Answer Both Questions

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Problem 1: Tom’s Little Lamb Store

Tom Lamb and his long-term personal friend, Kari Legga, have established a flourishing business selling lamb products at retail to several thousand customers from nearby Big City, Michigan. The customers gladly drive the short five miles to the lamb store, because the exquisite taste of the grain-fed lambs, whose fleece at one time was as white as snow, is beyond comparison. The lamb store, called Legga Lamb to Go sells the product for $8.00 per pound and purchases them at $3.00 per pound. Average weight per order is 5 pounds. Variable selling costs are 20 per cent of sales per pound and fixed costs are $180,000 annually.

In the five years that the lamb store has been in existence, their best year ever was selling 100,000 pounds in 2009; the worst year was 2007 when they sold 59,000 pounds.

Required:

a. Determine the gross profit per pound. ___________

b. The break-even sales in dollars are $ _______________________. .

c. Legga Lamp has a target profit of $122,000. Therefore, the sales needed to achieve this target profit are $ _______ or ________ pounds of product.

d. Kari and Tom are disagreeing on an important business concept. She would like to increase target profit to $150,000 annually. Tom is reluctant to go along with this because he does not feel that the break-even point should be moved that far to the right on the volume-cost-profit graph. Karie snaps back that he is confused with too much college education and graph analysis. They look at you, their financial advisor, for the resolution to this issue. Don’t let them down.

Base your advice on sound computations and narrative, including a solid conclusion

e. Review your answer in part c. A new supplier has offered to be the exclusive supplier of lamb to Legga Lamb to Go for a 1 year period of time, under contract. Marilee’s Lambs, Incorporated, an Arkansas company, would sell their lamb products to them for $2.75 per pound, quick-frozen and delivered, with the understanding that Legga Lamb would have to order a minimum of 70,000 pounds at regular intervals throughout the year, as needed. Comment on what Legga Lamb should do. Base your comments on calculations and come to a conclusion.

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Problem 2: Utica Plastics and Rubber, Inc.

As a result of your recent graduation from CMU’s MSA program, you are offered a position as Vice-president of Manufacturing at Utica Plastics and Rubber, Inc. You are excited because this represents the single biggest salary increase in your life and it allows you to relocate to a warmer climate..

Shortly after arriving at work, you are given a report which shows these pertinent ratios for your manufacturing division:

Fiscal Year ending October 31

2009-2010

2010-2011

2011-12

Inventory Period

88.7 days

110.4 days

120.8 days

Sales Returns & Allowances

3.9%

4.7%

10.7%

Cost of Goods Sold Ratio

37.5%

27.4%

33.5%

Sales

$70M

$75M

$85M

Change in selling price per unit

0.0%

1%

1.1%

Further analysis by your departmental staff revealed that the employees of Utica’s largest supplier of plastics, Toledo Plasteel, Inc. have been threatening a strike since early 2000. A strike is imminent, perhaps as early as October 15, 2013. Although Imperial Plastics, a major competitor of Plasteel, has offered to step in and supply all of Utica’s plastic needs, they are 12 per cent more expensive and their quality is not as good as Utica’s quality. The contract expired on October 1, 2013..

The industry benchmark for sales returns and allowances is 4 per cent; the benchmark gross margin ratio is 81%.

Utica’s largest competitor, Penelope’s Plastics and Molds, Inc. has increased prices 4 times during the past three years and their quality standards are considered the highest in the industry. Returns are less than 1%. Currently, their prices are approximately 5 per cent above Utica’s prices.

Required for Utica Plastics and Rubber, Inc:

1. Prepare a memo to the President of Utica Plastics and Rubber, presenting your analysis of the above facts. Suggest ways in which the company might improve their operations; but also compliment the company on their accomplishments.

2. Suggest at least three other financial ratios, statements, financial tools or analyses you would like to have used in order to better prepare yourself to become a successful Vice-president of manufacturing. Be sure to explain how they would have helped.

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