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Input - Financial statements

Exhibit 1
Income Statement for the year ending Decemeber 31, 2000
(thousands of Italian liras)
Revenues
Private brand
Premium brand

56,112,408
9,934,848
46,177,560

Costs of goods sold (*)


Gross margin

33,233,867
22,878,541

Marketing expenses
R&D expenses
Selling expenses
Administrative expenses
Interest expense

4,155,980
3,328,130
3,574,710
4,752,000
3,825,000

Research_1997
Selling_1997
Admin_1997
Interest_1997

Profits
Taxes (40%)
Net profit

3,242,721
1,297,088
1,945,632
Depreciation
2,593,700 ROE
ROA

(*) includes depreciation (th. liras)

Balance Sheet at December 31, 2000


(thousands of Italian liras)
Assets

23.75%
15.83%

Liabilities and Shareholders' Equity

Cash
Raw material inventory
Finished goods (174,000 kg.)
Accounts Receivable

1,121,450
2,907,963
1,148,400
9,368,467

Property, plant and equipment (*)


Depreciation

42,374,000
(12,267,080)

Total assets

44,653,200

(*) includes vacant land with a cost of 13,000,000 th. liras

Page 1

Accounts payable
Credit line
Long term debt
Equity

Total liabilities

Input - Financial statements

0.13
ROS

1.2566268
Asset turnover

d Shareholders' Equity
487,331
25,000,000
10,000,000
9,165,869

44,653,200

Page 2

Input - Other data

Exhibit 2
Quality
Prices per kilogram
VOLUME (kg.)
Advertising /Sales
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%

D
Price_private_brand
8,800

6,000,000

BB

AA

AAA

19,500

26,600

30,000

35,500

39,000

42,600

2,395,000
2,455,000
2,545,000
2,665,000
2,800,000
2,950,000
3,130,000
3,196,000
3,268,000
3,310,000
3,340,000

1,645,000
1,696,000
1,720,700
1,896,000
2,024,000
2,166,000
2,367,000
2,417,000
2,446,000
2,465,000
2,494,000

1,529,000
1,566,000
1,649,000
1,760,000
1,884,000
2,022,000
2,157,000
2,195,000
2,231,000
2,258,000
2,286,000

1,103,000
1,145,000
1,226,000
1,334,000
1,456,000
1,591,000
1,723,000
1,792,000
1,823,000
1,837,000
1,843,000

667,000
717,000
799,000
910,000
1,034,000
1,172,000
1,307,000
1,345,000
1,366,000
1,495,000
1,523,000

127,000
157,000
229,000
325,000
433,000
553,000
667,000
694,000
752,000
875,000
935,000

Page 3

Input - Other data

Exhibit 3
Quality
Prices per kilogram

D
8,800

C
19,500

B
26,600

BB
30,000

A
35,500

AA
39,000

AAA
42,600

Variable_private_brand
Unit cost (liras)
6,600
12,485
Fixed costs (th. of liras)*
3,319,500
4,100,500
Fixed_private_brand

14,275
4,100,500

16,288
4,100,500

17,791
4,100,500

19,166
4,100,500

20,441
4,100,500

24,526
21,109
19,401
18,376
17,692
17,204
16,838
16,553
16,325
16,139
15,984
15,852

26,539
23,122
21,414
20,389
19,705
19,217
18,851
18,566
18,338
18,152
17,997

28,042
24,625
22,917
21,892
21,208
20,720
20,354
20,069
19,841

29,417
26,000
24,292
23,267
22,583
22,095
21,729

30,692
27,275
25,567
24,542

Volume (kg.)
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
2,200,000
2,400,000
2,600,000
2,800,000
3,000,000
3,200,000
3,400,000
6,000,000

14,899
12,133
10,749
9,920
9,366
8,971
8,675
8,444
8,260
8,109
7,983
7,877
7,786
7,707
7,637
7,576
7,153

22,736
19,319
17,611
16,586
15,902
15,414
15,048
14,763
14,535
14,349
14,194
14,062
13,949
13,852
13,766
13,691

* Fixed costs for premium coffees include private brand fixed costs.

Page 4

Input - Other data

Exhibit 4
Year 2000
January
February
March
April
May
June
July
August
September
October
November
December

average price

Sales Private Sales Premium Percent of total


(kilograms)
(kilograms)
81,792
84,916
7.1%
103,680
107,640
9.0%
135,936
141,128
11.8%
86,400
89,700
7.5%
93,312
96,876
8.1%
57,600
59,800
5.0%
48,384
50,232
4.2%
38,016
39,468
3.3%
78,336
81,328
6.8%
150,912
156,676
13.1%
139,392
144,716
12.1%
138,240
143,520
12.0%
1,152,000

1,196,000

8.62

38.61

100.0%

Page 5

ASSUMPTION = the ending FG inventory in the 2000 BS is all private brand coffee
Beginning inventory Production

January
February
March
April
May
June
July
August
September
October
November
December

174,000
248,000
208,000
90,000
338,000
640,000
732,000
446,000
220,000

500,000
500,000
500,000
450,000
486,000
390,000
500,000
500,000
500,000
500,000
500,000
500,000

2000 Actual
Sales Percent

Sales

Ending inventory

426,000
540,000
708,000
450,000
486,000
300,000
252,000
198,000
408,000
786,000
726,000
720,000

7.1%
9.0%
11.8%
7.5%
8.1%
5.0%
4.2%
3.3%
6.8%
13.1%
12.1%
12.0%

6,000,000

100.0%

248,000
208,000
90,000
338,000
640,000
732,000
446,000
220,000
-

ASSUMPTION = same monthly sales (in %) as 2000

maximum monthly production capacity = 500,000


ending finished goods inventory = 0

Sales + ending inventory

674,000
748,000
708,000
450,000
486,000
390,000
590,000
838,000
1,140,000
1,232,000
946,000

SALES + ENDING INVENTORY = PRODUCTION + BEGINNING INVENTORY

mum monthly production capacity = 500,000 kg


g finished goods inventory = 0

BASIC SOLUTION GIVEN TO PARTICIPANTS

Strategy: Private-brand only


Price private brand
Income Statement 2001
(thousands of Italian liras)

8,800
ASSUMPTIONS
52,800,000 = 6 million kgs X 8,800 L (from ex. 2). Expected level of sales = 6 million kg

Revenues
Private brand
Premium brand
Costs of goods sold

52,800,000
42,919,500 = COGS var =
+COGS fix =
9,880,500
= assumption in ex. 2
832,033 = 25% of actual R&D spending (saving assumption pg. 3)
1,251,149 = 35% of actual selling costs (saving assumption pg. 3)
2,376,000 = 50% of actual administrative costs (saving assumption pg. 3)

Gross margin
Marketing expenses
R&D expenses
Selling expenses
Administrative expenses
Ebit
Interest expense

39,600,000 = 6 million kgs X 6,600 L (from ex. 3). Expected level of sales = 6 million kg
3,319,500 = assumption in ex. 3

5,421,319
3,903,897 = see calculation of monthly cash flows. ASSUMPTION: excess cash (relative to the initial cash= 1,121,450) is used to repay debt as soon as it is available each month
same interest rate as in 2000
1,517,422
606,969
910,453

Ebt
Taxes (40%)
Net profit

Cash flow: Direct Method

Cash In
A/R
Private
January
February
March
April
May
June
July
August
September
October
November
December

Cash Out
COGS
Variable

A/R
Premium

1,328,026
1,226,650
1,216,512
3,748,800
4,752,000
6,230,400
3,960,000
4,276,800
2,640,000
2,217,600
1,742,400
3,590,400
36,929,587

5,597,280

3,300,000
3,300,000
3,300,000
2,970,000
3,207,600
2,574,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
38,451,600

5,597,280

Add back
depreciation

COGS
Fixed
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
3,319,500

Selling

249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
2,993,700

R&D

104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
1,251,149

Admin

69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
832,033

198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
2,376,000

Interest(*)

Taxes

318,750
292,268
317,444
342,941
342,603
337,500
310,906
311,358
308,930
321,385
337,801
362,011
3,903,897

Monthy cash flow

2,907,807
(2,764,367)
(2,799,680)
37,111
560,261
2,920,151
(49,655)
266,693
(1,367,678)
(1,802,534)
(2,658,331)
(470,359)
(5,220,580) Yearly cash deficit
1,121,450 Initial cash
(5,220,580) Cash needed

242,787

364,181
606,969

ASSUMPTION
Taxes in Italy paid in May (40%) and Nov. (60%)
ASSUMPTION
90-day policy for brand retailers (private)
30-day policy for premium clients
Same monthly sales % as previous year

Accounts receivable 2000 (AS IN BS EX. 1)

ASSUMPTION
Based on production plan with 0 ending inventory
Costs are paid monthly

ASSUMPTION
Costs are paid monthly

ASSUMPTION
2,593,700.00
400,000.00
2,993,700.00
249,475.00

9,368,467

Accounts receivable 2001

ASSUMPTION
Costs are paid monthly

19,641,600

ASSUMPTION

2000 yearly average cost of debt

+
ARE FOR THE ADDITIONAL CAPACITY (EXPANSION FINISHED IN DECEMBER. 6 BILLION LIRAS ON 15 YEARS)
YEARLY DEPRECIATION
MONTHLY DEPRECIATION

Cash: Indirect method


Net profit
Depreciation
Var in Inventory
Var in A/R
Operating Cash flow
Debt
Cash flow
Beginning cash
Ending cash

910,453
2,993,700
1,148,400 ASSUMPTION
(10,273,133)

No variation in A/P and raw materials inventory


Ending FG Inventory = 0

(5,220,580)
5,220,580
(0)
1,121,450
1,121,450 ASSUMPTION

Beginning cash = ending cash

Balance Sheet 2001


Cash
Raw materials inventory
Finished goods inventory
AR
Property, plants and equipment (PPE)
Depreciation
Depreciation of the year
Total assets

1,121,450
2,907,963
0
19,641,600
42,374,000
-12,267,080
-2,993,700
50,784,233

AP
Credit line

Long term debt


Shareholders' equity
Retained earnings of the year
Total liabilities + equity

487,331
30,220,579.71 ASSUMPTION

10,000,000
9,165,869
910,453
50,784,233

We can increase our credit line to fund the cash deficit (negative operating cash flow)
Other alternatives: increase the long term debt or the equity (in this case, beware of the decrease in the ROE)

Monthly Debt

(*) Interest
(calculated on average debt)
35,000,000
32,092,193
34,856,560
37,656,240
37,619,129
37,058,868
34,138,717
34,188,371
33,921,678
35,289,356
37,091,890
39,750,220
40,220,580

########

ASSUMPTION
Each month we want to maintain the initial cash amount
10.9%

305,509
304,856
330,192
342,772
340,052
324,203
311,132
310,144
315,157
329,593
349,906
364,153
3,927,669

Strategy: Private-brand only


Price private brand
Income Statement 2001
(thousands of Italian liras)
Revenues
Private brand
Premium brand
Costs of goods sold

8,800

52,800,000
52,800,000
44,503,500

Gross margin
Marketing expenses
R&D expenses
Selling expenses
Administrative expenses

8,296,500
832,033
1,251,149
2,376,000

Ebit
Interest expense

3,837,319
3,974,941

Ebt
Taxes (40%)
Net profit

ROE
ROA

(137,622)
(137,622)

n.a.
8.04%

recalculated

NEW ASSUMPTION

recalculated
THE NEW STRATEGY BECOMES "NOT VIABLE"

We can not meet the unitary variable production cost target (we assume an increase by 4% vs. original estimate)

GY BECOMES "NOT VIABLE"

ncrease by 4% vs. original estimate)

Strategy: Private-brand only


Price private brand
Income Statement 2001
(thousands of Italian liras)
Revenues
Private brand
Premium brand
Costs of goods sold

8,800

52,800,000
52,800,000
42,919,500

Gross margin
Marketing expenses
R&D expenses
Selling expenses
Administrative expenses

9,880,500
1,664,065
1,787,355
2,851,200

Ebit
Interest expense

3,577,880
3,974,842

Ebt
Taxes (40%)
Net profit

ROE
ROA

(396,962)
(396,962)

na
7.50%

Cash flow: Direct Method

Cash In
A/R

A/R

Private
January
February
March
April
May
June
July
August
September
October
November
December

Premium

1,328,026
1,226,650
1,216,512
3,748,800
4,752,000
6,230,400
3,960,000
4,276,800
2,640,000
2,217,600
1,742,400
3,590,400
36,929,587

5,597,280

5,597,280

Accounts receivable 2000 (AS IN BS EX. 1)


Accounts receivable 2001

9,368,467
19,641,600

Cash: Indirect method


Net profit
Depreciation
Inventory
A/R
Operating Cash flow
Debt
Cash flow
Beginning cash
Ending cash

(396,962)
2,993,700
1,148,400
(10,273,133)
(6,527,995)
5,814,250
(713,746) ASSUMPTION
1,121,450
407,704

BS 2001
cash
raw materials inv
fin good inv
AR
ppe
depr
depr year
Total assets

407,704
2,907,963
0
19,641,600
42,374,000
-12,267,080
-2,993,700
50,070,487

AP
credit line

l-t debt
SE
retained earnings of the year
Total liabilities + equity

NEW ASSUMPTIONS
= 50% of actual R&D spending (saving assumption pg. 3)
= 50% of actual selling costs (saving assumption pg. 3)
= 60% of actual administrative costs (saving assumption pg. 3)

vs.

recalculated
THE NEW STRATEGY BECOMES "NOT VIABLE"

Cash Out
COGS

COGS

Variable

Fixed
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
39,600,000

no variation in A/P
inventory = 0 at the end of the year

487,331
30,814,250

10,713,746
9,165,869
-396,962
50,784,233

276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
3,319,500

= 25% of actual R&D spending (saving assumption pg. 3)


= 35% of actual selling costs (saving assumption pg. 3)
= 50% of actual administrative costs (saving assumption pg. 3)

Add back
depreciation

Selling

R&D

249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
2,993,700

104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
1,251,149

69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
832,033

Admin

Interest

Taxes

Monthy cash flow

Monthly Debt

198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
2,376,000

318,750
292,268
317,444
342,941
345,608
339,164
319,196
319,724
317,371
329,904
346,397
367,369
3,956,136

ASSUMPTION 2000 average cost of debt

35,000,000
2,907,807
32,092,193
(2,764,367)
34,856,560
(2,799,680)
37,656,240
(292,889)
37,949,129
707,643
37,241,486
2,192,488
35,048,998
(57,945)
35,106,942
258,328
34,848,615
(1,376,120)
36,224,734
(1,811,052)
38,035,787
(2,302,746)
40,338,532
(475,717)
40,814,250
(5,814,250) Yearly cash deficit
1,121,450 Initial cash
(4,692,800) Net cash needed
10.9%

(5,814,250)

Ending FG inventory = Beginning FG inventory = 174,000

Strategy: Private-brand only


Price private brand
Income Statement 2001
(thousands of Italian liras)
Revenues
Private brand
Premium brand
Costs of goods sold

8,800

52,800,000
52,800,000
42,919,500

Gross margin
Marketing expenses
R&D expenses
Selling expenses
Administrative expenses

9,880,500
832,033
1,251,149
2,376,000

Ebit
Interest expense

5,421,319
3,977,682

Ebt
Taxes (40%)
Net profit

1,443,637
577,455
866,182

Cash flow: Direct Method

Cash In
A/R
Private
January
February
March
April
May
June
July
August
September
October
November
December

Cash Out
COGS
Variable

A/R
Premium

1,328,026
1,226,650
1,216,512
3,748,800
4,752,000
6,230,400
3,960,000
4,276,800
2,640,000
2,217,600
1,742,400
3,590,400
36,929,587

5,597,280

5,597,280

COGS
Fixed
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
3,300,000
39,600,000

NEW ASSUMPTION

Accounts receivable 2000 (AS IN BS EX. 1)

276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
276,625
3,319,500

Add back
depreciation

249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
249,475
2,993,700

19,641,600

Cash: Indirect method


Net profit
Depreciation
Inventory
A/R
Operating Cash flow
Debt
Cash flow
Beginning cash
Ending cash

866,182
2,993,700
NEW ASSUMPTION
(10,273,133)

FG ending inventory = 174,000 (no variation from year 2000)

(6,413,251)
6,413,251
(0)
1,121,450
1,121,450

BS 2001
cash
raw materials inv
fin good inv
AR
ppe
depr
depr year
Total assets

1,121,450
2,907,963
1,148,400
19,641,600
42,374,000
-12,267,080
-2,993,700
51,932,633

AP
credit line

487,331
25,000,000

l-t debt
SE
retained earnings of the year
Total liabilities + equity

10,000,000
15,579,120
866,182
51,932,633

104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
104,262
1,251,149

R&D

69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
69,336
832,033

FG ending inventory = 174,000 (no variation from year 2000)

9,368,467

Accounts receivable 2001

Selling

Admin

198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
198,000
2,376,000

Interest

318,750
292,268
317,444
342,941
345,608
341,793
321,850
322,402
320,073
332,630
349,149
372,775
3,977,682

Taxes

Monthy cash flow

288,727

288,727
577,455

Monthly Debt

35,000,000
2,907,807
32,092,193
(2,764,367)
34,856,560
(2,799,680)
37,656,240
(292,889)
37,949,129
418,916
37,530,213
2,189,859
35,340,354
(60,598)
35,400,953
255,650
35,145,302
(1,378,822)
36,524,124
(1,813,779)
38,337,903
(2,594,225)
40,932,128
(481,123)
41,413,251
(6,413,251) Yearly cash deficit
1,121,450 Initial cash
(6,413,251) Cash needed

(6,413,251)

Select strategy

Strategy: Private-brand and Premium-brand


from Exhibit 3
Unit cost (lires)
6,600
Fixed costs (th of lires)* 3,319,500
Quality
Prices per kilogram
Margins including
advertising (*)

12,485
4,100,500

14,275
4,100,500

16,288
4,100,500

17,791
4,100,500

D
8,800

C
19,500

B
26,600

BB
30,000

A
35,500

0% 9,880,500
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%

12,700,425
12,642,600
12,760,125
13,035,450
13,357,500
13,717,500
14,194,350
13,956,900
13,726,440
13,310,100
12,816,600

16,174,125
16,351,564
16,191,715
17,754,692
18,691,764
19,714,670
21,295,043
21,188,571
20,841,362
20,379,415
20,004,010

16,865,148
16,902,692
17,521,188
18,448,620
19,472,108
20,592,164
21,593,684
21,387,840
21,136,572
20,764,596
20,387,132

15,432,527
15,769,830
16,740,274
18,102,596
19,616,284
21,250,494
22,742,117

23,180,908
23,005,687
22,561,718
21,994,537

(*) This is the contribution margin (volume from exhibit 2 times unit margin) minus the fixed costs minus the advertising expense

The alternative in the yellow cell/bolded margin is chosen in this example for a mixed strategy. It is chosen
=1792000 KG X (35,500-17,791) - 4100500000 - 1792000 KG X 35,500 X 7%
You can start from this alternative if you want to build a business plan for a mixed strategy

Page 25

Select strategy

19,166
4,100,500

20,441
4,100,500

AA
39,000

AAA
42,600

9,128,778
9,840,848
11,123,646
12,883,740
14,794,816
16,859,548
18,764,158
18,904,380
18,730,824
20,303,880
20,166,982

(1,286,307)
(688,419)
778,803
2,685,825
4,756,515
6,975,537
8,974,701
9,208,338
10,000,252
11,933,875
12,635,065

the fixed costs minus the advertising expense

this example for a mixed strategy. It is chosen because it gives the highest contribution, calculated as

s plan for a mixed strategy

Page 26

Select strategy

ution, calculated as

Page 27

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