In the past, Khatri Foods has expanded to more than 200 stores, 80% of which are franchised. Two of the company-operated units, Northside and Southside, are among the fastest-growing stores. Both are considering expanding their menus to include pizza. Purchase and installation of the necessary equipment costs $180,000 per store.
The current investment in the Northside store totals $890,000 – an amount that has not changed in the past two years. For the most recent year, store revenues were $1,100,500 and expenses were $924,420. It is expected that adding pizza to Northside’s menu would increase profits by $30,600.
The current investment in the Southside store totals $1,740,000 – an amount that has not changed in the past two years. For the most recent year, store revenues were $1,760,800 and expenses were $1,496,680. It is expected that adding pizza to Southside’s menu would increase profits by $30,600.
- Calculate the return on assets for both stores
- Before pizza is added
- For the pizza project only
- After pizza has been added (based on projections)
- Assuming a 14% cost of capital, calculate residual income for both stores before and after the potential menu expansion.
- What will be the expansion decision of each store manager assuming her performance is evaluated
- Using return on assets
- Using residual income
Summary: This question belongs to management accounting and discusses about a company’s expansion decision and to calculate the return on assets.
Total word count: 149
Download Full Solution