accounting-Read the Chapter 11 chapter opener about Keith Mullin and his company

QUESTION

Read the Chapter 11 chapter opener about Keith Mullin and his company, Gamer Grub. Keith is considering building a new, larger warehousing center to make his business more efficient and reduce costs. He expects that an efficient warehouse could reduce his costs by 20%.Text: “SAN DIEGO—“I have been battling greasy fingers and keyboard crumbs,” complained gamer Keith Mullin. “I thought ‘there has to be a better way!’” So, Keith-the-gamer morphed into Keith-the-entrepreneur. In 2008, Keith set up what he calls his “garage startup” and introduced Gamer Grub® (GamerGrub.com), which is performance snack food for gamers. “I got tired of wiping my hands on my jeans,” laughs Keith. “And, I like to multi-task.”Success, however, requires Keith to monitor and minimize costs. “I made the first Gamer Grub prototypes in my mom’s kitchen,” explains Keith. He eventually set up an accounting system to track costs and match them with revenues. But, Keith says, it is a constant struggle as his business has been tripling in revenues each month. He explains that properly applying capital budgeting methods and acting on that information has helped in his success. However, admits Keith, “it is more of a collaborative effort.”To date, Keith has successfully controlled his costs while monitoring both revenues and customer needs. “You need to be in front of your customer, watch them taste it, watch them understand what you’re doing,” says Keith. “You have to be out there … we have given out at least 16,000 samples!” Keith adds that he applies capital budgeting methods such as net present value and internal rate of return. These methods enable Keith to expand his capacity and enter new markets that deliver high returns. He also relies on analyses from these methods to assess which snacks have positive returns and which investments in production operations to make. But, what keeps him going, admits Keith, is knowing that he offers “different ways to snack while you’re computer gaming or multi-tasking.”Keith is on a mission. What motivates him, explains Keith, is the “Wow! If you get that ‘Wow’ reaction, that’s a really good thing.” To make that happen, he tracks the accounting numbers to be sure his “Wow food” is a money-making venture. “Gamer Grub allows gamers to consume healthy, game-enhancing snacks,” insists Keith. “Without greasy fingers or keyboard crumbs!”Required: 1. Name the four capital budgeting techniques learned in Chapter 11 that Keith could use to evaluate whether the new warehousing center will be a good investment. Which two would you recommend to him? Explain your answer (complete sentences, as usual).2. What specific financial information will he need to calculate the four techniques that you identified in your answer to part 1? (List components needed to calculate each of the four methods.) Be specific.3. What are two main advantages of using the payback period method?4. What are two advantages of using the accounting rate of return?5. What are the two advantage of using the net present value method?6. What is the main disadvantage of using either the net present value and internal rate of return methods?

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