Question
CASE 2: Located in Fargo, North Dakota, the Brant Freezer Company manufactures industrial freezers. These freezers come in one size and are distributed through public
CASE 2:
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 companys 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 firms controller drew up a budget each year, and each warehouses 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 | 2017 Figures | |||||||
Units Shipped | Warehouse Costs | Units Shipped | Warehouse Costs | |||||
12 Months Jan.Dec. | 5 Months through May 31 | 12 Months Jan.Dec. | 5 Months through May 31 | Projected 12 Months Jan.Dec. | Actual 5 Months May 31 | Budgeted 12 Months Jan.Dec. | Actual Costs through May 31 | |
Atlanta | 17,431 | 4,080 | 156,830 | 35,890 | 18,000 | 4,035 | 178,000 | 40,228 |
Boston | 6,920 | 3,061 | 63,417 | 27,915 | 7,200 | 3,119 | 73,000 | 29,416 |
Chicago | 28,104 | 14,621 | 246,315 | 131,618 | 30,000 | 15,230 | 285,000 | 141,222 |
Denver | 3,021 | 1,005a | 28,019 | 8,600* | 3,100 | 1,421 | 31,000 | 14,900 |
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 419, 2016. |
Figure 3.A Full Alternative Text
Exhibit 3.B Brant Freezer Company Income Statement
Income Statement 2016 | ||
Sales | $4,003,450 | |
Cost of goods sold | $937,000 | |
Gross Margin | $3,066,450 | |
Transportation cost | $657,322 | |
Warehousing cost | $735,982 | |
Inventory carrying cost | $567,987 | |
Other operating costs | $345,876 | |
Total operating cost | $2,307,167 | |
Earnings before interest and taxes | $759,283 | |
Interest | $110,000 | |
Taxes | $69,000 | |
Net Income | $580,283 |
Figure 3.B Full Alternative Text
Exhibit 3.C Brant Freezer Company Balance Sheet
Balance Sheet 2016 | |
Assets | |
Cash | $706,034 |
Accounts Receivable | $355,450 |
Inventory | $1,590,435 |
Total Current Assets | $2,651,919 |
Net Fixed Assets | $803,056 |
Total Assets | $3,454,975 |
Liabilities | |
Current Liabilities | $1,678,589 |
Long-term Debt | $398,060 |
Total Liabilities | $2,076,649 |
Shareholders Equity | $1,378,326 |
Total Liabilities and Equity | $3,454,975 |
Question:
- Holding all other information constant, what would be the affect on ROA for 2017 if warehousing costs declined 10% from 2016 levels?
(5 marks)
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