Exam 3 - Practice Problems.pdf

Page 47 solution 1 revenues 12000 disks x 22 per disk

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Page 47 SOLUTION: 1. Revenues (12,000 disks x $22 per disk) $264,000 Materials ((12,000 disks x $15 per disk) 180,000 Gross Margin $84,000 Ordering (40 vendors x $250 per vendor) 10,000 Cataloging (20 new titles x $100 per title) 2,000 Delivery and support (400 deliveries x $15 per delivery) 6,000 Billing and collection 15,000 Operating income $51,000 Rate of return on investment ($51,000/$300,000) 17% 2. The table below shows that if the selling price of game disks falls to $18 and the cost of each disk falls to $12, monthly gross margin falls to $72,000. This results in a return on investment of 13%, which is below ea's target rate of return on investment of 15%. ea will have to cut costs to earn its target rate of return on investment. 3. Revenues (12,000 disks x $18 per disk) $216,000 Materials ((12,000 disks x $12 per disk) 144,000 Gross Margin $ 72,000 Ordering (40 vendors x $250 per vendor) 10,000 Cataloging (20 new titles x $100 per title) 2,000 Delivery and support (400 deliveries x $15 per delivery) 6,000 Billing and collection 15,000 Operating income $39,000 Rate of return on investment ($51,000/$300,000) 13% 4. After EA's workforce has implemented process improvements, its monthly support costs are $31,500, as shown below: Ordering (30 vendors x $200 per vendor) $6,000 Cataloging (15 new titles x $100 per title) 1,500 Delivery and support (450 deliveries x $20 per delivery) 9,000 Billing and collection (300 customers x $50 per customer) 15,000 Total monthly support cost $31,500
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Exam 3 – Practice Problems Page 48 EA now earns $6 ($18 - $12) gross margin per disk. Suppose it needs to sell X game disks to earn at least its 15% target rate of return on investment of $300,000. Then X needs to be such that : $6X - $31,500 > + $3000,000 x 15% = $45,000 $6X > + $76,500 X > + $76,500 + $6 = 12,750 game disks per month
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Exam 3 – Practice Problems Page 49 PROBLEM: In order to induce its managers to attend to both the financial and the non-financial factors that are important determinants of the firm’s long-run performance, BlackWater Corp., a chemical manufacturer, uses a balanced scorecard approach to provide incentives for its senior management. Accordingly, for 2013, the bonus to be paid to the firm’s CEO is to be determined as follows: Weight Minimum Target Maximum Profit Margin (PM) 45% 6% 10% 15% Investment Turnover (IT) 15% 2.0 2.5 3.0 Pollution Index (PI) 40% 80 65 40 Bonus as a % of Base Salary (Bonus %) 10% 30% 60% For 2013, the CEO’s base salary is $500,000. Thus, the CEO’s bonus as a percent of base salary would be computed as: (Bonus % PM x Weight PM ) + (Bonus % IT x Weight IT ) + (Bonus % PI x Weight PI )
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Exam 3 – Practice Problems Page 50 Required: 1. (4 points) Assume that, at the beginning of 2013, BlackWater’s CEO, Ms. Meefirst, expected that the firm would be able to achieve the targeted levels for each of the determinants of her bonus. In January, 2013, Ms. Meefirst was presented with a proposal to invest in a new pollution abatement technology that would result in a 10% reduction of the firm’s pollution index and a 25% reduction of its investment turnover. The investment was expected to have a negligible effect of the firm’s profit margin.
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