Question

Kangaroo Company (KC) is a holding company that owns various businesses. KC is thinking of purchasing an existing grocery store and is choosing amongst three alternatives: a discount grocery store, a grocery store that would compete with chain grocery stores, and a premium grocery store.

Research has gleaned the following information on the three alternatives:

	Discount Store	Conventional Store	Premium Store
Quarterly Fixed Costs	$7,500,000	$9,500,000	$12,500,000
Contribution Margin Ratio	43%	47%	55%
Projected Quarterly Sales	$19,000,000	$22,000,000	$24,000,000

The initial investment in each facility will be three times quarterly fixed costs. Based solely on financial considerations, which store type would you recommend?

	Discount Store	Conventional Store	Premium Store
Quarterly Fixed Costs
Contribution Margin Ratio
Projected Quarterly Sales
Breakeven Revenue
Quarterly Income
Investment Required
Return on Investment

Answer 1

	Discount Store	Conventional Store	Premium Store
Quarterly Fixed Costs	$7,500,000	$9,500,000	$12,500,000
Contribution Margin Ratio	43%	47%	55%
Projected Quarterly Sales	$19,000,000	$22,000,000	$24,000,000
Break even Revenue	$17,441,860.47	$20,212,765.96	$22,727,272.73
Quarterly Income	$670,000	$840,000	$700,000
Investment Required	$22,500,000	$28,500,000	$37,500,000
ROI	2.98%	2.95%	1.87%
Hence, conventional store is recommended since highest projected income and Relatively high ROI

Discount Store Conventional Store Premium Store 3 Quarterly Fixed Costs 7500000 9500000 12500000 4. Contribution Margin Ratio 0.43 0.47 0.55 5 Projected Quarterly Sales 19000000 22000000 24000000 6 Break even Revenue =B3/B4 =C3/04 =D3/D4 7 Quarterly Income =B5*B4-B3 =C5*C4-C3 =D5*D4-D3 8 Investment Required =B3*3 =C3*3 =D3*3 9 ROI =B7/B8 =C7/08 =D7/D8 10 Hence, conventional store il