View the step-by-step solution to:

Year Net cash flows 0 (140,000) 1 23,240 2 45,78 3 54,320 4 54,320 5 54,320 Budget data for the first year of the re-cover service are as follows:

Year Net cash flows

0 £(140,000)

1 £23,240

2 £45,78

3 £54,320

4 £54,320

5 £54,320


Budget data for the first year of the re-cover service are as follows:

  Large Medium Small

Sales (units) 2,300 1,500 2,800

Selling price per unit £112 £84 £56

Direct labour cost per unit £12.60 £8.40 £6.30

Fabric cost per unit £44.80 £32.20 £21

Contribution per unit £54.60 £43.40 £28.70


Specific Fixed Costs:

·        Factory power costs: £84,000 per annum

·        Lease of equipment for re-cover service: £70,000 per annum 

The expected time to produce each size of cover is as follows:

Re-cover Service

Time to make each cover

Large Medium Small

0.6 hour 0.4 hour 0.25 hours


The production director has now informed the board that the supply of skilled labour for year 1 will be restricted to a maximum of 2,500 hours.

The company's cost of capital is 10% per annum.




a)       Calculate the budgeted profit after specific fixed costs, for year 1 of the re-cover operation, assuming demand can be met in full.                               

b)       Calculate the sales mix that will maximise budgeted profit for year 1 of the re-cover operation based on the limited availability of labour.                                                           

c)        Suggest two actions that the company could take to overcome the shortage of labour.     

d)       Calculate the payback period for the re-cover project.                         

e)       Calculate the net present value for the re-cover project.                       

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