SAF is a manufacturer of military hardware. Shown below is a simplified
projected income statement for its small arms division.
SAF
Small Arms Division
Income Statement
Revenue:
Sales (100,000 units at Sh. 600 per unit)
Cost of goods sold:
Cost (100,000 units at Sh. 250 per unit)
Operating expenses:
Variable cost (100,000 units at Sh. 50 per unit)
Fixed cost
General administrative expenses:
Variable cost (100,000 units at Sh. 50 per unit)
Fixed cost
Operating income
Sh.
60,000,000
25,000,000
5,000,000
5,000,000
5,000,000
10,000,000
10,000,000

STUDENTS t DISTRIBUTION
PERCENTILE VALUES (tp)
for
STUDENTS t DISTRIBUTION
With v degrees of freedom
(shaded area = p)
tp
Financial expense:
Bond interest expense
Income before taxes
Taxes
Net income
2,000,000
8,000,000
4,000,000
4,000,000
SAF has received an offer from an African country to purchase 20,000 small arms at a
price of Sh. 500 per unit. SAF has a production capacity of 150,000 unit per year in
its small arms division. Obtaining a permit to sell the arms abroad will not pose a
problem.
Required:
What course of action do you recommend for SAF? (10 marks)