Post on 15-Oct-2015
description
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Hassan Tariq GhaniSyed Saad ShahSyed Muhammad HamzaSyed Ather WaqarSyed Fayyaz Hasnain
Case Presentation -Accounting for Decision Making
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Founded in the early part of the 19thcentury,Cafes Monte Bianco is a manufacturer andDistributor of Premium Coffee, throughoutEurope
Known for its premium quality standardsand taste
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Grow business aggressively
Consideration of private brand manufacturing andselling
Stable performance for the year 2000 because ofmanufacturing and selling private brands
Projection of financial health of the businessconsidering private and premium brandmanufacturing
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Premium Brand Private BrandSales are volatile particularly in timesof economic downturn
Sales are relatively stable
Margin is relatively high Low margin
DSO is relatively low resulting inhealthy cash flow
Cash flow is hurt when payments aredelayed by the retailers
Production is planned to meet marketdemand
Production is kept to meet contractrequirements, stability of demandallows the company to use full capacityof production
Cannot stock premium coffee due to
concerns of freshness
Simplifies Manufacturing plan as
inventory can be maintained easily
Heavy R&D and marketingexpenditures are incurred to meet salestargets
Reduced administrative, R&D andselling costs (in particular marketingcosts)
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Income Statement
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Balance Sheet
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Current ratio = 0.57
Quick ratio = 0.41
Fixed Asset Turnover = 1.86
Total Asset Turnover = 1.26
Inventory turnover ratio = 11.43
Days Sales Outstanding = 61 days
Higher liabilities, poorliquidity
Indicating lower quality ofAccounts Receivables
Reason being private brandretailers delayed paymentsup to 90 days, reducingcash flow into the company
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Debt Ratio = 0.79
Debt-to-Equity Ratio = 3.87
Times Interest Earned = 1.85
Much of this companysfinancing is in form of debt
Company owes $3.87 indebt for every $1 in equity
More borrowing prospects
are not feasible
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Advertising Expenditure per SalesVolume
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Estimated Cost per Unit for Selling Volume
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Sales during 2000
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Production Plan for Private Brand
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52,800,000,000
Raw Materials & Labor @ 6,600 39,600,000,000
Fixed Costs 3,319,500,000
Total Cost of Goods Sold 42,919,500,000
Gross Profit 9,880,500,000
Marketing / Advertising Expenses ZERO
R&D Expense (Down by 75%) 832,032,500
Selling Expense (Down by 65%) 1,251,148,500Admin Expense (Down by 50%) 2,376,000,000
Interest Expense (Constant at 25 billion Liras) 3,825,000,000
Profit Before Tax 1,596,319,000
Tax @ 40% 638,527,600
Profit After Tax 957,791,400
Caf Monte Bianco
Income Statement
For the Year Ended Dec 31, 2001
Sales (6,000,000 kg @ 8,800) Private Brand
Cost of Goods Sold
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Brand Year 2000 Revenue Quantity Price Per Unit
PRIVATE Revenue/Quantity 9,934,848,000 1,152,000 $8,624
PREMIUM Revenue/Quantity 46,177,560,000 1,196,000 $38,610
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Caf Monte Bianco
Projected Cash Flows
For the Year 2001
Jan Feb Mar Apr May Jun
Opening Balance 1,121,450,000 4,136,804,905 1,511,504,129 (1,123,731,494) (947,324,877) (25,382,261)
Payment Received
Private 1,301,465,088 1,202,116,608 1,192,181,760 3,673,824,000 4,656,960,000 6,105,792,000
Premium 5,541,307,200 - - - - -
Add: Depreciation 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667Less: Disbursements
Raw Material/Labor 3,300,000,000 3,300,000,000 3,300,000,000 2,970,000,000 3,207,600,000 2,574,000,000
R&D Expense 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042
Selling Expense 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375
Interest Expense 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000
Admin Expense 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000
Taxes 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633
Closing Balance 4,136,804,905 1,511,504,129 (1,123,731,494) (947,324,877) (25,382,261) 2,978,992,356
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Caf Monte Bianco
Projected Cash FlowsFor the Year Ended 2001
Jul Aug Sep Oct Nov Dec
Opening Balance 2,978,992,356 3,032,374,973 3,396,221,589 2,156,004,206 501,834,823 (1,618,030,561)
Payment Received
Private 3,880,800,000 4,191,264,000 2,587,200,000 2,173,248,000 1,707,552,000 3,518,592,000
Premium - - - - - -
Add: Depreciation 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667
Less: DisbursementsRaw Material/Labor 3,300,000,000 3,300,000,000 3,300,000,000 3,300,000,000 3,300,000,000 3,300,000,000
R&D Expense 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042
Selling Expense 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375
Interest Expense 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000
Admin Expense 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000
Taxes 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633
Closing Balance 3,032,374,973 3,396,221,589 2,156,004,206 501,834,823 (1,618,030,561) (1,926,855,944)
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For Premium Brand (Year 2000)= Gross Profit / Sales * 100
= 22,878 / 56,112 * 100
= 40.77%
For Private Brand (Year 2001)= Gross Profit / Sales * 100
= 9,880 / 52,800 * 100
= 18.71%
Gross Profit Margin in Year 2000 was greater by 22when compared with GP Margin of 2001
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Contribution Margin is the lowest for privatebrand (D)
2ndlowest CM is at least 3 times greater than
the CM for private brand
Grade D C B BB A AA AAA
Selling Price 8,800 19,500 26,600 30,000 35,500 39,000 42,600
Variable Cost 6,600 12,485 14,275 16,288 17,791 19,166 20,441
Contribution 2,200 7,015 12,325 13,712 17,709 19,834 22,159
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ROE = Net Income / Shareholders Equity
ROE (2000) = 1,945 / 9,165 = 21.2 %
ROE (2001) = 958 / 9,165 = 10.45 %
The ROE on the premium brand is twice the
return earned on private brand.
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Caf Monte Bianco should opt for premium brand or a mixtureof private and premium
A major chunk of sales should come from premium brand
The Gross Profit Margin on premium brand is much higher
The CM on premium brand is higher
A complete shift to private brand will have negative impact oncash flows
Payment is received after 90 days
ROE on premium brand is twice the ROE earned on private brand
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Q A