Question

Rain Forest Inc. Imports fruit from Latin America and sells them in boxes to retailers in the U.S.

a) Today the company signed a contract with a major software company to purchase, customize, and implement an Enterprise Resource Planning (ERP) system. Rain Forest is taking a loan from a bank of $3 million, which is the value of the ERP contract. The bank offers an APR (annual percentage rate) of 4.3% for 120 monthly payments. How much Rain Forest has to pay per month for the loan taken to purchase the warehouse?

b) A competing bank heard that Rain Forest will take a loan and made an offer that is supposedly more advantageous for Rain Forest than the loan described in (a). The competing bank is offering a $3 million loan to be paid back in 125 monthly payments of $30 thousand each. Assuming that Rain Forest wants the loan with the lowest APR, which loan should they take?

c) The cost of each box of fruit is $4.35. Rain Forest sells each box for $4.89 to retailers. Retailers buy 45,000 boxes per month. Considering that the only relevant fixed expense is the payment made each month for the ERP contract described in (a), show total revenue, total variable cost, fixed expenses, and profit (or loss) per month. Is Rain Forest profitable? If not, would Rain Forest be profitable if it decided not to implement the ERP system?
Tip: be careful with the signs, especially if you are referencing a result from item (a)!

d) Considering the price in c), build a table that shows total revenue for several quantities of boxes. Your table should show revenues for quantities varying from 40,000 to 60,000 in steps of 2,000. The result should be a table with 2 columns (quantity and revenue), and 11 rows (one for each quantity).

e) Considering the cost and fixed expense in c), add a column to the table above that is (total variable cost + fixed expense with ERP).

f) Add a line chart with one line for total revenue, another line for (total var. cost + fixed expense with ERP), and quantity sold in the horizontal axis. Based on the chart, what is the quantity the company needs to sell to break-even? How would the break-even quantity change if the ERP system cost 20% less?

g) Considering the variable cost and fixed expense in c), build a table that shows profit (or loss) for several quantities of boxes and prices per box. Your table should show profits for quantities varying from 40,000 to 60,000 in steps of 2,000, and prices varying from $4.79 to $5.19 in steps of $0.05.

h) For a selling price of $4.89 per box, what is (approximately) the quantity of boxes that Rain Forest needs to sell to break-even? Is this quantity the same as the one you found in the chart? (It should.)

i) For a total quantity of 50,000 boxes per month, what price (approximately) does Rain Forest need to charge per box to make a profit of more than $3,600 per month?

Answer 1

Answer (a)

APR = 4.3%

Monthly rate = 4.3/12 = 0.3583%

Monthly installments = 3000000 / PVAF (0.3583%, 120) = 3000000/97.40 = 30802

Therefore Rain Ltd. will have to pay $30802 per month.

Answer (b)

Using backward induction for the calculation shown above we calculate that the APR for the latter proposal is approximately 4.45% as compared to the earlier proposal's 4.3%.

Therefore the option in (a) with APR 4.3% is better.

Answer (c)

		Total
# of Units	45000
SP	4.89	220050
VC	4.35	195750
Contribution		24300
Fixed Cost		30800
Profit (loss)		-6500

currently Rain Forest is incurring a loss of $6500. If Rain Forest does not implement ERP, its fixed cost will be saved and it will be profitable with a profit of $24300

Answer (d)

Quantity	Total Revenue
40000	195600
42000	205380
44000	215160
46000	224940
48000	234720
50000	244500
52000	254280
54000	264060
56000	273840
58000	283620
60000	293400

Answer (e)

Quantity	Total Revenue	Variable Cost + Fixed Expense
40000	195600	204800
42000	205380	213500
44000	215160	222200
46000	224940	230900
48000	234720	239600
50000	244500	248300
52000	254280	257000
54000	264060	265700
56000	273840	274400
58000	283620	283100
60000	293400	291800

Answer (f)

Bsed on the chart, the company needs to sell around 57000 units to vreak even.

If the ERP cost is reduced by 20% then Break Even quantity will be

New Break Even Qty = New Fixed Cost / Contribution Per Unit

= 24640/0.54

=45630 units

Therefore breakeven quantity will be reduced by around 11400 units to 45630 units.

350000 300000 250000 200000 - Total Revenue 150000 100000 Variable Cost + Fixed Expense 50000 Quantity 40000 42000 44000 46000 48000 50000 52000 54000 56000 58000