Question

National Restaurant Supply, Inc., sells restaurant equipment and supplies throughout most of the United States. Management is considering adding a machine that makes sorbet to its line of ice cream making machines. Management will negotiate the price of the sorbet machine with its Swedish manufacturer.

Management of National Restaurant Supply believes the sorbet machine can be sold to its customers in the United States for $3,845. At that price, annual sales of the sorbet machine should be 87 units. If the sorbet machine is added to National Restaurant Supply’s product lines, the company will have to invest $55,000 in inventories and special warehouse fixtures. The variable cost of selling the sorbet machines would be $350 per machine.

Required:

1. If National Restaurant Supply requires a 23% return on investment (ROI), what is the maximum amount the company would be willing to pay the Swedish manufacturer for the sorbet machines? (Round your final answers to nearest whole dollar.)

Target Cost Per Machine	????
Less National Restaurant Supply's Variable Selling cost per machine	????
Maximum Allowable Purchase price per machine	????

2. The manager who is flying to Sweden to negotiate the purchase price of the machines would like to know how the purchase price of the machines would affect National Restaurant Supply’s ROI. Compute the ROI for purchase prices between $2,500 and $3,500 per machine. (Negative answers should be indicated by a minus sign. Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3)

Purchase Price	ROI%
$2500	??%
$2600	??%
$2700	??%
$2800	??%
$2900	??%
$3000	??%
$3100	??%
$3200	??%
$3300	??%
$3400	??%
$3500	??%

Answer 1

Solution:-

1:-

Projected sales (87 machines × $3,845 per machine)	$334,515
Less desired profit (23% × $55,000)	12,650
Target cost for 87 machines	$321,865

Target cost per machine ($321,865 ÷ 87 machines)	$3,700
Less National Restaurant Supply’s variable selling cost per machine	350
Maximum allowable purchase price per machine	$3,350

2:-

The relation between the purchase price of the machine and ROI can be developed as follows:

The above formula can be used to compute the ROI for purchase prices between $2,500 and $3,500 (in increments of $100) as follows:

Purchase price	ROI
$2,500	154.4%
$2,600	141.6%
$2,700	125.8%
$2,800	109.9%
$2,900	94.1%
$3,000	78.3%
$3,100	62.5%
$3,200	46.7%
$3,300	30.8%
$3,400	15.0%
$3,500	-0.8%