer sales by 40 units in order to contract the special order. There are selling expenses on only the sales to the regular customers. What is the net income if the special order of 100 units is accepted?

• A)£831,960
• B)£876,960
• C)£1,011,600
• D)£900,000

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Definitions:

Initial Cash Outlay

The total amount of money required upfront to initiate a project, investment, or venture.

Discount Rate

This is the interest rate used in DCF evaluations to establish the current value of expected future cash inflows.

After-tax Cash Inflows

The amount of money a company receives from its operations after all tax obligations have been paid.

Required Return

The minimum rate of profit expected by investors for assuming the risk of investing in a stock or other types of securities.