Question

1. Petal Providers Corporation opens and operates “mega” floral stores in the United States. The idea behind the superstore concept is to model the U.S. floral industry after its European counterparts, whose flower markets generally have larger selections at lower prices. Revenues were $1 million with net profit of $50,000 last year when the first Petal Providers floral outlet was opened. If the economy grows rapidly next year, Petal Providers expect its sales to grow by 50 percent. However, if the economy exhibits average growth, Petal Providers expects a sales growth of 30 percent. For a slow economic growth scenario, sales are expected to grow next year at a rate of 10 percent. Management estimates the probability of each scenario occurring to be rapid growth (0.30), average growth (0.50), and slow growth (0.20). Petal Providers’ net profit margins are also expected to vary with the level of economic activity next year. If slow growth occurs, the net profit margin is expected to be 5 percent. Net profit margins of 7 and 10 percent are expected for the average-and-rapid-growth scenarios, respectively.
   1. Estimate the average sales growth rate for Petal Providers for next year.
   2. Estimate the dollar amount of sales expected next year under each scenario, as well as the expected value sales amount.
   3. Estimate the dollar amount of net profit expected next year under each scenario, as well as the expected value net profit amount.

Answer 1

Answer 1)

Given,

Sales Current Year = 1000000

Average growth rate = 7%

Sales Next year = Sales current year * ( 1+ growth rate)

= 1000000 * (1+7%)

Average Sales Next year = 1300000

Answer 2)

Dollar Amount sales in each scenarios.

Sales Next year = Sales current year * ( 1+ growth rate)

Rapid Sales Current Year = 1000000 * (1+50%) = 1500000

Average Sales Current Year = 1000000 * (1+7%) = 1300000

Slow Sales Current Year = 1000000 * (1+10%) = 1100000

Expected Value of Sales Amount = Probability of Expected scenario * Sales in scenario

= (0.3 * 1500000) + (0.5*1300000) + (0.2 * 1100000)

= 450000 + 650000 + 220000

Expected Value of Sales Amount = 1320000

Answer 3 )

Dollar Amount Net profit in each scenarios.

Net Profit Next year = Net Profit Current year * Net Profit Margin

Rapid Net Profit Current Year = 1500000 * 10% = 150,000

Average Net Profit Current Year = 1300000 * 7% = 91,000

Slow Net Profit Current Year = 1100000 * 5% = 55,000

Expected Value of Net Profit Amount = Probability of Expected scenario * Net profit in scenario

= (0.3 * 150,000) + (0.5*91,000) + (0.2 * 55,000)

= 15,000 + 6,370 + 2,750

Expected Value of Net Profit Amount = 24,120