Part I
Beautifully Fabulous Beauty Salon (BFBS) manufacturer has two stores. The most recent monthly Income Statement for BFBS.
Total
Store I
Store II
Sales
$2,000,000
$1,200,000
$800,000
Less variable expenses
1,200,000
840,000
360,000
Contribution margin
800,000
360,000
440,000
Less traceable fixed expenses
400,000
220,000
180,000
Segment margin
400,000
140,000
260,000
Less common fixed expenses
300,000
180,000
120,000
Net operating income
$ 100,000
$( 40,000)
$140,000
BFBS is considering closing Store I. If Store I is closed, one-fourth of its traceable fixed expenses would continue unchanged. Also, the closing of Store I would result in a 20% decrease in sales in Store II. BFBS allocates common fixed expenses on the basis of sales dollars.
The following items will be assessed in particular:
- Prepare a new monthly income statement for the company if Store I is closed.
- Evaluate and discuss the impact of the decision of closing Store I.
- Include in your discussion the relevance of traceable and common fixed expenses.
Part II
Beautifully Fabulous Beauty Salon manufactures two products, Beauty Gloss and Cocooning Spray. Beauty Gloss is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Cocooning Spray. Beauty Gloss is produced on an automated production line. Due to the forecast of economic growth, the BFBS is considering purchasing a new machine costing $40,000. The machine will have 10 years of useful life and a salvage value of $6,000. Using the straight-line depreciation method, the original machine cost will be depreciated over 10 years not considering the salvage value in the calculation of the depreciation. The new machine will generate $15,000 in annual net cash flows throughout its useful life (ordinary annuity). To maintain the machine it will require additional working capital of $3,000, which would be released at the end of the useful life. The company’s tax rate is 40% and its discount rate is 10%. Present value tables can be accessed at the following link: http://highered.mcgraw-hill.com/sites/0072994029/student_view0/present_and_future_value_tables.html
The following items will be assessed in particular:
- Prepare a NPV table based on the information given and using the table BFBS Cost Analysis format. The student may use Periasamy, P. (2010). Textbook of Financial Cost and Management Accounting, Global Media 2010 (read chaps 27-29) as a review source.
- Analyze the data in the NPV table.
- Discuss the decision that should be made concerning the investment in the new machine.
As an example, review the spreadsheet below:
Cash
Tax Effect
After-Tax
11%
PV of
Description
Year(s)
Flow
30%
Cash flows
Factor
Cash Flow
New machine cost
Now
($500,000)
-500,000
1.0000
($500,000)
Controls and software
Now
-80,000
-80,000
1.0000
-80,000
Salvage of old machine
Now
12,000
0.70
8,400
1.0000
8,400
New annual cost savings
1 to 12
78,500
0.70
54,950
6.4924
356,755
Depreciation tax shield
1 to 12
-45,000
0.30
-13,500
6.4924
-87647.4
Salvage value of machine
12
20,000
0.70
14,000
0.2858
4,002
Net present value
($298,490.4)
When your discussion paper and spreadsheet analysis are done, upload them.