Question 1

A company makes and sells a single product. At the beginning of Year 1, there are no opening inventories. Variable production cost is $7 per unit and the sales price is $12 per unit. Fixed costs are $4,000 per annum, of which $1,800 are fixed production costs. Units produced and sold are as follows:-


Year 1             Year 2

Units               Units

Sales                                        1600              2000

Production                              1800              1800



Prepare an Income Statement in which you calculate the profit in each year and over the two years in total using:-

  1. Absorption costing
  2. Marginal costing
  3. Critically discuss the differences in the Profit calculations


Question 2

Blue Ltd is a technology company and is considering a number of different capital projects. An initial outlay of €144,000 is payable immediately. There are two investment options – Project A or Project B – which will yield cash-flows over three years as follows:

Project A Project B
Projected Cash-inflows Projected Cash inflows
Year 1 40,000 83,000
Year 2 60,000 65,000
Year 3 95,000 76,000


The company has a cost of capital of 8%.



  1. For Project A and Project B calculate:
    1. Net present Value (NPV)
    2. Discounted Payback
    3. Accounting Rate of Return (ARR)
    4. Estimated Internal Rate of Return (IRR)
  2. Critically evaluate which project should be undertaken.

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