David Burroughs sat at his corner office his forehead wrinkled deep in thought. He had had a

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David Burroughs sat at his corner office his forehead wrinkled deep in thought. He had had a good year in 2021 and his company had used its operating assets well generating a decent net profit before tax. ( see Table below)

RUBOFUN PERFORMANCE 2021

Sales	$3,150,000
Variable cost	$1,890,000
Contribution	$1,260,000
Fixed cost	$882,000
Firm's operating assets	$1,557,500

There were two business opportunities in front of him to take his fledgling company -Rubofun Ltd - making rubber toys forward. The first was to invest in expanding his firm by increasing capacity in his rubber molding assets to scale up. He had an offer of readily available plant and machinery to augment capacity and the whole installation would be up and running within eight weeks.

The second was to buy up RubJoy a small rival company with almost new and good quality machinery but lacking a good marketing strategy. Rubjoy's marketing failure did not bother him as its assets were young and in good condition and the technical team there were capable. He could easily market the additional output. The whole legal process to buy RubJoy would take eight weeks.

The whole proposal seemed to boil down to the finances, so he called you his management accountant to provide recommendation about the course of action.

The accountant had summed up the investment proposals as below:

EXPAND


Sales (incremental)	$1,820,000
Variable cost	65% of sales
Fixed cost	$490,000
Investment required	$770,000

ACQUIRE RUBJOY


Sales	$1,890,000
Variable cost	60% of sales
Fixed cost	$476,000
Invested capital	$840,000

If Rubofun were to expand it would increase would require an investment of $770,000 if Robofun were to acquire Rubjoy, they would need to invest $840,000. Rubofun has set a target of a minimum of 15 % required rate of return.

Should Rubofun Ltd expand or undertake the acquisition of Rubjoy? As a management Accountant of Rubofun Ltd, write a report to David Burroughs with your recommendation providing supporting Return on Investment and Residual Income calculations.