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sveticcg [70]
4 years ago
5

A property consists of 8 office suites, 3 on the first floor and 5 on the second floor. The contract rents are as follows: 2 sui

tes at $1,800 per month, 1 at $3,600 per month and 5, at $1,560 per month. Annual market rent for all suites increase 3% per year after the first year. Vacancy and collection losses are estimated at 10% of potential gross rent per year. Operating expenses and reserve for replacement or capital expenditures are 45% of effective gross income each year. The expected holding period is 5 years. At the end of the holding period you are expecting to sell the property for $1,180,472.A. Prepare the first year pro forma generating the NOI for year 1.
Business
1 answer:
tangare [24]4 years ago
6 0

Answer:

$89,100

Explanation:

Let us first calculate annual gross rent for Year 1:

Total rent per month:

= 2 suites at $1,800 + 1 suites at $3,600 + 5 suites at $1,560

= $3,600 + $3,600 + $7,800

= $15,000

Annual gross rent = Total rent per month × 12

                              = $15,000 × 12

                              = $180,000

Effective gross revenue = Potential gross rent revenue - Vacancy and connection losses (10% of potential gross rent)

                                        = $180,000 - $18,000

                                        = $162,000

Net operating income = Effective gross revenue - Operating expenses including depreciation

                                      = $162,000 - $72,900

                                      = $89,100

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1A. Compute the CM ratio and the break-even point in balls.

  • CM ratio = 2.5
  • break even point = 21,000 balls

1B. Compute the degree of operating leverage at last year.

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2. Due to an increase in labor rates, the company estimates that variable expenses will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new CM ratio and break-even point in balls?

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3. Refer to the data in (2) above. If the expected change in variable expenses takes place, how many balls will have to be sold next year to earn the same net operating income, $90,000, last year?

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5. The company is discussing the construction of a new, automated manufacturing plant. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses per year to double. If the new plant is built, what would be the company's new CM ratio and new break-even point in balls?

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Income Statement

Total revenue $750,000

Variable expenses <u>($270,000) </u>

Contribution margin $480,000

Fixed expenses <u>($420,000 )</u>

Net operating income $60,000

Degree of operating leverage = 60.87%

6.c. If you were a member of top management, would you have been in favor of constructing the new plant?

  • If you cannot avoid paying the salary raise, then the company needs to carry on the new plant project.

Explanation:

sales price per ball = $25

variable expenses: $15 per unit

  • direct labor $9
  • other variable costs $6

CM ratio = net sales / CM = $750,000 / $300,000 = 2.5

break even point = total fixed costs / CM per unit = $210,000 / $10 = 21,000 balls

degree of operating leverage = fixed costs / total costs = $210,000 / $660,000 = 31.82%

new CM ratio = net sales / CM = $750,000 / $210,000 = 3.57

break even point = total fixed costs / CM per unit = $210,000 / $7 = 30,000 balls

sales level for $90,000 profit = ($210,000 + $90,000) / $7 = 42,857.14 ≈ 42,858 balls

CM ratio (new plant) = net sales / CM = $750,000 / $570,000 = 1.32

break even point = total fixed costs / CM per unit = $420,000 / $16 = 26,250 balls

sales level for $90,000 profit = ($420,000 + $90,000) / $16 = 31,875 balls

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