Roche Brothers is considering a capacity expansion of its supermarket. The lando

ID: 355230 • Letter: R

Question

Roche Brothers is considering a capacity expansion of its supermarket. The landowner will build the addition to suit in return for $200,000 upon completion and a five-year lease. The increase in rent for the addition is $11,000 per month. The annual sales projected through year 5 follow. The current effective capacity is equivalent to 500,000 customers per year. Assume a 3 percent preta:x profit on sales. Click the icon to view the annual sales projections. a. If Roche expands its capacity to serve 700,000 customers per year now (end of year 0), what are the projected annual incremental pretax cash flows attributable to this expansion? The projected annual incremental pretax cash flows attibutable to this expansion in year O are S(Enter your response as an integer.) Data Table esa Customers Average Sales per Customer$51.00 550,000 600,000 685,000 700,000 725,000 $56.00 S53.00 $62.00$64.00

Explanation / Answer

The calculation is as follows:

year

Customers

550,000

600,000

685,000

700,000

725,000

D – 500,000

Customers more than base level (> 500,000)

50,000

100,000

185,000

200,000

225,000

Average Sales per customer

$51.00

$53.00

$56.00

$62.00

$64.00

S = P x (D – 500,000)

Total Additional Sales

$2,550,000.00

$5,300,000.00

$10,360,000.00

$12,400,000.00

$14,400,000.00

0.03 x S

Pretax Profit on Sales @ 3%

$76,500.00

$159,000.00

$310,800.00

$372,000.00

$432,000.00

Less Additional Rent (@ $11,000/month)

$132,000.00

Incremental Contributions Per year

-$55,500.00

$27,000.00

$178,800.00

$240,000.00

$300,000.00

Total Incremental Contribution

$690,300.00

Ans: $690,3000