Suggested answers to selected
problem questions
(Answers to the remaining problems are to be found in the Solutions Manual that
accompanies this text.)2.1 Talco Ltd
Let the benefits of continuing with the research project be positive.
£
Sales proceeds 250,000
Material – saving on disposal cost 8,000 (see Note 2)
Labour [2,000 ×(£25 −£12)] (26,000) (see Note 3)
Management (£10,000 −£8,000) (2,000) (see Note 4)
Net benefit of completing the project £230,000
Thus the overwhelming benefit lies with continuing with the project.
Notes
1 Costs already incurred, including the £200,000 incurred on the project and £40,000
for materials, are irrelevant to the present decision. What is not irrelevant, however,
is the fact that the project has reached a stage where relatively little cost will bring
it to completion. What it cost to bring it to that stage has no bearing on the present
decision.
2 Talco will be £8,000 better off as a result of continuing with the project since it will not
have to pay to dispose of the material.
3 Since it appears that the skilled labour will be employed at a cost of £25,000, irrespective
of the present decision, this amount is irrelevant. The difference between completing the
project and abandoning it is that in the latter case it can make and sell 2,000 units of a
product, at a net benefit per product of £13 (that is, £25 −£12).
4 Abandoning the project will save £2,000, the difference between the salary and the
redundancy payment.3.1 Counterpoint plc
There has been a marked downturn in performance as measured both by ROCE and by
ROSF. The proportional reduction is rather greater for ROSF than it is for ROCE. This dif-
ference between the reduction in ROCE and ROSF could be consistent with the increase in
gearing, in that, all other things being equal, higher gearing implies higher interest costs.
The alteration in the gearing is, however, fairly small which may mean that there are other
reasons for the difference between ROCE and ROSF.Appendix 4
Chapter 2
Chapter 3
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