% 2016 Costs Warehouse Occurring in First Five Months Location Atlanta Boston Chicago Denver Fargo Los Angeles Portland St. Louis Actual Costs for First Five Projected Total Costs in 2017 Projected Costs in Last Six Months of 2017 ($) ($) Months of 2017 ($) Case 3.1 Brant Freezer Company Located in Fargo, North Dakota, the Brant Freezer Company manufactures industrial freezers. These freezers come in one size and are distributed through public warehouses in Atlanta, Boston, Chicago, Denver, Los Angeles, Portland, and St. Louis. In addition, some space is used in the company's Fargo warehouse. Young Joaquin (J. Q.) Brant, with a fresh MBA degree from the University of South Alabama, returned to the family firm, where he had once worked during summers. On his first day of work, J. Q. met with his father. His father complained that they were being "eaten alive" by warehousing costs. The firm's controller drew up a budget each year, and each warehouse's monthly activity (units shipped) and costs were tallied. Exhibit 3.A shows actual 2016 figures for all warehouses, plus actual figures for the first five months of 2017. Projected 12-month 2017 budgets and shipments are also included. Exhibit 3.B shows the Income Statement for 2016. Exhibit 3.C is the 2016 Balance Sheet. If you are familiar with Excel or other spreadsheet software, you might try using it to answer the following questions. Exhibit 3.A Brant Freezer Warehouse Performance 2016 Figures Units Shipped Warehouse Costs 12 Months Jan.-Dec. 5 Months 12 Months through May 31 Jan.-Dec. 5 Months Units Shipped Projected Actual 2017 Figures Warehouse Costs Budgeted Actual Costs Atlantal 17,431 4,080 through 12 Months 5 Months 12 Months May 31 Jan.-Dec. May 31 Jan.-Dec. 158,830 35,890 18,000 4,035 through May 31 178,000 Boston 6,920 3,061 63,417 27,915 7,200 3,119 73,000 Chicago 28,104 40,228 29,416 14.621 246,315 131,618 30,000 15,230 285,000 141,222 28,019 8,600* 3,100 1,421 31,000 14,900 Denver 3,021 1,005a Fargo 2,016 980 16,411 8,883 2,000 804 17,000 9,605 Los Angeles 16,491 11,431 151,975 109,690 17,000 9,444 176,000 93,280 Portland 8,333 4,028 73,015 36,021 9,000 4,600 85,000 42,616 St. Louis 5,921 2,331 51,819 23,232 8,000 2,116 56,000 19,191 aDenver warehouse closed by strike March 4-19, 2016. Exhibit 3.B Brant Freezer Company Income Statement Income Statement 2016 Sales Cost of goods sold Gross Margin Transportation cost Warehousing cost Inventory carrying cost Other operating costs Total operating cost Earnings before interest and taxes Interest Taxes Net Income $857,322 $735,982 $567,987 $345,876 $4.003,450 $937,000 $3,066,450 $2,307,167 $759,283 $110,000 $69,000 $580,283 Exhibit 3.C Brant Freezer Company Balance Sheet Balance Sheet 2016 Assets Cash Accounts Receivable Inventory Total Current Assets Net Fixed Assets Total Assets Liabilities Current Liabilities Long-term Debt Total Liabilities $706,034 $355,450 $1,590,435 $2,651,919 $803,056 $3,454,975 $1,678,589 $398,000 $2,076,649 Shareholders' Equity Total Liabilities and Equity $1,378,326 $3,454,975 Questions 1. When comparing performance during the first five months of 2017 with performance in 2016, which warehouse shows the most improvement? 2. When comparing performance during the first five months of 2017 with performance in 2016, which warehouse shows the poorest change in performance? 3. When comparisons are made among all eight warehouses, which one do you think does the best job for the Brant Company? What criteria did you use? Why? 4. J. Q. is aggressive and is going to recommend that his father cancel the contract with one of the warehouses and give that business to a competing warehouse in the same city. J. Q. feels that when word of this gets around, the other warehouses they use will "shape up." Which of the seven should J. Q. recommend be dropped? Why? 5. The year 2017 is nearly half over. J. Q. is told to determine how much the firm is likely to spend for warehousing at each of the eight warehouses for the last six months in 2017. Do his work for him. 6. When comparing the 2016 figures with the 2017 figures shown in the table, the amount budgeted for each warehouse in 2017 was greater than actual 2016 costs. How much of the increase is caused by increased volume of business (units shipped) and how much by inflation? 7. Use the 2016 Income Statement and Balance Sheet to complete a Strategic Profit Model for J. Q. 8. Holding all other information constant, what would be the affect on ROA for 2017 if warehousing costs declined 10% from 2016 levels?