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Problem M4-1: Retail, Inc. operates three stores in its Region X sales territory.,M4-2,M4-3...

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Question;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;General advertising1 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 $541,2001allocated on the basis of sales dollars.;Total Store#1 Store#2 Store#3;Administrative expense;Store management;salaries $140,000 $ 42,000 $ 60,000 $;38,000;General office salaries1;100,000 24,000 40,000 36,000;Insurance on fixtures;inventory 50,000 15,000 18,000 17,000;Utilities;212,000 62,000 80,000 70,000;Employment taxes;114,000 33,000 43,800 37,200;General office-other1150,000 36,000 60,000;54,000;Total administrative;expense $766,000 $212,000 $301,800 $252,2001allocated on the basis of sales dollars.;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 person?s 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 region?s 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 person?s compensation is $12,000 per quarter.;Required;1] Prepare a schedule showing the;change in revenues and expense and the impact on the Region?s 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#37746 | Written in 18-Jul-2015

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