pre june mock exam

THIS IS THE QUESTION:
Chase Co (CC) runs a large number of wholesale stores and is increasing the number of these stores all the time. It measures the performance of each store on the basis of a target return on investment (ROI) of 15%. Store managers get a bonus of 10% of their salary if their store’s annual ROI exceeds the target each year. Once a store is built there is very little further capital expenditure until a full four years have passed.

CC has a store (store W) in the west of the country. Store W has historic financial data as follows over the past four years:

20X8

20X9

20Y0

20Y1

Sales ($000)

200

200

180

170

Gross profit ($000)

80

70

63

51

Net profit ($000)

13

14

10

8

Net assets at start of year ($000)

100

80

60

40

The market in which CC operates has been growing steadily. Typically, PC’s stores generate a 40% gross profit margin.

CC has another store (store S) about to open in the south of the country. It has asked you for help in calculating the gross profit, net profit and ROI it can expect over each of the next four years. The following information is provided:

Sales in the first year will be 18,000 units. Sales volume will grow at 10% for years two and three but no further growth is expected in year 4. Sales price will start at $12 per unit for the first two years but then reduce by 5% per annum for each of the next two years.

Gross profit will start at 40% but will reduce as the sales price reduces. All purchase prices on goods for resale will remain constant for the four years.

Overheads, including depreciation, will be $70,000 for the first two years rising to $80,000 in years three and four.

Store S requires an investment of $100,000 at the start of its first year of trading.

PC depreciates non-current assets at 25% of cost. No residual value is expected on these assets.

Calculate (in columnar form) the gross profit of store S over each of its first 4th years.