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 you prefer and what are the strengths and weaknesses of each?