ACC 600 IMBA Case 2

Situation 1

Honest Als Auto Dealer purchases used cars at auto auctions and sells them retail. The autos, on average, sell for approximately $15,000 each and cost Al $11,000. The costs that the company incurs in a typical month are listed below:

Costs Cost Formula

Selling:

Advertising $2,500 per month

Preparation of Autos for Delivery $175 per auto sold

Sales salaries & commissions $3,500 per month, plus 5% of sales

Utilities $3,000 per month

Depreciation on sales facility $4,000 per month

Administrative:

Executive salaries $15,000 per month

Depreciation on office equipment $2,400 per month

Clerical $3,200 per month

Insurance $900 per month

During June, Honest Als sold 38 autos.

Prepare a traditional income statement for June.

Prepare a contribution format income statement for June.Show costs and revenues on both a total and per unit basis down through contribution margin.

For the statement you prepared for Part 2, why might it be misleading to show the fixed costs on a per unit basis?

Situation 2

Fly-by-Night, Inc. is strapped for cash for investment projects and must decide which of four projects it will fund. Below are the projects and information about them:

Life of

Net the Internal

Investment Present Project Rate of

Project Required Value* in Years Return

1 $800,000 $221,615 7 18%

2 $675,000 $210,000 12 16%

3 $500,000 $175,175 7 20%

4 $700,000 $152,544 3 22%

*A 10% discount rate was used to compute the net present value.

Required

Compute the project profitability index for each project .

Fly-by-Night wants to rank the projects first, second, third, and fourth based on each of the following:

Rank the four projects in order of preference in terms of :

Internal rate of return

Project profitability index

Net present value.

Which of the three rankings above do youprefer and what are the strengths and weaknesses of each?

Situation 3

Much has been written about the value chain. Find and summarize (not copy) an article on this subject. Cite the author and the publication using APA style. Your summary should be at least 200 words long. Give the meaning of the term value chain and identify a business organization that employs this concept.