ACT4.docx Download Attachment;Problem M4-1;Retail, Inc. operates three stores in its Region X sales territory. A segmented absorption;costing income statement for the company for the last quarter is as follows;Region X;Income Statement;For the Quarter Ended June 30, 20XX;Total;Store#1;Store#2;Store#3;Sales;$6,000,000 $1,440,000;$2,400,000 $2,160,000;CGS;3,314,400;806,400;1,320,000 1,188,000;Gross margin;2,685,600;633,600;1,080,000;972,000;S & A expense;Selling;1,634,000;462,800;630,000;541,200;Administrative;766,000;212,000;301,800;252,200;Total expense;2,400,000;674,800;931,800;793,400;Net operating income (loss) $ 285,600;$(41,200);$148,200;$178,600;Store #1 has consistently shown losses over the past two years. The company has;asked you to make a recommendation as to whether the store should be closed or kept;open. The company has provided you with the following information;a] Selling and administrative expenses are broken down as follows;Total;Store#1;Store#2;Store#3;Selling expenses;Sales salaries;$478,000;$140,000;$178,000;$160,000;Direct advertising;374,000;102,000;144,000;128,000;1;General advertising;90,000;21,600;36,000;32,400;Store rent;600,000;170,000;240,000;190,000;Depreciation-store fixtures;32,000;9,200;12,000;10,800;Deliver salaries;42,000;14,000;14,000;14,000;Depreciation-delivery equip. 18,000;6,000;6,000;6,000;Total selling expense;$1,634,000 $ 462,800;$ 630,000;$541,200;1;allocated on the basis of sales dollars.;Total;Store#1;Administrative expense;Store management;salaries;$140,000;$ 42,000;1;General office salaries;100,000;24,000;Insurance on fixtures;inventory;50,000;15,000;Utilities;212,000;62,000;Employment taxes;114,000;33,000;37,200;General office-other1;150,000;36,000;Total administrative;expense;$766,000;$212,000;1;allocated on the basis of sales dollars.;Store#2;Store#3;$ 60,000;40,000;$ 38,000;36,000;18,000;17,000;80,000;70,000;43,800;60,000;54,000;$301,800;$252,200;b] The lease on store#1 can be broken with no penalty.;c] The fixtures from store#1 would be transferred to the other two stores if store#1 is;closed.;d] The general manager of store#1 would be retained and transferred to another;position in the region if store#1 is closed. She would be filling a position that would;otherwise be filled by hiring a new employee at a salary of $22,000 per quarter. The;general manager of store#1 would retain her current salary of $24,000 per quarter. All;other employees of store#1 will be discharged.;e] The region has one delivery crew that serves all three stores. One delivery person;could be discharged if store#1 were closed, this persons salary is $8,000 per quarter.;The delivery equipment would be distributed to the other two stores. The equipment;does not wear out thru use but does eventually become obsolete.;f] The regions employment taxes are 15% of salaries.;g] One-third of the insurance in store#1 is on the stores fixtures.;h] The General office salaries and General office-other relate to the overall;management of Region X. If store#1 were closed, one person in the general office could;be discharged because of the decrease in workload. This persons compensation is;$12,000 per quarter.;Required;1] Prepare a schedule showing the change in revenues and expense and the impact;on the Regions overall net operating income that would result if store#1 were closed;assume all sales from store#1 would be lost. What do you recommend? Show all;calculations.;2] Now assume that if store#1 were closed, at least 25% of its sales would transfer to;store#3. Store#3 has enough capacity to handle the increased sales. The increased;sales in store#3 would yield the same gross margin as a percentage of sales as present;sales in that store. What effect would these factors have on your recommendation?;Show all computations to support your answer.;Problem M4-2;Your client has a potential business opportunity. He has given you the following;information.;1] Rent will be $3,500 per month.;2] Equipment will cost $270,000, estimated life is 15 years after which it will have;a salvage value of $18,000. Depreciation will be straight line after considering the;salvage value.;3] Projected sales are $300,000 per year and CGS are projected at 20% of sales.;4] Operating costs are;Salaries $70,000 per year;Insurance $3,500 per year;Utilities $27,000 per year;Royalties 12.5% of sales;5] Ignore all income taxes.;Required;a] Prepare a contribution format income statement that shows the expected annual;net operating income.;b] Compute the simple rate of return for the project. Your client requires a simple rate;of return of 14%, should he do the deal?;c] Compute the payback period for the project. If your client wants a payback period of;four years or less, will he do the deal?;Problem M4-3;Little Boat, Inc. has a boat that is worn out. It must be either overhauled or replaced;with a new boat. You have been given the following information;Old Boat;New Boat;Purchase cost new;31,500;45,000;Remaining book value;17,250;Overhaul needed now;10,500;Annual cash operating costs;15,000;7,500;Salvage value now;13,500;Salvage value eight years from now;1,500;6,000;If the company keeps and overhauls the old boat, it will be useable for eight more years.;If the company buys a new boat it will be used for eight years and then traded on;another boat. Depreciation is computed on a straight line basis. All alternatives are;evaluated using a 16% discount rate. Ignore all income taxes.;Required;a] Using the total cost approach to NPV, should Little Boat, Inc. keep the old boat or;purchase the new one (round all numbers to the nearest dollar)?;b] Using the incremental cost approach to NPV, should Little Boat, Inc. keep the old;boat or purchase the new one (round all numbers to the nearest dollar)?;c] Are the results in (a) and (b) different? Why or why not?
Paper#19442 | Written in 18-Jul-2015Price : $57