Please explain each step. Thanks in advance!
A company has multiple retail stores. One store manager is considering a change in product mix. The manager would like to invest $700,000 in more expensive merchandise (an increase in working capital) with the expectation that it would increase annual sales and variable expenses by $500,000 and $300,000 respectively for each of the next three years. After that time, the manager would release the additional increase in working capital back to corporate. The store manager's compensation (particularly bonuses) is determined by the store's return on investment, which has beel over 20% in each of the last five years. 1. Calculate the return on investment provided by the store manager's investment request 2. Assuming the company's minimum required rate of return is 16%, calculate the residual income earned by the store manager for each of the years the store uses the additional working capital. 3. Should the store manager undertake this opportunity? Why or why not? 4. Would the company want the store manager to do this? Why or why not? Read the following scenario and complete the problem requirements at the end: VP Manufacturing: I thought lean production was supposed to make us more efficient: But just look at our current manufacturing variances. The labor efficiency variance was $240,000 unfavorable - that's four times higher than it has ever been! It took 90,000 hours to produce 30,000 products, that's a 3 hour per unit average when our standard labor is only 2.5 hours. If you add on the $102,000 unfavorable materials price variance, that's $342,000 down the drain in a single month on just one product. Purchasing Manager: We knew the switch to lean production was going to increase our materials costs. But we have partnerships now with top-notch suppliers who deliver materials to the plant three times each day. In a few months we will be able to offset those higher purchasing costs because we will be able to stop renting three different warehouses. Production Manager: Labor efficiency does look bad, but it is not the whole story. The just-in-time flow of our production lines has made our plant more efficient. We've also invested in automation that reduces our materials waste. Part of our lean transformation requires cutting back production to reduce the excess finished goods inventories. In a few months, our warehouses will be cleared out and we will be able to match production with demand. And remember our assembly workers aren't just standing around. Because of our commitment to total quality management, they are doing their own inspections and equipment maintenance now. VP Manufacturing: Well, if you want to earn your bonuses this year, we can't let this go on. I have been looking at these reports for 20 years, I know inefficiency when I see it. We have to get everything back under control. The production manager stops by your desk to ask for your help to develop some performance measures that will highlight the benefits of the company's lean transformation. You pull together the company's standard costs and some other information for the production manager: a. During the month, the company purchased 510,000 feet of material for production at a cost of $3.20 per foot. All material was used to make the 30,000 products b. All employees are considered direct labor - employees who were previously inspections or maintenance employees were reassigned as assembly workers. During the month, laborers worked 90,000 hours at an average pay of $15.85 per hour. c. Variable manufacturing overhead costs are allocated based on direct labor hours. During the month, the company incurred $207,000 in variable costs. A company has multiple retail stores. One store manager is considering a change in product mix. The manager would like to invest $700,000 in more expensive merchandise (an increase in working capital) with the expectation that it would increase annual sales and variable expenses by $500,000 and $300,000 respectively for each of the next three years. After that time, the manager would release the additional increase in working capital back to corporate. The store manager's compensation (particularly bonuses) is determined by the store's return on investment, which has beel over 20% in each of the last five years. 1. Calculate the return on investment provided by the store manager's investment request 2. Assuming the company's minimum required rate of return is 16%, calculate the residual income earned by the store manager for each of the years the store uses the additional working capital. 3. Should the store manager undertake this opportunity? Why or why not? 4. Would the company want the store manager to do this? Why or why not? Read the following scenario and complete the problem requirements at the end: VP Manufacturing: I thought lean production was supposed to make us more efficient: But just look at our current manufacturing variances. The labor efficiency variance was $240,000 unfavorable - that's four times higher than it has ever been! It took 90,000 hours to produce 30,000 products, that's a 3 hour per unit average when our standard labor is only 2.5 hours. If you add on the $102,000 unfavorable materials price variance, that's $342,000 down the drain in a single month on just one product. Purchasing Manager: We knew the switch to lean production was going to increase our materials costs. But we have partnerships now with top-notch suppliers who deliver materials to the plant three times each day. In a few months we will be able to offset those higher purchasing costs because we will be able to stop renting three different warehouses. Production Manager: Labor efficiency does look bad, but it is not the whole story. The just-in-time flow of our production lines has made our plant more efficient. We've also invested in automation that reduces our materials waste. Part of our lean transformation requires cutting back production to reduce the excess finished goods inventories. In a few months, our warehouses will be cleared out and we will be able to match production with demand. And remember our assembly workers aren't just standing around. Because of our commitment to total quality management, they are doing their own inspections and equipment maintenance now. VP Manufacturing: Well, if you want to earn your bonuses this year, we can't let this go on. I have been looking at these reports for 20 years, I know inefficiency when I see it. We have to get everything back under control. The production manager stops by your desk to ask for your help to develop some performance measures that will highlight the benefits of the company's lean transformation. You pull together the company's standard costs and some other information for the production manager: a. During the month, the company purchased 510,000 feet of material for production at a cost of $3.20 per foot. All material was used to make the 30,000 products b. All employees are considered direct labor - employees who were previously inspections or maintenance employees were reassigned as assembly workers. During the month, laborers worked 90,000 hours at an average pay of $15.85 per hour. c. Variable manufacturing overhead costs are allocated based on direct labor hours. During the month, the company incurred $207,000 in variable costs
