National Restaurant Supply, Inc., sells restaurant equipment and supplies throughout most of the...

Question:

National Restaurant Supply Inc. sells restaurant equipment and supplies throughout most of the United States.

Management is considering adding a machine, that makes sorbet, to its line of ice cream making machines.

Management will negotiate the price of the sorbet machine with its Swedish manufacturer.

Management of National Restaurant Supply believes the sorbet machine can be sold to its customers in the United States for $3,810.

At that price, annual sales of the sorbet machine should be 88 units.

If the sorbet machine is added to National Restaurant Supply's product lines, the company will have to invest $54,000 in inventories and special warehouse fixtures.

The variable cost of selling the sorbet machines would be $335 per machine.

Required:

1. If National Restaurant Supply requires a 20% return on investment (ROI), what is the maximum amount the company would be willing to pay the Swedish manufacturer for the sorbet machines?

(Round final answers to nearest whole dollar)

2. The manager, who is flying to Sweden to negotiate the purchase price of the machines, would like to know how the purchase price of the machines would affect National Restaurant Supply's ROI.

Compute the ROI for purchase prices between $2,600 and $3,600 per machine.

(Round your percentage answers to 1 decimal place)

Return on Investment:

Return on investment is an area of managerial accounting, which is a popular versatile and simple metric used by investors and management to measure the profitability of investments.

Answer and Explanation:

1. If National Restaurant Supply requires a 20% return on investment (ROI), what is the maximum amount the company would be willing to pay the Swedish manufacturer for the sorbet machines?

Projected sales 88 $3,810.00 $335,280.00
Less: desired profit -20% $67,056.00
Targeted cost - - $268,224.00
- - - -
Targeted cost per machine - - $3,048.00
Variable cost selling - - $335.00
Maximum allowable purchase price per machine - - $2,713.00

2. The manager, who is flying to Sweden to negotiate the purchase price of the machines, would like to know how the purchase price of the machines would affect National Restaurant Supply's ROI. Compute the ROI for purchase prices between $2,600 and $3,600 per machine.

- Selling price Variable selling cost Purchase price machine Profit/unit units Net income Investment ROI
2600 $3,810.00 $335.00 2600 $875.00 88 $77,000.00 54,000.00 143%
2700 $3,810.00 $335.00 2700 $775.00 88 $68,200.00 54,000.00 126%
2800 $3,810.00 $335.00 2800 $675.00 88 $59,400.00 54,000.00 110%
2900 $3,810.00 $335.00 2900 $575.00 88 $50,600.00 54,000.00 94%
3000 $3,810.00 $335.00 3000 $475.00 88 $41,800.00 54,000.00 77%
3100 $3,810.00 $335.00 3100 $375.00 88 $33,000.00 54,000.00 61%
3200 $3,810.00 $335.00 3200 $275.00 88 $24,200.00 54,000.00 45%
3300 $3,810.00 $335.00 3300 $175.00 88 $15,400.00 54,000.00 29%
3400 $3,810.00 $335.00 3400 $75.00 88 $6,600.00 54,000.00 12%
3500 $3,810.00 $335.00 3500 $-25.00 88 $-2,200.00 54,000.00 -4%
3600 $3,810.00 $335.00 3600 $-125.00 88 $-11,000.00 54,000.00 -20%

Learn more about this topic:

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Return on Investment: Definition, Formula & Example

from Intro to Business: Help and Review

Chapter 25 / Lesson 6
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