1.Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store, which currently has an abandoned warehouse located on it. Last month, the marketing department spent $10,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store.
Which of the following should be included as part of the incremental earnings for the proposed new retail store?
a. The cost of the land where the store will be located.
b. The cost of demolishing the abandoned warehouse and clearing the lot.
c. The loss of sales in the existing retail outlet, if customers who previously drove across town
to shop at the existing outlet become customers of the new store instead.
d. The $10,000 in market research spent to evaluate customer demand.
e. Construction costs for the new store.
f. The value of the land if sold.
g. Interest expense on the debt borrowed to pay the construction costs.
2.Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit, and this year’s sales are expected to be 20,000 units.
a. Suppose that if Hyperion drops the price to $300 immediately, it can increase this year’s sales by 25% to 25,000 units. What would be the incremental impact on this year’s EBIT of such a price drop?
b. Suppose that for each printer sold, Hyperion expects additional sales of $75 per year on ink cartridges for the next three years, and Hyperion has a gross profit margin of 70% on ink cartridges. What is the incremental impact on EBIT for the next three years of a price drop this year?