Subject : Management Accounting

Q. No. 1 Max Marks - 10 DIFFERENTIAL COST ANALYSIS Dawan Company is considering the introduction of a new product which will be manufactured in an existing plant; however, new equipment costing Rs. 300,000 with a useful life of five years will be necessary. The space in the existing plant to be used for the new product is currently used for warehousing. When the new product takes over the warehouse space, on which the actual depreciation is Rs. 30,000. Dawan Company will rent warehouse space at an annual cost of Rs. 35,000. An accounting study produces the following estimates of differential revenue and expense on an average annual basis: Sales Cost of merchandise sold (excluding depreciation) Depreciation of equipment (straight line) Marketing Expense Rs. 600,000 415,000 60,000 25,000 The company requires an average annual rate of return of 12% (after income tax) on the average investment in proposals. The effective income tax rate is 48%. (Ignore the time value of money). Required: a. The average annual differential cost for the first five years (including income tax which must be considered in evaluating this decision. b. The estimated differential cash flow during the third year. The minimum net income needed to meet the company's requirement for this proposal. d. The estimated annual differential income (after allowing for return on investment in new equipment) resulting from introduction of the new product. c