Greenwich Plc Has £1million to Invest in New Products and Has

Essay

Greenwich plc has £1million to invest in new products and has to decide between two alternatives. Both projects have an estimated life of 4 years. The annual sales for Project X have been forecast at 50,000 units and for Project Y only 4,000 units.
Recent experience suggests that any new products will face severe competition and it is becoming increasingly difficult for managers to prepare reliable forecasts. Senior managers are therefore very concerned about the sensitivity of revenues and costs for the projects.
Details of the proposals
$$\begin{array} { | l | l | l | } \hline & \text { Project } & \text { P roject Y } \\\hline & \text { Unit £} & \text { Unit £ } \\\hline \text { Selling price } & 290 & 890 \\\hline \text { Costs: } & & \\ \hline \text { Labour } & 200 & 40 \\\hline \text { Material } & 25 & 320 \\\hline \text { Variable Overhead } & 25 & 41 \\\hline\end{array}$$
The cost of capital for the group is 10%
Total fixed costs for project X are forecast at £1,500,000 and this includes £500,000 of head office charges. A residual value has been estimated at £100,000.
Total fixed costs for project Y are forecast at £1,250,000 and this includes £300,000 of head office charges. There will be no residual value.
Calculate how sensitive Project Y and Project X is to increases in variable overhead costs.