Managerial Accounting (Warren)
Chapter 9 Differential Analysis and Product Pricing
P9-1B Differential Analysis report involving opportunity costs
On November 1, Essences Stores 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 $140,000 of 5% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled:
Cost of store equipment 140,000
Life of store equipment (years) 16
Estimated residual value of store equipment 15,000
Yearly costs to operate the store, excluding depreciation of store equipment 62,000 Yearly expected revenues - years 1-8 78,000
Yearly expected revenues - years 9-16 72,000
1. Prepare a report as of November 1, 2010, presenting a differential analysis of the proposed operation of the store for the 16 years as compared with present conditions.
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 income from operations of the store for the 16 years?