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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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