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 and were not monogrammed. Keep in mind that the retail sales numbers do not accurately reflect actual demand since they stocked out of the OSU sweaters toward the end of the season. As for advertising the sweaters for next season, Rhonda is committed to using the same approach used last year. The firm placed ads in the football program sold at each game. These worked very well for reaching those attending the games, but she realized there might be ways to advertise that would open sales to more alumni. She has hired a market research firm to help identify other advertising outlets but has decided to wait at least another year to try something different. Forecasting demand is a major problem for the company. You have asked Rhonda and Steve to predict what they think sales might be next year. You have also asked the market research firm to apply their forecasting tools. Data on these forecasts are given in Exhibit 20.13. To generate some statistics you have averaged the forecasts and calculated the standard deviation for each school and in total. Based on advice from the market research firm, you have decided to use the aggregate demand forecast and standard deviation for the aggregate demand. The aggregate demand was calculated by adding the average forecast for each item. The aggregate standard deviation was calculated by squaring the standard deviation for each item (this is the variance), summing the variance for each item, and then taking the square root of this sum. This assumes that the demand for each school is independent, meaning that the demand for Ohio State is totally unrelated to the demand at Michigan and the other schools. You will allocate your aggregate order to the individual schools based on their expected percentage of total demand. You discussed your analysis with Rhonda and Steve and they are OK with your analysis. They would like to see what the order quantities would be if each school was considered individually. 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. (Round your answer to the nearest dollar amount.) Expected pre-tax profit 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? (Round your answer to the nearest dollar amount.) Increase in cash 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 Total subcontractor cost Total (per sweater) 9.00 $14.00 $80.03 Exhibit 20.13 AVERAGE FOOTBALL GAME ATTENDANCE Ohio State 105,261 LAST YEAR'S ACTUAL SALES (FULL PRICE) 2,260 FORECAST DATA FOR THE BIG TEN SWEATERS RHONDA'S FORECAST FOR NEXT YEAR STEVE'S FORECAST FOR NEXT YEAR MARKET RESEARCH FORECAST FOR AVERAGE STANDARD NEXT YEAR FORECAST DEVIATION 2,420 2,260 2,760 2,480 255 Michigan 108,933 1,431 1,830 1,470 2,030 1,777 284 Purdue 50,457 875 1,040 890 1,050 993 90 Michigan State 74,741 Indiana 41,833 1,770 570 1,470 480 1,520 1,587 161 490 513 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). N "Calculated assuming the demand at each school is independent = Our monogramming subcontractor gets $14 for each sweater. Shipping cost is paid by the customer when the order is placed.