Question 3

Question 3 uses the Strategic Profit Model (SPM) to calculate the ROA of Sola-R-Us and how the negotiated reductions in COGS and Transportation in Questions 1 and 2 can improve ROA.

HINT: You can create your own version of the SPM in excel -or- copy the SPM spreadsheet from the PowerPoint slides, to make the calculations below easier.

Part A. Using the Strategic Profit Model (SPM) with the following base numbers, calculate the ROA for Sola-R-Us for the base case found above and repeated here:

Sales $25,000,000

COGS $18,100,000

Transportation Costs $ 4,000,000

Net Profit $ 2,900,000

NOTE: Assume transportation costs cover all Variable Expenses in your SPM.

Fixed Expenses: $0

Inventory: $3,200,000

Accounts Receivable: $2,450,000

Other Current Assets: $900,000

Fix Assets: $850,000

Part B. Using your final numbers from Question 2 above, calculate the new ROA for Sola-R-Us.

Part C. What is the percentage improvement in ROA after all of the reductions in COGS and Transportation?