Q#6

Hys is a nationwide hardware and furnishings chain. The manager of the Hys Store in Boise is evaluated using ROI. Hys headquarters requires an ROI of 8 percent of assets. For the coming year, the manager estimates revenues will be $4,800,000, cost of goods sold will be $3,024,000, and operating expenses for this level of sales will be $480,000. Investment in the store assets throughout the year is $3,350,000 before considering the following proposal.

A representative of Ace Appliances approached the manager about carrying Ace's line of appliances. This line is expected to generate $1,440,000 in sales in the coming year at Hys Boise store with a merchandise cost of $1,094,400. Annual operating expenses for this additional merchandise line total $150,000. To carry the line of goods, an inventory investment of $1,020,000 throughout the year is required. Ace is willing to floor-plan the merchandise so that the Hy store will not have to invest in any inventory. The cost of floor planning would be $126,000 per year. Hys marginal cost of capital is 8 percent. Ignore taxes.

Required:

a. What is Hys Boise store's expected ROI for the coming year if it does not carry Ace's appliances?

b. What is the store's expected ROI if the manager invests in Ace's inventory and carries the appliance line?

c. What would the store's expected ROI be if the manager elected to take the floor plan option?

d. Would the manager prefer (a), (b), or (c) if evaluated using ROI?

e-1. What is Hys Boise store's expected residual income for the coming year if it does not carry Ace's appliances?

e-2. What is the store's expected residual income if the manager invests in Ace's inventory and carries the appliance line?

e-3. What would the store's expected residual income be if the manager elected to take the floor plan option?

e-4. Would the manager prefer (a), (b), or (c) if evaluated using residual income?

Req A

	Regular Merchandise
Operating profit
Investment
ROI		%

Req B

	Regular Merchandise & Appliances
Operating profit
Investment
ROI		%

Req C

Expected ROI

%

Req D

Would the manager prefer (a), (b), or (c) if evaluated using ROI?

	The case where the manager elected to take the floor plan option.radio button unchecked1 of 3 The case where Hy's Boise store does not carry Ace's appliances.radio button unchecked2 of 3 The case where the manager invests in Ace's inventory and carries the appliance line.radio button unchecked3 of 3

Rec E1

	Regular Merchandise
Operating profit
Capital cost
Residual income (RI)

Req E2

	Regular Merchandise & Appliances
Operating profit
Capital cost
Residual income (RI)

Req E3

What would the store's expected residual income be if the manager elected to take the floor plan option?

	Floor Plan
Operating profit
Capital cost
Residual income (RI)

Req E4

The case where the manager elected to take the floor plan option.radio button unchecked1 of 3

The case where Hy's Boise store does not carry Ace's appliances.radio button unchecked2 of 3

The case where the manager invests in Ace's inventory and carries the appliance line.radio button unchecked3 of 3