Question

Billy Davidson operates Billy’s Worm Farm in Mississippi. Davidson raises worms for fishing. He sells a box of 20 worms for $ 12.60. Davidson has invested $ 400,000 in the worm farm. He had hoped to earn a 24% annual rate of return (net income divided by total assets), which works out to a 2% monthly return on his investment. After looking at the farm’s bank balance, Davidson fears he is not achieving this return. To evaluate the farm’s performance, he prepared the following production cost report. The Finished Goods Inventory is zero because the worms ship out as soon as they reach the required size. Monthly operating expenses total $ 2,000 (in addition to the costs below).


Requirements
Billy Davidson has the following questions about the farm’s performance during June.
1. What is the cost per box of worms sold?
2. What is the gross profit per box?
3. How much operating income did Billy’s Worm Farm make in June?
4. What is the return on Davidson’s investment of $ 400,000 for the month of June? (Compute this as June’s operating income divided by Davidson’s $ 400,000 investment, expressed as a percentage.)
5. What monthly operating income would provide a 2% monthly rate of return? What price per box would Billy’s Worm Farm have had to charge in June to achieve a 2% monthly rate ofreturn?


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  • CreatedJanuary 16, 2015
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