Reference no: EM132855691

1) An investment of Php20 million would be needed to start production of this new product category- PhP10 million for building and equipment; Php10 million for working capital needs (accounts receivable, inventory, accounts payable);

2) The average total cost of producing each meal pack is PhP135.00 for the first year; this average total cost could increase by Php12 in the second year.

3) Total cash-operating expense for the first year of operations would be Php6 million; for the second year, total costs could be reduced by Php750,000.

4) Around 30,000 microwaveable meals could be sold during the first year of operations; by the second year, total sales volume would double.

5) The subsidiary would be financed fully by Company DR-it would not incur any debt.

6)The SRP of each meal would remain at Php300.00 during its first two years of operations.

7) The investment in building and equipment would be depreciated over 15 years, with a salvage value of Php1 million.

8) The relevant corporate tax rate for this company is 30%. (NOTE: If the subsidiary's EBT is negative, no taxes are due). Given this, complete the following requirements:

a) Compute the BEP in units for the new subsidiary for its first and second year of operations, and indicate whether or not the BEP is achieved given the forecast information.

b) Prepare the Income Statement for the subsidiary for its first and second year of operations.

c) Compute the horizontal and vertical analysis of the subsidiary's income statement for its first and second year of operations.

d) Given all that you have prepared, arrive at a recommendation to the CEO of Company DR as to whether or not the planned launch of this subsidiary should be pursued. You may use additional qualitative factors to support your recommendations.