Vermont Automotive is a regional chain of auto parts stores. The managers of the Individual stores are evaluated using ROI. Vermont requires managers to earn an ROI of at least 10 percent of assets. The manager of the Erle store estimates revenues in the following year will be $3,750,000, cost of goods sold will be $2,180,000, and operating expenses for this level of sales will be $310,000. Investment in the store assets throughout the year is $3,500,000 before considering any changes. A representative of Hoffman Audio approached the manager about carrying Hoffman's line of car audio systems. This line is expected to generate $1,000,000 in sales in the coming year at the Erle store with a merchandise cost of $780,000. Annual operating expenses for this additional merchandise line total $120,000. To carry the line of goods, an inventory Investment of $750,000 throughout the year is required. Hoffman is willing to "floor-plan" the merchandise so that the Erle store will not have to invest in any Inventory. The cost of floor planning would be $65,000 per year. Vermont's marginal cost of capital is 7 percent. Ignore taxes. Required: a. What is the Erle store's expected ROI for the coming year if it does not carry Hoffman's merchandise? b. What is the store's expected ROI If the manager Invests in Hoffman's Inventory and carries the audio 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) If evaluated using ROI? e-1. What is Erle store's expected residual income for the coming year if it does not carry Hoffman's merchandise? e-2. What is the store's expected residual income of the manager Invests in Hoffman's Inventory and carries the audio line? e-3. What would the store's expected residual income be if the manager elected to take the floor plan option? e-4. Would the manager prefer (a), (b), or (c) If evaluated using residual income?
Vermont Automotive is a regional chain of auto parts stores. The managers of the Individual stores are evaluated using ROI. Vermont requires managers to earn an ROI of at least 10 percent of assets. The manager of the Erle store estimates revenues in the following year will be $3,750,000, cost of goods sold will be $2,180,000, and operating expenses for this level of sales will be $310,000. Investment in the store assets throughout the year is $3,500,000 before considering any changes. A representative of Hoffman Audio approached the manager about carrying Hoffman's line of car audio systems. This line is expected to generate $1,000,000 in sales in the coming year at the Erle store with a merchandise cost of $780,000. Annual operating expenses for this additional merchandise line total $120,000. To carry the line of goods, an inventory Investment of $750,000 throughout the year is required. Hoffman is willing to "floor-plan" the merchandise so that the Erle store will not have to invest in any Inventory. The cost of floor planning would be $65,000 per year. Vermont's marginal cost of capital is 7 percent. Ignore taxes. Required: a. What is the Erle store's expected ROI for the coming year if it does not carry Hoffman's merchandise? b. What is the store's expected ROI If the manager Invests in Hoffman's Inventory and carries the audio 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) If evaluated using ROI? e-1. What is Erle store's expected residual income for the coming year if it does not carry Hoffman's merchandise? e-2. What is the store's expected residual income of the manager Invests in Hoffman's Inventory and carries the audio line? e-3. What would the store's expected residual income be if the manager elected to take the floor plan option? e-4. Would the manager prefer (a), (b), or (c) If evaluated using residual income?
Cornerstones of Cost Management (Cornerstones Series)
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Chapter14: Quality And Environmental Cost Management
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Transcribed Image Text:Vermont Automotive is a regional chain of auto parts stores. The managers of the individual stores are evaluated using ROI. Vermont
requires managers to earn an ROI of at least 10 percent of assets. The manager of the Erle store estimates revenues in the following
year will be $3,750,000, cost of goods sold will be $2,180,000, and operating expenses for this level of sales will be $310,000.
Investment in the store assets throughout the year is $3,500,000 before considering any changes.
A representative of Hoffman Audio approached the manager about carrying Hoffman's line of car audio systems. This line is expected
to generate $1,000,000 in sales in the coming year at the Erle store with a merchandise cost of $780,000. Annual operating expenses
for this additional merchandise line total $120,000. To carry the line of goods, an Inventory Investment of $750,000 throughout the
year is required. Hoffman is willing to "floor-plan" the merchandise so that the Erle store will not have to invest in any Inventory. The
cost of floor planning would be $65,000 per year. Vermont's marginal cost of capital is 7 percent. Ignore taxes.
Required:
a. What is the Erle store's expected ROI for the coming year If It does not carry Hoffman's merchandise?
b. What is the store's expected ROI If the manager Invests in Hoffman's Inventory and carries the audio 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) If evaluated using ROI?
e-1. What is Erle store's expected residual income for the coming year if it does not carry Hoffman's merchandise?
e-2. What is the store's expected residual income if the manager Invests in Hoffman's Inventory and carries the audio line?
e-3. What would the store's expected residual income be if the manager elected to take the floor plan option?
e-4. Would the manager prefer (a), (b), or (c) If evaluated using residual income?
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