Differential Analysis Involving Opportunity CostsOn August 1, Rantoul Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the fundsto invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled:Cost of store equipment$1,000,000Life of store equipment15 yearsEstimated residual value of store equipment$50,000Yearly costs to operate the store, excludingdepreciation of store equipment$200,000Yearly expected revenues-years 1-6$300,000Yearly expected revenues-years 7-15$400,000Required:1. Prepare a differential analysis as of August 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".Differential AnalysisOperate Retail (Alt. 1) or Invest in Bonds (Alt. 2)August 1OperateInvest inDifferentialRetailBondsEffects(Alternative 1) (Alternative 2) (Alternative 2)Revenues Differential AnalysisOperate Retail (Alt. 1) or Invest in Bonds (Alt. 2)August 1OperateRetailInvest inDifferentialBondsEffects(Alternative 1) (Alternative 2) (Alternative 2)RevenuesCosts:Costs to operate storeCost of equipment less residual valueProfit (loss)FeedbackV Check My WorkSubtract the operate costs (15 years) and the cost of the equipment less the residual value from the revenues from operating the operate. Determine the bond investmentinterest income for 15 years (principal x rate x time). Determine the differential effect on income of the revenues, costs, and profit (loss) by subtracting alternative 2 fromalternative 1. Which alternative has the most desirable effect on income?2. Based on the results disclosed by the differential analysis, should the proposal be accepted?Yes3. If the proposal is accepted, what would be the total estimated operating income of the store for the 15 years?

Solution 1: Differential Analysis - Rantoul Stores Inc. Operate Retail (Alt 1) or Invest in…

On August 1, Rantoul 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 $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $1,000,000 Life of store equipment 15 years Estimated residual value of store equipment $50,000 Yearly costs to operate the store, excluding depreciation of store equipment $200,000 Yearly expected revenues-years 1-6 $300,000 Yearly expected revenues-years 7-15 $400,000 Required: 1. Prepare a differential analysis as of August 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".

On August 1, Rantoul 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 $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment $1,000,000 Life of store equipment 15 years Estimated residual value of store equipment $50,000 Yearly costs to operate the store, excluding depreciation of store equipment $200,000 Yearly expected revenues-years 1-6 $300,000 Yearly expected revenues-years 7-15 $400,000 Required: 1. Prepare a differential analysis as of August 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".

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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