1.  Michigan State University, 2011 - 1 - Strategic Profit Model: Base Case Exercises Instructions –The “Base Case” is represented by the values you will see in the upcoming strategic profit model slides. Your assignment is to make changes to the Base Case values as directed in each of the four scenarios presented. Treat each scenario independently from the others. –When you are ready, advance to Slide 2. Read Scenario #1, and then go to Slide 3 to begin changing the values and working through the strategic profit model. –Proceed through all four scenarios and then watch Lectures 32 and 33 for a complete analysis.

2.  Michigan State University, 2011 - 2 - Strategic Profit Model: Scenario #1 Scenario #1 –Suppose that by working closer with suppliers to reduce their cost of serving you, suppliers are able to reduce their prices to you. The result is a 2% reduction in your cost of goods sold. This also reduces the value of your average inventory by 4%. Assume your inventory carrying cost is 20%. If all of the other elements (sales, non-inventory assets, and non-inventory related expenses) remain the same, what would be your profit margin, asset turnover, and return on assets? –Proceed to the next slide to begin your work.

3.  Michigan State University, 2011 - 3 - Strategic Profit Model: Scenario #1 Change the numbers as directed in Scenario #1

4.  Michigan State University, 2011 - 4 - Strategic Profit Model: Scenario #2 Scenario #2 –Suppose your research suggests that by increasing inventory in your business unit, you can substantially increase service levels to customers. It also suggests that increasing service levels can increase revenue. You believe that a 6% increase in inventory will result in a 3% increase in revenue. This will also increase cost of goods sold (assume it will increase by 2%). Assume inventory carrying cost in your business unit is 20%. What is the financial impact of these changes on your business unit? –Proceed to the next slide to begin your work.

5.  Michigan State University, 2011 - 5 - Strategic Profit Model: Scenario #2 Change the numbers as directed in Scenario #2

6.  Michigan State University, 2011 - 6 - Strategic Profit Model: Scenario #3 Scenario #3 –Suppose by using a different transportation mode you can improve service. As a result, sales increase by 5%. Cost of goods sold increases by 4%. Variable expense (of which transportation is considered a part) increases by 6%. Assume no other changes. –Proceed to the next slide to begin your work.

7.  Michigan State University, 2011 - 7 - Strategic Profit Model: Scenario #3 Change the numbers as directed in Scenario #3

8.  Michigan State University, 2011 - 8 - Strategic Profit Model: Scenario #4 Scenario #4 –Your executive in charge of warehousing tells you he is considering using a contract warehousing firm and closing the company-owned warehouses. This will reduce your assets by $50 and eliminate $50 in expenses of operating the warehouses. However, you will have to pay the contract warehouse firm $55. For simplicity, treat both the current warehouse expense and the contract warehouse expense as if they are “fixed” expenses. What would be the impact of this decision on ROA assuming all else remains the same? –Proceed to the next slide to begin your work.

9.  Michigan State University, 2011 - 9 - Strategic Profit Model: Scenario #4 Change the numbers as directed in Scenario #4