Cooper Processing: Return on Assets

Introduction

Whon we left off on the last diccussion. we had fieured out. we had determined the orofitability of botn

the retail and foodservice segment. And I said, that only tells me half the answer. That doesn't provide

me with any insipht with how well I m using assets. So$.$ in order to figure out now well I$\text{'}$m using assets.

have to use a strategic profit model or also called the Dupont model, and this is not unique to Michigan

State or not even particularly new. But what it does is it ties in three critical pieces. One is the revenue

on the cales levpl. The other one is the cods. which are the eynenses. And the last one is acets. which is

the bottom part of the figure. I want to put those pieces together, so I can determine on the left$-$hand

Retail Channel

So$.$ if $1$ look on the right side, I$\text{'}$m taking the data from the Cooper processing case, the retail channel, my

solos was $60$ million. My cost of poods sole was $18$ million. So$.$ the eross marin was $42$ million. So that's

my gross margin part of it$.$ If I look at my expenses, normally, I$\text{'}$m going to separate between variable

and ficed, but here, frust out them together and my expenses were $34,$ milion, so$,$ that's the variable

pypenses as mart as operatine ine sunoy chain. That takes care of my revenue and the expences

ilook towards the bottom of the feure. see mu inventor. Remember. Inventory is an asset. it is

something I have paid for. It's sitting in my warehouse and I effectively incur interest for it$.$ But this is the

Inventory itself. I also have accounts receivable, which is three million. I may have other current assets, so my current assets are seven million. That's the four million plus the three million. And the fixed assets

are $10$ million

Now, what I$\text{'}$d like you to do is complete the rest of the strategic profit model and figure out the return an assets for the Cooper processing retail segment. This tells me effectively what interest rate I$\text{'}$m getting from the firm, And remember, the number will look probably higher than it used to$.$ And the

reason that happens is we have taken out indirect costs. We configured the profitability of one sector without the indirect costs because that gives me a lot better insight in terms of what that sector$\text{'}$s really

provine me

Foodservice Channel

Do the same thing for the foodservice channel. in this case, we have sales of $40$ million, cost of goods sold of $22$ million. So$,$ the gross margin is $18$ million. Our total expenses are $8\mathrm{.}3$ million, much less because we don't have that packaging machine. We don't have many salespeople, and we don't have any promotions. So$,$ relatively speaking, the foodservice segment is much lower cost. It does have more

Inventory. it dops have less arrounts recewahle but our current accats are still seven million dollars

which coincidentally are the same as the retail segment. But a big difference is I have no fixed asset. I

have no oackagine machine

So$,$ what you need to do now is again, building on the gross margin, the total, and the current assets, IT

be able to figure out the nes protis and the asses furnover for the toodservice segment. And in this case.

you would see the relative return for foodservice. You'd want to comoare that with the retail segment

and determine what direction you should go in terms of moving the business forward.

Cooper Case Debrief

So$,$ we look at just the profitability, the foodservice will be better. If we look at the return on assets, we

cleany see that the roodservice channel is much better. it has three times the retum. or over three times

the return, that the retail sector has. So$,$ if we wanted to move forward, we could either make the

choice of putune more emphasis on the foodservice seement. or we could make the choice to see what

we could do to increase the profitability of the retail segment. One of the things we may want to do$,$ in

terms of the supoly chain, is take out one of the assets

The bipeest asset, in the case of retail, is that labeling machine. So$,$ what can we do with that? We could

sell it and lance it back: we convert a from an asset to an oreratino excense. or from an asset to an

outsourcing expense, if you will. You see if you try that out, that your assets so way down, vour

expenses po up a little because now you have to pay a little bit more. But the return on assets makes a

of keeping the business going.

If you have not done so already, review the Introduction to Cooper Processing Company page and complete the interactive exercise. Review the case study rubric provided, then answer the following questions.

$1.$How profitable is each channel?

$2.$What is the return on assets $($ROA$)$of each channel?

$3.$Any recommendations?