Review the chapter’s opening feature about Aaron Kennedy and his start-up company, Noodles & Company. Assume that Aaron is considering expanding his business to open an outlet in Hawaii. Assume the current income statement is as follows.
NOODLES & COMPANY
Income Statement
For Year Ended December 31, 2011
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Cost of goods sold (30%) . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
Operating expenses (25%) . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450,000
Noodles & Company currently has no interest-bearing debt. If Noodles & Company expands to open a Hawaiian location, it will require a $300,000 loan. Noodles & Company has found a bank that will loan it the money on a 7% note payable. The company believes that, at least for the first few years, sales at its Hawaiian location will be $250,000, and that all expenses (including cost of goods sold) will follow the same patterns as the current locations.
Required
1. Prepare an income statement (separately for current outlets, Hawaii, and total) for Noodles & Company assuming that he borrows the funds and expands to Hawaii. Annual revenues at the current locations are expected to remain at $1,000,000.
2. Compute Noodles & Company’s time’s interest earned under the expansion assumptions in part 1.
3. Assume sales at the Hawaii location are $400,000. Prepare an income statement (separately for current outlets, Hawaii, and total) for Noodles & Company and compute times interest earned.
4. Assume sales at the Hawaii location are $100,000. Prepare an income statement (separately for current outlets, Hawaii, and total) for Noodles & Company and compute times interest earned.
5. Comment on your results from parts 1 through 4.