Question

Task 2

They believe it will cost them $250,000 to purchase the land near Fort Lee and to build a bakery and storefront. Your task is:

1) Calculate Return on Investment if the expected increase in net income, due to opening the new location near Ft. Lee, is $35,000.

2) Calculate Asset Turnover Rate and Margin if the expected sales increased to $450,000

3) Calculate Residual Income if the required rate of return is 15%.

Type of cake	Expected Annual sales	Selling Price per cake	Raw Ingredient (Direct Materials)cost per cake	Direct Labor Hour per cake
1 tier wedding cake	500	$200	$40	4
2 tier wedding cake	300	$300	$50	6
3 tier wedding cake	100	$400	$75	8
Large sheet cake	450	$120	$25	3
Medium sheet cake	600	$90	$15	2
Small sheet cake	750	$50	$10	2

Expense	Estimated annual amount
Total direct materials	$70,250
Total direct labor	$108,125
Total factory overhead	$47,900
Selling Cost	$17,500
Administrative Costs	$108,700
Total Costs	$352,475
Variable verses Fixed Costs
Total Variable Costs	$202,475
Total Fixed Costs	$150,000
Total costs	$352,475

Answer 1

1. Return on investment =net income /capital employed

Increase in net income is the net income from the new shop

net income in new shop =$35000

Capital employed =$250000

ROI =35000/250000*100 = 14%

2. Asset turnover = sales/capital employed

sales =$450000

capital employed =$250000

Asset turnover =450000/250000 = 1.8 times

Profit margin = net income/sales

profit margin = 35000/45000 *100 = 7.7%

3. Residual income = net income - notional interest incurred

net income = $35000

interest incurred =250000*15% = $37500

Residual income =35000-37500 = $-2500

There will be negative residual income