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Jenny is the president of the West division of Courland Inc. In December she reviews the...


Jenny is the president of the West division of Courland Inc. In December she reviews the divisions projected accounting stat
Jenny will receive a $100,000 bonus if she can achieve an ROI of 18%. Clearly, she would like to do that. She considers the f
Jenny is the president of the West division of Courland Inc. In December she reviews the division's projected accounting statements for the year. If she does nothing, she expects the division to have $5 million in revenue, $2.4 million in variable costs, and $1.6 million in fixed costs, on volume of 100,000 units. The division has $6 million in assets. Courland has a cost of capital of 12%. Calculate the ROI as a number of %. Answer: Calculate the RI as a number of $. Answer: Jenny will receive a $100,000 bonus if she can achieve an ROI of 18%. Clearly, she would like to do that. She considers the following schemes to earn the bonus. First, West division could ship a lot of extra product to customers at year-end (called channel stuffing). Assume the extra products sell at the typical cost and have the typical variable cost. How many extra units would West
Jenny will receive a $100,000 bonus if she can achieve an ROI of 18%. Clearly, she would like to do that. She considers the following schemes to earn the bonus. First, West division could ship a lot of extra product to customers at year-end (called channel stuffing). Assume the extra products sell at the typical cost and have the typical variable cost. How many extra units would West division need to sell to reach the ROI target? Answer: Alternatively, West division could defer some of its costs (such as maintenance) until next year. This would decrease fixed costs this year. How much fixed cost would need to be deferred to reach the ROI target? Provide an answer as a number of $. Answer: Instead, West division could hide some of its assets from the year-end balance sheet. There are several ways to do that (e.g., repurchase agreements, special purpose entities, or early pay down of operating liabilities). How much assets would need to be hidden to reach the ROI target? Provide an answer as a number of $. Answer:
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Answer #1
Particular   Amount  
Revenue                      5,000,000
Variable cost                    2,400,000
Contribution                      2,600,000
Fixed Cost                      1,600,000
2 Profit                      1,000,000
Assets                      6,000,000
1 ROI 16.67%
Calculation of Desired Contribution
Particular   Amount  
Assets                    6,000,000
Desired ROI 18%                    1,080,000
Add: Bonous                       100,000
Add: Fixed Cost                    1,600,000
Desired Contribution                    2,780,000
Calculation of Number of units to be sold
Sales per unit (5000000/100000) 50
Variable cost per unit (2400000/100000) 24
Contribution per unit 26
3 Desired Unit 106923.0769
106924 (round off)
Alternative when the fixed cost is deffered
Particular   Amount  
Assets                    6,000,000
Desired ROI 18%                    1,080,000
Sales Revenue                    5,000,000
Less: Variable cost                    2,400,000
Contribution                    2,600,000
Less: Bonous                       100,000
Less: Desired Profit                    1,080,000
Amount Available for Fixed Cost                    1,420,000
Already Fixed cost                    1,600,000
4 Reduction in fixed cost                       180,000
Alternative when the fixed asset to be reduced
Particular   Amount  
Sales Revenue                    5,000,000
Less: Variable cost                    2,400,000
Contribution                    2,600,000
Less: Bonous                       100,000
Less: Fixed Cost                    1,600,000
Return                       900,000
Required Fixed Asset @ 18%                    5,000,000
Already have fixed cost                    6,000,000
5 Reduction in fixed cost                    1,000,000
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