Analytics Exercise 20-4 (Algo)

Big10Sweaters.com is a new company started last year by two recent college graduates.

The rest had to be spent on the website, advertising, and inventory. In addition, the venture capital company gets 26 percent of the company profits, before taxes, during the first four years of operation, assuming the company makes a profit.

Here we see that the cost for each sweater, delivered to the warehouse of our monogramming subcontractor, is $66.03. This price is valid for any quantity that we order above 5,000 sweaters. This order can be a mix of sweaters for each of the five schools we are targeting. The supplier needs 20 weeks to process the order, so the order needs to be placed around April 1 for the upcoming football season.

Exhibit 20.12

COST INFORMATION FOR THE BIG TEN SWEATERS
China supplier cost
Material	$	36.00
Labor		11.50
Overhead		1.25
Transportation within China		1.00
Supplier profit		9.10
Agent's fee		2.68
Freight (ocean carrier)		1.50
Duty, insurance, etc.		3.00
Total supplier cost				$	66.03
Domestic subcontractor cost
Monogram material	$	5.00
Labor		9.00
Total subcontractor cost				$	14.00
Total (per sweater)				$	80.03

Exhibit 20.13

FORECAST DATA FOR THE BIG TEN SWEATERS
	AVERAGE FOOTBALL GAME ATTENDANCE	LAST YEARS ACTUAL SALES (FULL PRICE)	RHONDAS FORECAST FOR NEXT YEAR	STEVES FORECAST FOR NEXT YEAR	MARKET RESEARCH FORECAST FOR NEXT YEAR	AVERAGE FORECAST	STANDARD DEVIATION
Ohio State	105,261	2,260	2,420	2,260	2,760	2,480	255
Michigan	108,933	1,431	1,830	1,470	2,030	1,777	284
	50,457	875	1,040	890	1,050	993	90
Michigan State	74,741	-	1,770	1,470	1,520	1,587	161
Indiana	41,833	-	570	480	490	513	49
Penn State	107,008
Wisconsin	80,109
Iowa	70,214
Illinois	59,545
Minnesota	50,805
Northwestern	24,190
Nebraska	85,071
Total		4,566*	7,630	6,570	7,850	7,350	427**

*434 sweaters were sold through eBay for $49 each (the customer pays shipping on all orders).

**Calculated assuming the demand at each school is independent = i=1N2ii=1Ni2

Our monogramming subcontractor gets $14 for each sweater.

In addition to the cost data, you also have some demand information, as shown in Exhibit 20.13. The exact sales numbers for last year are given. The exhibit indicates the retail or full price sales for the sweaters that were sold for $133 each. Sweaters that we had at the end of the season were sold through eBay for $49 each .

You are curious as to how much Rhonda and Steve made in their business last year. You do not have all the data, but you know that most of their expenses relate to buying the sweaters and having them monogrammed. You know they paid themselves $50,000 each and you know the rent, utilities, insurance, and a benefit package for the business was about $16,000.

They are paying you $36,000 and you expect your benefit package addition would be about $1,000 per year. Assume that they order based on the aggregate forecast.

a. what is the expected pre-tax profit for this year, after deducting salary and overhead? Use average forecast for each school. Assume sales materialize per the average forecasts and the entire safety stock amount (computed based on aggregate demand) must be sold on EBay.

b. If they must pay 50% in taxes after deducting their venture capital firm payment, how much do you expect their business cash to increase this year?