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Problem 2. Strategic Profit Model (14 points) In the Topic 4 End of Topic Case, Katie Lee, a consultant hired by RR on-line, is considering

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Problem 2. Strategic Profit Model (14 points) In the Topic 4 End of Topic Case, Katie Lee, a consultant hired by RR on-line, is considering 3 options to improve RR on-line's supply chain efficiency and customer service levels. During the Zoom session on Feb 17, we (will) conduct the analysis for the first 2 options. Here you are asked to conduct the analysis for the third one. Base Case Income Statement (in millions) Sales 74,452 Cost of Goods Sold 47,546 Gross Margin 26,906 Transportation 6,635 Warehousing 8,585 Inventory Carrying 4,733 Other Operating Cost 6,208 Total Operating Cost 26,161 Interest 239 Taxes 161 Net Income 345 Base Case Balance Sheet (in millions) Asset Cash 8,658 Accounts Receivable 4,767 Inventory 7,411 Total Current Assets 20,836 Fixed Assets 10,949 Total Assets 31,785 Liabilities Current Liabilities 18,848 Long Term Debt 3,191 Total Liabilities 22,039 Stockholder's Equity 9,746 Total Liabilities & 31,785 Equity Base Case Strategie Profit Model: Sales $74,452 Gross Profit $26,906 COGS $47,546 Net Income 5345 Logistics Costs $19.953 + Total Op. Costs $26,161 Profit Margin 0.46% Other Op. Costs $6,208 Taxes & Interest 5400 Sales 574452 Cash $8,658 Return on Assets 1.09% Accounts Receivable $4,767 Sales $74,452 Current Assets $20,836 Asset Turnover 2.34 Inventory $7,411 Total Assets $31,785 Other Assets N/A Fixed Assets $10,949 Third Option: Improve the training of the distribution center team to reduce the errors in order fill. The direct impacts caused by the third option are: Sales increase by 2% COGS increase by 2% Inventory increases by 1% Transportation, warehousing, and other operating costs remain the same. Assume interest is unchanged. Taxes increase from 161 to 390. Cash, accounts receivable, other assets, fixed assets remain the same. (a) Fill the numbers in the strategic profit model below. Show detailed analysis for each change you make in the strategic profit model. (10 points) Note: it is easier to conduct the analysis in the Topic 4 End of Topic Case Study Worksheet, in which case, please submit the spread sheet (not screenshot of spread sheet) as an attachment Sales S Gross Profit 5 COGS $ Logistics Costs $ Net Income $ Total Op. Costs $ Profit Margin + Other Op. Costs $6,208 Taxes & Interest Sales 5 Return on Assets Cash $8,658 Accounts Receivable $4,767 Sales $ Asset Turnover Current Assets $ Inventory $ + Total Assets $ Other Assets N/A Fixed Assets $10,949 (b) The table below summarizes and compares the financial impact of the three alternatives. Fill the numbers for option 3. Indicate which option would you recommend and point out any potential concerns of the option. (4 points) Base Option 3 $74,452 Option 1 $74,452 $25,630.2 Option 2 $74,452 $25,065.85 $1151.15 $26,161 Item Sales Total Operating cost Net income Inventory turnover Asset turnover Profit margin $345 $664.8 6.42 6.42 6.75 2.34 2.34 2.37 0.46% 0.89% 1.55% ROA 1.09% 2.09% 3.66%

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