trident acc310 module 4 case latest july 2016

Module 4 - Case

ANALYSIS OF PROFITABILITY AND CAPITAL BUDGETING

Case Assignment

This case has two separate parts.

Part I

Beautifully Fabulous Beauty Salon (BFBS) manufacturer has two stores. The most recent monthly Income Statement for BFBS.

Total

Store I

Store II

Sales

$2,000,000

$1,200,000

$800,000

Less variable expenses

1,200,000

840,000

360,000

Contribution margin

800,000

360,000

440,000

Less traceable fixed expenses

400,000

220,000

180,000

Segment margin

400,000

140,000

260,000

Less common fixed expenses

300,000

180,000

120,000

Net operating income

$ 100,000

$( 40,000)

$140,000

BFBS is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. BFBS allocates common fixed expenses on the basis of sales dollars.

The following items will be assessed in particular:

Prepare a new monthly income statement for the company if Store I is closed.

Evaluate and discuss the impact of the decision of closing Store I.

Include in your discussion the relevance of traceable and common fixed expenses.

Part II

Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is produced on an automated production line. Due to the forecast of economic growth, the BFBS is considering purchasing a new machine costing $40,000. The machine will have 10 years of useful life and a salvage value of $6,000. Using the straight-line depreciation method, the original machine cost will be depreciated over 10 years not considering the salvage value in the calculation of the depreciation. The new machine will generate $15,000 in annual net cash flows throughout its useful life (ordinary annuity). To maintain the machine it will require additional working capital of $3,000, which would be released at the end of the useful life. The company's tax rate is 40% and its discount rate is 10%. Present value tables can be accessed at the following link: http://highered.mcgraw-hill.com/sites/0072994029/student_view0/present_and_future_value_tables.html

The following items will be assessed in particular:

Prepare a NPV table based on the information given and using the table BFBS Cost Analysis format. The student may use Periasamy, P. (2010). Textbook of Financial Cost and Management Accounting, Global Media 2010 (read chaps 27-29) as a review source.

Analyze the data in the NPV table.

Discuss the decision that should be made concerning the investment in the new machine.

As an example, review the spreadsheet below:

Cash

Tax Effect

After-Tax

11%

PV of

Description

Year(s)

Flow

30%

Cash flows

Factor

Cash Flow

New machine cost

Now

($500,000)

-500,000

1.0000

($500,000)

Controls and software

Now

-80,000

-80,000

1.0000

-80,000

Salvage of old machine

Now

12,000

0.70

8,400

1.0000

8,400

New annual cost savings

1 to 12

78,500

0.70

54,950

6.4924

356,755

Depreciation tax shield

1 to 12

-45,000

0.30

-13,500

6.4924

-87647.4

Salvage value of machine

12

20,000

0.70

14,000

0.2858

4,002

Net present value

($298,490.4)

When your discussion paper and spreadsheet analysis are done, upload them.

Assignment Expectations

It is important to answer the questions above. The discussion should be four to six pages and written in a clear and concise manner. Support your discussion with references in APA format. You are encouraged to use Excel or other compatible spreadsheet when computations are involved.

When your paper is done, send it in.