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The production manager at Peppermint Stockings wants to replace an old filling machine with a newer model that is expected to reduce variable and fixed costs by 1.5%. The new machine costs $110,000 while the old machine is valued at $25,000. Current sales are $300,000 with fixed costs of $31,000 and contribution margin of 36%. Total assets are $1,000,000. ROI analysis shows the new machine would slightly decrease ROI from 7.7% to 7.41%, so the company should not purchase the new machine.

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169 views1 page

123

The production manager at Peppermint Stockings wants to replace an old filling machine with a newer model that is expected to reduce variable and fixed costs by 1.5%. The new machine costs $110,000 while the old machine is valued at $25,000. Current sales are $300,000 with fixed costs of $31,000 and contribution margin of 36%. Total assets are $1,000,000. ROI analysis shows the new machine would slightly decrease ROI from 7.7% to 7.41%, so the company should not purchase the new machine.

Uploaded by

kristine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Peppermint Stockings makes toy- and candy-filled piñatas.

The production manager wants to replace an old filling


machine with a newer model. He believes the new model will allow them to reduce fixed and variable costs by
1.5%. The new machine has a value of $110,000 and the old machine is valued at $25,000. Current sales are
$300,000 with a contribution margin of 36% and fixed costs of $31,000. Total assets before purchase of the new
machine are $1,000,000. Should the company upgrade its filling machine? Why or why not?
>Return on investment is a common performance metric used to evaluate investment centers as it incorporates all
the items an investment center manager is responsible for (revenues, controllable expenses, and center assets). It
is calculated as “Operating Income ÷ Assets.” The current contribution margin is $108,000 (36% × $300,000). This
results in operating income of $77,000 ($108,000 − $31,000). Combined with assets of $1,000,000 the current ROI
is 7.7% ($77,000 ÷ $1,000,000). If the new machine is purchased, variable costs will decrease from $192,000
($300,000 – $108,000) to $189,120 ($192,000 × [1 – .015]) and fixed costs will decrease from $31,000 to $30,535
($31,000 × [1 – .015]). This results in new operating income of $80,345 ($300,000 – $189,120 – $30,535). Total
assets will increase by $85,000 ($110,000 – $25,000) to $1,085,000 if the new machine is purchased. This results in
a new ROI of 7.41% ($80,345 ÷ $1,085,000). Since ROI would decrease 0.29%, the machine should not be
purchased.

Business intelligence (BI) is collecting and analyzing internal data and external data to provide new insights that
were not apparent before. Both pivot table and contingency table are used to turn raw data into actionable
information.

A pivot table is a second, revised table in rows and columns containing reformatted data using the raw data from
the first, original table in rows and columns. A pivot table is also called a pivot chart.

First Table → Original Table

Second Table → Pivot Table

The basic data values are the same between the original tale and the pivot table. However, the pivot table contains
sorted, rearranged, and summarized data, providing better insights. For example, a retail marketing manager can
create a pivot table showing which salesperson has the highest sales dollars in a given month or quarter from
original sales data tables.

A contingency table is a type of table presented in a matrix format displaying frequency distribution, showing their
probabilities. Contingency tables (cross-tabulations) are used in business intelligence, market research, and
customer surveys where interrelations and interactions between two or more variables can be studied to obtain
greater insights of data. Due to their statistical focus, contingency tables show a measure of association between
variables. For example, a table can be put together showing how male and female customers prefer to purchase
product A and product B from a retailer.

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