Question

National Restaurant Supply Inc. sells restaurant equipment and supplies throughout most of the United States. The management of the company is considering adding a machine that makes sorbet to its line of ice cream making machines. Management is preparing to enter into negotiations with the Swedish manufacturer of the sorbet machine concerning the price at which the machine would be sold to National Restaurant Supply. Management of National Restaurant Supply believes the sorbet machine can be sold to its customers in the United States for $4,950. At that price, annual sales of the sorbet machine is expected to be 100 units. If the sorbet machine is added to National Restaurant Supply's product lines, the company will have to invest $600,000 in inventories and special warehouse fixtures. The variable cost of selling the sorbet machines would be $650 per machine. Required 1. If National Restaurant Supply requires a 15% return on investment (ROI), what is the maximum amount the company would be willing to pay the Swedish manufacturer for the sorbet machines? 2. The manager who is flying to Sweden to negotiate the purchase price of the machines would like to know how the purchase price of the machines would affect National Restaurant Supply's ROI. Construct a chart that shows National Restaurant Supply's ROI as a function of the purchase price of the sorbet machine. Put the purchase price on the X-axis and the resulting ROI on the Y- axis. Plot the ROI for purchase prices between $3,000 and $4,000 per machine (assume the function is a straight line). 3. After many hours of negotiations management has concluded that the Swedish manufacturer is unwilling to sell the sorbet machine at a low enough price so that National Restaurant Supply is able to earn its 15% required ROI. Apart from simply giving up on the idea of adding the sorbet machine to National Restaurant Supply's product lines, what could management do?

Answer 1

1)
Projected sales (100 machines × $4,950 per machine)	$ 495,000.00
Less desired profit (15% × $600,000)	$   90,000.00
Target cost for 100 machines	$ 405,000.00
Target cost per machine ($405,000 ÷ 100 machines)	$     4,050.00
Less:  National Restaurant Supply’s variable selling cost per machine	$        650.00
Maximum allowable purchase price per machine	$     3,400.00
2)
ROI = Total projected sales - Total cost/ Invetments
ROI = ($495,000 - ($650 + Purchase price of machines) × 100)/$600,000
The above formula can be used to compute the ROI for purchase prices between $3,000 and $4,000 (in increments of $100) as follows
Purchase Price	ROI
3000	21.67%
3100	20.00%
3200	18.33%
3300	16.67%
3400	15.00%
3500	13.33%
3600	11.67%
3700	10.00%
3800	8.33%
3900	6.67%
4000	5.00%
3)
A number of options are available in addition to simply giving up on adding the new sorbet machines to the company’s product lines. These options include:
1) Modify the selling price. This does not necessarily mean increasing the projected selling price. Decreasing the selling price may generate enough additional unit sales to make carrying the sorbet machines more profitable.
2)Does the company really need a 15% ROI? Does it cost the company this much to acquire more funds?
3) Rethink the investment that would be required to carry this new prod- uct. Can the size of the inventory be reduced? Are the new warehouse fixtures really necessary?
4) Improve the selling process to decrease the variable selling costs.
5) Check the projected unit sales figures. Perhaps more units could be sold at the $4,950 price management should be careful while projecting the targets  .

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