Richard and Linda Butler decide that it is time to purchase a​ high-definition (HD) television because the technology has improved and prices have fallen over the past 3 years. From their​ research, they narrow their choices to two​ sets, the Samsung​ 64-inch plasma with 1080p capability and the Sony​ 64-inch plasma with 1080p features. The price of the Samsung is ​$2,375 and the Sony will cost ​$2,740. They expect to keep the Samsung for 3​ years; if they buy the more expensive Sony​ unit, they will keep the Sony for 4 years. They expect sell the Samsung for ​$405by the end of 3​ years; they expect to sell the Sony for ​$365 at the end of the year 4. Richard and Linda estimate that the​ end-of-year entertainment benefits​ (i.e., not going to movies or events and watching at​ home) from the Samsung to be ​$930and for the Sony to be ​$970. Both sets can be viewed as quality units and are equally risky purchases. They estimate their opportunity cost to be 8.6 %. The Butlers wish to choose the better alternative from a purely financial perspective. To perform this analysis they wish to do the​ following:

a. Determine the NPV of the Samsung HD plasma TV.

b. Determine the ANPV of the Samsung HD plasma TV.

c. Determine the NPV of the Sony HD plasma TV.

d. Determine the ANPV of the Sony HD plasma TV.

e. Which set should the Butlers purchase and​ why?

3.

The DeBourgh Manufacturing Company was founded in 1909 as a metal-fabricating company in Minnesota by the four Berg brothers. In the 1980s, the company ran into hard times, as did the rest of the metal-fabricating industry. Among the problems that DeBourgh faced were declining sales, deteriorating labor relations, and increasing costs. Labour unions had resisted cost-cutting measures. Losses were piling up in the heavy job-shop fabrication division, which was the largest of the company’s three divisions. A division that made pedestrian steel bridges closed in 1990. The remaining company division, producer of All-American lockers, had to move to a lower-cost environment.

            In 1990, with the company’s survival at stake, the firm made a risky decision and moved everything from its high-cost location in Minnesota to a lower-cost area in La Junta, Colorado. Eighty semi-trailer trucks were used to move equipment and inventory 1,000 miles at a cost of $1.2 million. The company was relocated to a building in La Junta that had stood vacant for three years. Only 10 of the Minnesota workers transferred with the company, which quickly hired and trained 80 more workers in La Junta. By moving to La Junta, the company was able to go nonunion.

            DeBourgh also faced a financial crisis. A bank that had been loaning the company money for 35 years would no longer do so. In addition, a costly severance package was worked out with Minnesota workers to keep production going during the move. An internal stock-purchase “earnout” was arranged between company president Steven C. Berg and his three aunts, who were the other principal owners.

            The roof of the building that was to be the new home of DeBourgh Manufacturing in La Junta was badly in need of repair. During the first few weeks of production, heavy rains fell on the area and production was all but halted. However, DeBourgh was able to overcome these obstacles. One year later, locker sales achieved record-high sales levels each month. The company is now more profitable than ever with sales topping $6 million. Much credit has been given to the positive spirit of teamwork fostered among its approximately 80 employees. Emphasis shifted to employee involvement in decision making, quality, teamwork, employee participation in compensation action, and shared profits. In addition, DeBourgh became a more socially responsible company by doing more for the town in which it is located and by using paints that are more environmentally friendly.

After its move in 1990 to La Junta, Colorado, and its new initiatives, the DeBourgh Manufacturing Company began an upward climb of record sales. Table 1 shows the DeBourgh monthly sales figures from January 1993 through December 2001 (in $1,000s).

DeBourgh accountants computed a per-unit cost of lockers for each year since 1988, as shown in Table 2. Management has provided you with this data in the form of an Excel workbook.

Source: Adapted from “DeBourgh Manufacturing Company: A Move That Saved a Company,” Real-World Lessons for America’s Small Businesses: Insights from the Blue Chip Enterprise Initiative. Published by Nation’s Business magazine on behalf of Connecticut Mutual Life Insurance Company and the U.S. Chamber of Commerce in association with the Blue Chip Enterprise Initiative, 1992. See also DeBourgh, available at htt;://www.debourgh.com: and the Web site containing Colorado Springs top business stories, available at http://www.csbj.com/1998/981113/top_stor.htm.

The Assignment:

This assignment may be completed in groups of up to 4 students. Your task is to provide Steven Berg with a forecast of sales and per-unit labour costs for 2002.

For each data set:

Plot the data as a function of time.

Select an approach you believe will be effective in forecasting this data set.

?

Write a brief (no more than ½ page) explanation of why you chose the method you did – observations about the data and characteristics of the chosen methodology.

?

Generate a forecast for 2002. Show the spreadsheet(s) you used to build the model. Annotate briefly to explain your methodology.

Calculate EV/EBITDA, PE ratio and dividend yield for CVS (CVS), WAG (Walgreens) and FRED (Fred’s). Also calculate year-over-year sales growth and EBITDA growth. Using these together with other information of your choosing, explain why you would or wouldn’t invest in each of them.

CVS

Income Statement

All numbers in thousands

WAG

Income Statement

All numbers in thousands

Fred's

Income Statement

All numbers in thousands

CVP Problem

Business Description:

After taking business classes, Jake, an avid dog-lover, decided to start selling unique pet supplies at trade shows. He has two products:  

Product 1:   "Launch-it"-   a tennis ball thrower that will sell for $10.

Product 2: "Treat-time"- an automatic treat dispenser that releases a treat when the dog places his paw on the pedal.   The treat dispenser will sell for $30.

Costs:    Jake has hired an employee to work the trade show booths.   The work contract is $1,000 per month plus a commission equal to 10% of revenue.    Jake will also spend $500 per month on trade-show entry fees. Jake is purchasing the products from a supplier in Mexico.    Launch-its cost $1 each;   Treat-times cost $7 each.     Shipping and handling on the Launch-its will cost $2 each; Shipping and handling on the Treat-times, which are heavier, will cost $8 each. The shipping and handling costs will be paid by Jake, not the customer.

Assume Jake expects to sell 200 Launch-its and 100 Treat-times during his first month of operations (June).

Jake's financial goal is to earn an operating income of $8,000 per month.    He believes volume may grow at a rate of 5% a month.

**Tax Rate 35%

Directions:

1a) Complete the input area with the product and cost assumptions.

1b) Build a model to calculate the breakeven for each product separately, both in units and dollars (make the assumption that the other product does not exist).

1c) Create a proforma income statment with a column for each product and a total column. Product columns should include revenue, variable costs, and contribution margin. The total column will show the fixed costs, operating income, taxes, and net income. Base this statement on the original product assumptions.

1d) Calculate the weighted average contribution margin (WACM) per unit.

1e) Use the WACM/unit to calculate the TOTAL number of units needed to breakeven .   THEN, calculate the number of EACH type of product needed to breakeven.   Finally, calculate the sales revenue associated with this volume for EACH product, and then the sales revenue to breakeven in total. Design your presentation of this data to make it clear to the reader what you are doing.

1f) Use the WACM/unit to calculate the total number of units needed to achieve Jake's target profit. THEN, calculate the number of EACH type of product needed to achieve the target profit.   Finally, calculate sales revenue associated with this volume for EACH product, and then the sales revenue in total.

1g) Calculate the MOS using June sales as the expected sales. Calculate the MOS in terms of sales revenue and as a percentage.   Also calculate the current operating leverage factor (round to the nearest 2 decimal places) and use it to determine the expected percentage change in operating income stemming from an expected change in sales volume.   

1h) Change name of worksheet to "Original Assumptions".

1i) Make sure you have cleaned up your worksheet using the formatting conventions listed above.

1j) Create a worksheet for each of the following three scenarios:

Supplier cost increase (20% increase); show impact on operating income, WACM %, and MOS %

New sales mix (sell 175 treat times and 125 launch-its); show impact on operating income, WACM/unit, and units to earn the target profit

Alternative contract (new work contract of $1,500 per month plus 5% of revenue instead of $1,000 plus 10% of revenue); show impact on operating income, operating leverage, and expected % change in operating income.

Case 4 – Budgeting and Variance

Mike has been selling lemonade at his lemonade stand under the name ‘Mike’s Lemonade’ for the past few summers and has had tremendous success. As a matter of fact, kids are so “hooked” on his lemonade that he is now offering credit to those customers who have spent their allowance but need more of his product. His weekly budget is:

BUDGET NOTES:

• ‘Salaries & wages’ are comprised of Mike’s salary
• Cash customers pay $0.50/cup and credit customers pay a 10% surcharge
• Lemons, sugar, and cups expenses are for 100 cups of lemonade
• Equipment (pitcher, spoons, measuring cups) are rented from Mike’s mother

1. Mike’s Lemonade – Monthly Budget

Mike plans to keep his lemonade stand open for the 3 summer months (total of 12 weeks) each year. For better planning, expand his weekly budget into a monthly (4 weeks) budget.

2. Mike’s Lemonade – Budget Variance

Things go well for the first two months of operations. However, after the third month Mike finds that he is losing money badly, having to offset his losses from his personal savings account (previous months’ profits). He speaks with his father, a CPA at an accounting firm, who recommends that Mike run a budget variance report. Mike asks you to complete the following table (note – the budget numbers should come from your monthly budget in #1):

Clearly there is a problem, so Mike begins to investigate. He talks to his customers and finds that many were away on vacation some or part of his third month of operations. He also talks to his distributors (the grocery store manager) and finds that the price of lemons and sugar are likely to increase this year due to drought and freezing. Mike estimates that the cost of his supplies will increase by 3% next year.

Mike talks to his father again, who recommends that Mike project monthly budgets for next year including predictions for drops in volume and increases in costs. He also suggests that Mike may want to consider raising the price of his lemonade, but must take into account that price affects volume.

3. Mike’s Lemonade – Projected Monthly Budget

Develop a monthly budget for each of the 3 summer months (June, July, and August) for next year. Make and note any assumptions under ‘Budget Notes’, including from the information that Mike learned from his investigation.

4. What could Mike do to improve his net profit?

Find the internal rate of return (IRR) of a project that costs $10,000 and brings net revenue of $8,000 each year for two consecutive years.

1. What are the four most important ways a firm becomes a monopoly? Will a monopoly that maximizes profit also be maximizing revenue? Will it be maximizing output? Explain.