Performance Measurement and Financial Analysis Call Starky never thought she would be able to sell paper products to consumers on the Internet. However, after five years in business Paper2Go.com has reached $75 million in Paper2Go specializes in shipping paper-related products to consumers, including pers. paper towels, and facial tissue from numerous suppliers. Because these items have Paper2Go receives 500,000 orders annually with an average revenue per order of $150 and an average proht per order of $90. Paper2Go's current order fill rate is 92 percent. Colleen estimates that of the orders not filled correctly or completely, 15 percent of the customers cancel their orders and 85 percent will accept a reshipment of the correct/ w margin, Colleen knows she needs to control costs and at the same time have high CASE 13.2 paper2Go.com service levels. rehandled orders by $30. filled items. This rehandling costs Paper2Go $15 per order and is only applicable on the reshipped orders. In an effort to retain customers, Paper2Go reduces the invoice value of Paper2Go pays $2,500,000 for transportation, both inbound to and outbound from its warehouses. Its warehousing costs are $1,950,000 annually. Paper2Go has $40 million of debt at an annual interest rate of 12 percent. Other operating costs are $1 million per year and Paper2Go maintains $100,000 in cash at all times. Paper2Go has an average inventory of $6.7 million. This level of inventory is necessary no help fill consumer orders correctly the first time. The inventory carrying cost rate is 30 percent of the average inventory value per year. Its accounts receivable averages $350,000 per year. Paper2Go owns three warehouses that are valued in total at $85.7 million. The net worth of Paper2Go is $45 million. Colleen has decided that a 92 percent order fill rate is not acceptable in the market and lost customers and rehandled orders are negatively affecting profits. She has decided to invest $1 million in a new stock locater system for the warehouses, increase inventories by 10 percent, and increase the on-time delivery of inbound shipments by contracting with a new carrier. This carrier upgrade will increase total transportation costs by 10 percent. Colleen hopes these changes will increase the order fill rate to 98 percent. Paper2Go faces a current tax rate of 35%. CASE QUESTIONS 1. You are the logistics analyst at Paper2Go.com and have been asked to do the following: a. Calculate the financial impact of increasing order fill rates to 98 percent from 92 percent b. Develop a strategic profit model of both the old system and the modified system that reflects the suggested adjustments. Order Fill Rate 92% 500000 Order Fill Rate 98% 500000 Annual orders Orders filled correctly 460000 Service failure orders 40000 6000 Lost sales orders (15%) Retified orders (85%) 34000 Net orders sold 494000 75000000 75000000 Revenue Less: Invoice deductions 1020000 Lost sales revenue 900000 Net revenue 73080000 Cost of Goods Sold 29640000 Gross Margin 43440000 Rehandling cost 510000 Transportation 2500000 Warehousing 1950000 Inventory carrying Cost 2010000 1000000 1000000 Other operating cost Total operating cost 7970000 EBIT 35470000 4300000 4800000 nterest Tax (359) 10734500 Net income 19935500 Profit increase of 16 Sales 22080000 Net profit after Interest and taxes 19936600 Incomaleostassato ST 9 Gross Margin 03440000 lel COGS 29640000 Net profit marg 273 lo Net profit 35470000 Return on Assets Return on Equity 121.5% 443 IN Logistics costs 0970000 c) Net profit margin 1485 Total Costs 7970000 Sales Other costs 1000000 1000000 Return on Assets Return on Equity Inventory 67xxx Sales Current Assets 17180000 Asset Turnover 78 Ace Receivable WO WOO Tots AS XO Fixed Assets TOKO 86700000 Cash 10000 100000