Sensitivity and inflation (continuation of Exercise 8.24) (10-20 minutes) As chairman of Walk-About, you are concerned that inflation may squeeze your profitability Specifically, you feel committed to the 30 selling price, and fear that lowering the quality of the shoes in the face of rising costs would be an unwise marketing move. You expect the cost of shoes to rise by 10% during the coming year. You are tempted to avoid the cost increase by placing a non-cancellable order with a large supplier that would provide 50 000 units of the specified quality for each store at 19.50 per unit. (To simplify this analysis, assume that all stores will face identical demands.) These shoes could be acquired and paid for as delivered throughout the year However, all shoes must be delivered to the stores by the end of the year. As a shrewd merchandiser, you foresee some risks. If sales were less than 50 000 units, you feel that markdowns of the unsold merchandise would be necessary to sell the goods. You predict that the average selling price of the leftover units would be 18.00. The regular commission 5% of revenues would be paid to salespeople. Required 1 Suppose that actual sales at 30 for the year are 48 000 units and that you contracted for 8.26 50 000 units. What is the operating profit for the store? 50 000 units. What would the operating profit have been if you had ordered 48 000 units? rise before you would have been indifferent between having the contract for 50 000 units and 2 If you had perfect forecasting ability, you would have contracted for 48 000 units rather than 3 Given actual sales of 48 000 units, by how much would the average cost per unit have had not having the contract