HARARE INSTITUTE OF TECHNOLOGY

SCHOOL OF ENGINEERING AND TECHNOLOGY

DEPARTMENT OF INDUSTRIAL AND MANUFACTURING ENGINEERING

B-TECH INDUSTRIAL AND MANUFACTURING ENGINEERING

EIM 421: ENGINEERING ECONOMIC ANALYSIS & COST ESTIMATION

(Block B)

END OF SEMESTER II EXAMINATION

Duration: 3 hours Date:May/June 2014

Instructions to Candidates:
1. Answer any Four questions from a total of Six
2. Each question carries 25 marks.
3. Clear and neat presentation of writing and computations is recommended

Requirements:
1. Answer booklet
2. A non-programmable calculator

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Question 1
a) Pazuwa Pvt. Limited wishes to purchase a property which has an annual payment of $300. The
payments will be paid annually in advance. Pazuwa has a cost of capital of 12% per annum.
Determine the present value of the lease payments over a five year period. [5]
b) A company is considering an investment project that has a life of four years and requires an
initial investment of $800,000. Net cash inflows are estimated to be $281,000 per year. The
project is discounted at 12% per annum. Ignoring tax and inflation, calculate, to the nearest 3 s.f.,
the net present value of the project and whether the project will be financially viable. [10]
c) EF manufactures and sells three products, X, Y and Z. The following production overhead
costs are budgeted for next year:
Table Q1.1- Activity data
Activity $
Set up 560,000
Material handling 242,000
Inspection 386,000
Total production overheads 1,188,000

Budgeted details for each of the products for next year are as follows:
Table Q1.2 Budgeted details
Product X Product Y Product Z
Production units 10,000 16,000 18,000
Batch size 100 200 300
Number of set ups per batch 2 3 6
Number of material movements 16,530 20,938 17,632
Number of inspections 1,188 1,782 2,430
Required:
Calculate the total budgeted production overhead cost for each product using activity based
budgeting. [10]
[Total: 25 Marks]

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Question 2
a) A company is considering five investment projects as follows:
Table Q2.1 Projects data
Project Investment ($) Profitability Index
A 12,000 0.20
B 8,000 0.05
C 20,000 0.60
D 16,000 0.40
E 14,000 0.30
The company has $40,000 available for investment. Projects C and D are mutually exclusive. All
projects can be undertaken only once and are divisible. Calculate the maximum net present value
(NPV) that can be earned from the projects given that there is only $40,000 available for
investment. [17]
b) Salukazi Limited is optimistic about the future economic prospects and has decided to expand
its operations. To expand, it will need to borrow funds to finance the acquisition of property,
plant and equipment. The following data in Table Q2.2 was extracted from the firms financial
statement for the years ended 31 March 2010 and 2011:
Table Q2.2 Financial data
2011 2010
$ $
Total assets 825 000 928 750
Ordinary shareholders equity 472 500 415 000
Long term debt 125 000 237 500
Total debt 352 500 513 750
Earnings before interest and tax 134 900 40 250
Interest charges 18 750 15 000
Required:
i) Compute any two (2) relevant financial leverage ratios for the two years. [8]
[Total: 25 Marks]

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Question 3
Amandla Inc. is considering the purchase of Johnson Company. The audited balance sheet and
income statement a month before the date of purchase, December 31, 2011, is as follows:

Johnson Company Income Statement for the Year Ending December 31, 2011
Sales revenue $350,000
Less: Cost of goods sold (includes $45,000 Johnson inventory) $130,000
Gross profit $220,000
Selling expenses (includes $4,000, copyright amortization) $44,000
Administrative expenses (includes $5,000 employee training amortization) $63,000
Depreciationbuilding (includes $4,000, Johnson building) $25,000
Depreciationequipment (includes $8,000, Johnson equipment) $18,000
Patent amortization (for Johnson patents) $ 7,500
Total operating expenses $157,500
Operating income $ 62,500
Less: Interest expense (minus $200 premium amortization) $ 9,800
Income before taxes $ 52,700
Provision for income tax (40%) ($21,080)
Net income $ 31,620
Johnson Company Balance Sheet for the Year Ending December 31, 2011
Assets Liabilities and Equity
Current assets:
Accounts receivable . . . . . . . . . $28,000 Current liabilities . . . . . . . . $ 5,000
Inventory . . . . . . . . . . . . . . . . $40,000 Bonds payable . . . . . . . . . $20,000
Total current assets . . . . . . . . $ 68,000 Total liabilities . . . . . . . . . . . . . $ 25,000
Long-term assets:
Land . . . . . . . . . . . . . . . . . . . $10,000
Buildings (net) . . . . . . . . . . . . . 40,000 Stockholders equity
Equipment (net) . . . . . . . . . . . . 20,000 Common stock ($1 par) . . . . . . . $ 1,000
Patent (net) . . . . . . . . . . . . . . . 15,000 Paid-in capital in excess of par. $59,000
Goodwill (existing) . . . . . . . . . . 20,000 Retained earnings . . . . . . . . . . $88,000

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Total long-term assets . . . . . . . 105,000 Total stockholders equity . . . .
$148,000
Total assets . . . . . . . . . . . . . . . . $173,000 Total liabilities and equity . . . . 173,000
Consider the above data. Do an analysis and advise Amandla Inc. accordingly. [25]
[Total: 25 Marks]

Question 4
a) Mamvura has budgeted sales for next year of 24,000 units and inventory levels are expected to
remain constant throughout the year. Each unit produced will require 3 labour hours and the
budgeted labour rate will be $15 per hour. It is estimated that 10% of units produced will be
wasted. It is expected that 15% of the total hours worked will be paid at overtime rates. 10% of
the total hours will be paid at the basic rate plus an overtime premium of 50% of the basic rate.
5% of the total hours will be paid at the basic rate plus an overtime premium of 100% of the
basic rate. Calculate the labour cost budget for next year. [10]
b) Estimate total cost of the metal component shown in Fig Q1 below, if material lost in
machining is 15% of the weight of the component, and density of the material is 8gcm-3, cost of
the metal is $60 per kg, machining charges are 30cents per 10cm2 of finished surface and total
overhead charges are 5% of the material cost. [10]

Figure Q1 Metal component

c) Paradzai Company is developing a new production system serving 6,900 people and
containing 300,000 lines of C++ code. Previously, the company developed a similar 120,000
lines of code system for $13,000,000 for only 2,300 people. The engineering team tells you that
the new system is 20% more complicated than the other system. You have also previously
developed the following Cost Estimation Relationship (CER) shown, where LOC stands for
lines of code: Cost = LOC x $1.50(LOC) 2
Page 5 of 8
The CER was developed to estimate a new production system based on lines of code (LOC). The
CER is based on systems ranging from 100,000 to 300,000 LOC. Determine the total price of
developing the new system using analogous cost estimation. (Show detailed working) [5]
[Total: 25 Marks]

Question 5
Gorerino produces three models of trailers for sale to the retail market. Gorerino currently
operates a standard absorption costing system. Budgeting information for next year is given
below:

Table Q5.1 Budgeting Information

Model of trailer Superior Deluxe Ultra Total
$000 $000 $000 $000
Sales 54,000 86,400 102,000 242,400
Direct material 17,600 27,400 40,200 85,200
Direct labour 10,700 13,400 16,600 40,700
Production overhead 69,600
Gross profit 46,900

Table Q5.2 Data

Superior Deluxe Ultra
Production / sales (number of trailers) 1,000 1,200 800
Machine hours per trailer 100 200 300

The production overhead cost is absorbed using a machine hour rate. Gorerino is considering
changing to a marginal costing system. The main activities and their associated cost drivers and
overhead cost have been identified as follows:

Page 6 of 8
Table Q5.3 Cost Driver
Activity Cost Driver Production overhead cost $000
Machining Machine hours 13,920
Set up Number of set ups 23,920
Quality inspection Number of quality inspections 14,140
Stores receiving Number of component deliveries 6,840
Stores issue Number of issues from stores 10,780
69,600

The analysis also revealed the following information:

Table Q5.4 Production Data
Superior Deluxe Ultra
Budgeted production (number of trailers) 1,000 1,200 800
Trailers per production run 5 4 2
Quality inspections per production run 10 20 30
Number of component deliveries 500 600 800
Number of issues from stores 4,000 5,000 7,000
The machines are set up for each production run of each model.
a) Calculate the total gross profit for each model of speedboat using:
i) The absorption costing system; [8]
ii) The marginal costing system. [12]
b) Explain why a marginal costing system may produce more accurate costing than a traditional
absorption costing system. [5]
[Total: 25 Marks]

Question 6
Shamwari Limited produces buckets. The projected sales for the first quarter of the coming year;
beginning and ending inventory data are as follows:
Sales in units 150 000
Unit price $15
Beginning inventory 8 000 units

Page 7 of 8
Targeted ending inventory 12 000 units
The buckets are moulded and then handles are placed. Each bucket requires 1.5 kg of plastic,
which costs $2 per kg. The beginning inventory of materials is 1,500 kg. Shamwari Limited
requires 2,000 kg of plastic in inventory at the end of the quarter. Each bucket produced requires
15 minutes of direct labour time, which is billed at $7.00 per hour. The standard cost per bucket
is $10.00.
Required:
a) Prepare the following budgets for the first quarter:
i) Production budget [5]
ii) Direct materials purchases budget [8]
ii) Direct labour budget. [7]
b) Discuss the implications of the above budgets prepared, giving recommendations if you
perceive any are required. [5]
[Total: 25 Marks]

End of Examination. All the best!

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