Differential Analysis Involving Opportunity Costs On July 1, Campus Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,500,000 of 2% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Line Item Description Amount Cost of store equipment $1,500,000 Life of store equipment 15 years Estimated residual value of store equipment $75,000 Yearly costs to operate the store, excluding depreciation of store equipment $320,000 Yearly expected revenues—years 1-6 $400,000 Yearly expected revenues—years 7-15 $600,000 Required: Question Content Area 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential AnalysisOperate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)July 1 Line Item Description Operate Retail Store (Alternative 1) Invest in Bonds (Alternative 2) Differential Effects (Alternative 2) Revenues $Revenues $Revenues $Revenues Costs: Costs to operate store Costs to operate store Costs to operate store Costs to operate store Cost of equipment less residual value Cost of equipment less residual value Cost of equipment less residual value Cost of equipment less residual value Profit (loss) $Profit (loss) $Profit (loss) $Profit (loss) Feedback Area Feedback Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal × rate × time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? Question Content Area 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? fill in the blank 1 of 1$

Differential Analysis Involving Opportunity Costs On July 1, Campus Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,500,000 of 2% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Line Item Description Amount Cost of store equipment $1,500,000 Life of store equipment 15 years Estimated residual value of store equipment $75,000 Yearly costs to operate the store, excluding depreciation of store equipment $320,000 Yearly expected revenues—years 1-6 $400,000 Yearly expected revenues—years 7-15 $600,000 Required: Question Content Area 1. Prepare a differential analysis as of July 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential AnalysisOperate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)July 1 Line Item Description Operate Retail Store (Alternative 1) Invest in Bonds (Alternative 2) Differential Effects (Alternative 2) Revenues $Revenues $Revenues $Revenues Costs: Costs to operate store Costs to operate store Costs to operate store Costs to operate store Cost of equipment less residual value Cost of equipment less residual value Cost of equipment less residual value Cost of equipment less residual value Profit (loss) $Profit (loss) $Profit (loss) $Profit (loss) Feedback Area Feedback Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal × rate × time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income? Question Content Area 2. Based on the results disclosed by the differential analysis, should the proposal be accepted? 3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years? fill in the blank 1 of 1$

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter11: Differential Analysis And Product Pricing

Section: Chapter Questions

Problem 1PA: Differential analysis involving opportunity costs On August 1, Rantoul Stores Inc. is considering...

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Question Content Area

Differential Analysis Involving Opportunity Costs

On July 1, Campus Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in $1,500,000 of 2% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:

Line Item Description	Amount
Cost of store equipment	$1,500,000
Life of store equipment	15 years
Estimated residual value of store equipment	$75,000
Yearly costs to operate the store, excluding depreciation of store equipment	$320,000
Yearly expected revenues—years 1-6	$400,000
Yearly expected revenues—years 7-15	$600,000

Required:

Question Content Area

1. Prepare a differential analysis as of July 1 presenting the proposed operation of the store for the 15 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential AnalysisOperate Retail Store (Alt. 1) or Invest in Bonds (Alt. 2)July 1

Line Item Description	Operate Retail Store (Alternative 1)	Invest in Bonds (Alternative 2)	Differential Effects (Alternative 2)
Revenues	$Revenues	$Revenues	$Revenues
Costs:
Costs to operate store	Costs to operate store	Costs to operate store	Costs to operate store
Cost of equipment less residual value	Cost of equipment less residual value	Cost of equipment less residual value	Cost of equipment less residual value
Profit (loss)	$Profit (loss)	$Profit (loss)	$Profit (loss)

Feedback Area

Feedback

Subtract the operating costs and the cost of the equipment less the residual value from the revenues from operating the store. Determine the bond investment interest income for 15 years (principal × rate × time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 from alternative 1. Which alternative has the most desirable effect on income?

Question Content Area

2. Based on the results disclosed by the differential analysis, should the proposal be accepted?

3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?
fill in the blank 1 of 1$

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