Sun Systems Ltd. is considering installing a new heating system in its factory to provide heating and power.

Details are as follows:

1. The existing heating system will cost 8,000 to remove, and has no value. If retained, the existing heating system has an expected life of a further 5 years.

2. The new heating system will cost 57,000 including installation expenses of 2,800.

3. The current heating system costs 22,000 per year in energy, 8,000 per year in maintenance and 2,000 per year in depreciation.

4. The new heating system would cost 12,000 per year in energy, cost nothing to maintain in the first 2 years (as it would be under guarantee) and 3,000 per year for the remaining life.

5. The new heating would be depreciated in the accounts on a straight line basis over the life of 5 years. There is no expected residual value.

6. At the end of 5 year period, both old and new heating systems would have the same cost of removal.

7. The companys cost of capital is 10%.

8. All annual costs can be assumed to occur in arrears.

• Calculate the net present value of the new system and recommend whether the new system should be installed. (16 Marks)

Mikey Limited uses Target costing when developing new products. A new product is being considered which has the following costs and revenue information:

Sales: the demand is expected to average 5,000 units per month at a selling price of 7.00 per unit

Materials: the product requires 0.5 kg of material T for each unit

Labour: each unit requires 6 minutes of labour at 14 per hour

Overheads: the product would be manufactured in a separate factory, with total fixed production overheads of 10,000 per month

Profit :the gross margin required is at least 25%

• Calculate the Maximum cost per kilo for material T which company will be ready to pay. (6 Marks)

• Comment on whether standard costing applies in both manufacturing and service businesses and how it may be affected by modern initiatives of continuous performance improvement and reduction. (8 Marks)