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Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114ROI, EVA, and Different Asset Bases
House Station, Inc., is a nationwide hardware and furnishings chain. The manager of the House Station Store in Portland is evaluated using ROI. House Station headquarters requires an ROI of 10 percent of assets. For the coming year, the manager estimates revenues will be $2,340,000, cost of goods sold will be $1,467,000, and operating expenses for this level of sales will be $234,000. Investment in the store assets throughout the year is $1,687,500 before considering the following proposal.
A representative of Sharp’s Appliances approached the manager about carrying Sharp’s line of appliances. This line is expected to generate $675,000 in sales in the coming year at the Portland House Station store with a merchandise cost of $513,000. Annual operating expenses for this additional merchandise line total $76,500. To carry the line of goods, an inventory investment of $495,000 throughout the year is required. Sharp’s is willing to floor plan the merchandise so that the House Station store will not have to invest in any inventory. The cost of floor planning would be $60,750 per year. House Station’s marginal cost of capital is 10 percent. Ignore taxes.
Required
a. What is the Portland House Station store’s expected ROI for the coming year if it does not carry Sharp’s appliances?
b. What is the store’s expected ROI if the manager invests in Sharp’s inventory and carries the appliance line?
c. What would the store’s expected ROI be if the manager elected to take the floor plan option?
d. Would the manager prefer (a), (b), or (c)? Why?
e. Would your answers to any of the above change if EVA was used to evaluate performance? For purposes of this problem, assume no current liabilities.
Verified
Step 1 of 4
a. and b.
?Income statements to summarize the alternatives are as follows:
| Regular Merchandise |
| Appliances |
| Total | ||||
Revenue? |
| $2,340,000 |
|
|
| $675,000 |
|
| $3,015,000 |
Cost of sales? |
| 1,467,000 |
|
|
| 513,000 |
|
| 1,980,000 |
Gross margin? |
| $?873,000 |
|
|
| $162,000 |
|
| $1,035,000 |
Operating expense? |
| 234,000 |
|
|
| 76,500 |
|
| 310,500 |
Operating profit? |
| $ 639,000 |
|
|
| $?85,500 |
|
| $?724,500 |
Investment? |
| ÷ $1,687,500 |
|
|
| ÷ $495,000 |
|
| ÷ $2,182,500 |
ROI? |
| (a.) 37.87% |
|
|
| 17.27% |
|
| (b.) 33.20% |
?Although the appliances provide a return greater than the cost of capital, it lowers the status quo ROI.
Step 2 of 4
Step 3 of 4
Step 4 of 4
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