brickmortfinancialanalysis_moodlepost

8/8/2019 BrickMortFinancialAnalysis_MoodlePost

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Financial Analysis- Problem Set

With partial solutions

Brik-Mort is a US based supermarket that sells everything from groceries, dairy, snacks, house hold

items, furnishings etc. Organic milk is a premium, high margin product in their store. Currently, to

manage this product Brik-Mort incurs an annual labor cost of $15,000, overhead allocation of $10,000

per annum, and a capital cost allocation of $10,000. A gallon of organic milk is sold at a price of $6 at

Brik-Mort and the annual sales are 36,000 gallons. Each gallon is procured for $4, and inventory

manager incurs a monitoring cost of $.75 per gallon, which involves checking for stock-outs and expiries.

SET A:

1. What is the current operating profit of the organic milk category at Brik-Mort?2. What is the contribution margin of a gallon of organic milk?3. Management is contemplating a price change for this product. If the price is increased by 5%

then what quantity of sales can Brik-Mort afford to lose in order to maintain the current levelsof profitability?

4. Construct a break-even sales curve5. The management is contemplating procuring milk from an alternate supplier to reduce costs per

gallon by $0.10. With this reduction in costs what is the break-even sales change?

6. The inventory manager has been pressurizing the store manager to hire a monitoring agent asthe volume of milk handled in store is fairly high. He expects to incur $20,000 in annual costs for

this agent. If the management hires the agent and combines it with a price hike of $0.25, what

should be the change in sales that justifies this hiring.

7. Management is planning a 5% price reduction. Any time the annual sales volume increasesabove 40,000 gallons the store needed help from additional labor that usually cost them anadditional $8000 per annum. Map the change in contribution and profit of this 5% reduction in

price for a series of possible sales changes from 0% change in sales volume to 20% change in

sales.

SOLUTION:

1. Operating Profit = Revenue Costs = Sales Qty * P Total V.C Total F.C= 36000*6 36000(4+0.75) (15000+10000+10000)=10000

2.

CM = P V.C = 6 4.75 = 1.25, %CM = 1.25*100/6 = 21%3. % Break Even Sales change= -P/New CM = -(6.3-6)/(6.3-4.75) = -0.3/1.55 = 19.35%

The amount of sales that Brik-Mort can afford to lose is 36000*19.35/100 = 6966.

Or equivalently the new sales should be no lower than 36000 6966 = 29034

4.


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5. % break-even sales change with change in VC isHere it is -0.1/1.35 , approximately -7%

6. % break-even sales with change in FC is=(-0.25/1.5 + 20000/1.5x36000) = 20.4%

7. Contribution = P-VC,What I state as change in contribution is the total contribution from sales with price change

contribution from sales prior to price change.

%change

in price -5% change

in Sales Unit Sales

Unit Change in

Sales

Change in

Contribution IFC

Total Change in

Profit

0 36000 0 -10800 0 -10800

5 37800 1800 -540 0 -540

10 39600 3600 9720 0 9720

15 41400 5400 19980 8000 11980

20 43200 7200 30240 8000 22240

25 45000 9000 40500 8000 32500

30 46800 10800 50760 8000 42760

The above results are mapped as in the chart below

-15%

-10%

-5%

0%5% 10% 15%

0.00

20000.00

40000.00

60000.00

80000.00

100000.00

120000.00

140000.00

5 5.2 5.4 5.6 5.8 6 6.2 6.4 6.6 6.8 7

SalesUnitInitialCMNew

FCinChange

CMNew

CM

$

$

$

$

CMNew

CM

$

$


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Through a commissioned survey among the consumers, the management found that they are unable to

meet significant amount of demand because of stock-outs. A within store assessment showed them

that the inventory systems showed positive quantities on hand but the items were displaced from their

shelves.

Upon further investigation into Brik-Mort accounts, Mr. Sam found that the current procurement has to

account for 2.5% wastage. That is, due to misplaced inventory, the procured quantity of milk is 1.025

times the sales quantity. Then

SET B:

1. What is the current operating profit of the organic milk category at Brik-Mort?2. What is the contribution margin of a gallon of organic milk?3. Construct a break-even sales curve.

SOLUTION:

1. Operating Profit = Revenue Costs = Sales Qty * P Total V.C Total F.C= 36000*6 36000(4+0.75)*1.025 (15000+10000+10000)=5725

While the management was contemplating ways to combat this misplaced inventory problem, the

store manager, Mr. Sam, discovered a lot of press coverage on RFID systems. He learnt that RFID chips,

through code inscriptions, have the ability to transfer information related to the products that contain

these chips. The press was in all praise for how RFID was helping businesses address counterfeiting,

smuggling, shipment tracking and many other pressing issues.

-20000

-10000

0

10000

20000

30000

40000

50000

60000

0 1800 3600 5400 7200 9000 10800

Change in Contribution

Change in FC


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It struck Mr. Sam that the RFID chips idea may be the way to go to solve the misplaced inventory

problem that has been lingering for some time. Mr. Sam got excited about the possible solution, now he

would be able to not just track inventory but also keep track of the expiry dates on the perishable items.

The RFID chips installation would not be easy, the new system of coding products would obviously

involve higher costs. On the other hand, with RFID he may be able to offer fresher products to

consumers. Would he be able to recover these costs through a price increase on products. He began to

investigate.

Going the RFID way meant that they would need to install a printer to tag(ID) each carton(gallon) of

milk. Each printer machine costs $10,000 and has the capacity to produce 50,000 tags per annum.

The advantage of RFID is that it completely eliminates wastage, so that no extra procurement is needed

to meet sales numbers. However, in the first year the labor overhead (for scanning and monitoring) is

expected to be $20,000 and is expected to go down to $10,000 in the subsequent years. Once this

system is installed, the monitoring cost is estimated to come down from the current cost of $0.75 to

$0.20.

If Brik-Mort decides to pursue the RFID tagging, then

SET C:

1. What will be the operating profit of the organic milk category at Brik-Mort?2. What is then the contribution margin of a gallon of organic milk?3. What is the sales change required so that without a change in price Brik-Mort will be able to

maintain the current profit level (as in SET B, question 1)?

Brik-Mort recently received a discount offer from a supplier of milk, where if Brik-Mort purchases above

30,000 gallons per annum they will receive a price per gallon of $3.8. However, if the procured quantity

is below 30,000 then the supplier will charge a price of $4 per gallon.

SET D:

1. What is the operating profit for this alternative2. Compare the alternatives available for Brik-Mort. Make a recommendation based on your

comparison as to which of the following alternatives should be chosen. Support yourrecommendation with analysis for both the cases below

a. RFID implementationb. Choosing a supplier who gives a quantitative discount

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