Midterm

AMC vs Cinemark: Which company has a higher Degree of Operating Leverage? Interpret what this means, by showing how a 10% increase in operating revenue would affect each firm. What does this imply about the difference in cost structure between each firm? (not discussed)

-AMC has a higher DOL at 12.5 -this means that at their current sales volume, a 10% increase in sales would increase operating profit by 125% -this implies that AMC has higher fixed costs to cover, but once it covers those costs, a bigger share of an additional sales dollar becomes profit

Soft to the Touch background

-Aisha, the owner of Soft to the Touch, began selling a wearable blanket called ""The Swaddle" on Amazon, which was an immediate success -the Swaddle cost $40, a higher price than other wearable blankets due to its superior quality -before long, Aisha started selling to retailers (and stopped selling to Amazon as a condition of one retailer), and know sells in Bed Bath & Beyond, gift shops, and college bookstores across the country -in 2017 universities started requesting their own customized Swaddle -in 2017, Aisha started selling a pillow that attaches to a person's chest -the blanket is manufactured at the St. Louis plant and the pillow is manufactured at a plant in Farmington, chosen b/c she was offered a vacant manufacturing facility for almost nothing -an additional benefit is that the cost of labor is a bit cheaper in Farmington, but transportation costs are higher -the process for manufacturing speciality blankets is no different from the typical process -each production run requires the same amount of set-up time and materials handling, regardless of the size of the production run (note that speciality blankets tend to be ordered in smaller quantities and speciality blankets from different organizations cannot be produced in the same production run, so the specialty blankets are characterized by shorter, more frequent production runs -the company directly traces materials and labor costs to each product -MOH is assigned as part of a two-stage process: MOH is traced to either the St. Louis plant or Farmington plant and then each plant calculates its own MOH rate based on the MOH assigned to the plant and the amount of machine hours attributable to that particular plant -each plant then allocates MOH to each product line on the basis of machine hours attributable to that product line -Aisha is concerned about the decline in sales of the regular blanket -the specialty blanket, on the other hand, is experiencing rapid sales growth -the company as a whole lost money in 2019, and there is just 50,000 cash left in the bank -Aisha recently proposed a new product: using scrap materials to make a "Patchwork Pillow" that would be targeted toward eco-conscious consumers -the pillow would require no machining and could be assembled by hand at the Farmington plant (there's open space) -Aisha had pitched the buyers a price of just $20, which the accountant said would increase the company's losses for each pillow sold -potential choices: she could try to turn around the declining product line (regular blankets) or focus her efforts on the growing specialty blanket and pillow product lines

Apple's cost cutting

-Apple is known for creativity and innovation, so there is a worry that their are just focusing on costs -they drive a hard bargain with suppliers -Apple threatens suppliers that they will make their products internally and cut them out -they rotate staff members to keep them from developing supplier relationships b/c after becoming friends, it is harder to drive a hard bargain -their techniques may strain supplier relationships -from the suppliers POV, it may be beneficial to steer clear of relationships where the majority of your revenue comes from it -from Apple's perspective, aside from ethics, suppliers are replaceable -this is not good for Apple's image -also, need to think about if quality will suffer if you're focusing a lot on costs

How does Kraft Heinz's R&D spending compare to that of Campbell Soup? Why might a CEO be quick to reduce R&D spending, and why does it matter?

-Campbell Soup has a higher R&D as a percentage of revenue than Kraft Heinz -R&D is often cut b/c CEOs are evaluated on short-term earnings, rather than creating long term value and creativity -cutting R&D spending destroys value in the long-term and may prevent companies from keeping up with consumer demands

AMC said that one of its strengths is the ability to generate concessions and other revenue from guests. What percentage of AMC's total revenues came from the combination of concessions revenue and other revenue in 2018? How does this compare to the corresponding figure for Cinemark? (didn't discuss this)

-Cinemark has a higher percentage of total revenues coming from the combination of concessions revenue and other revenue than AMC

AMC vs Cinemark: compare the margin of safety percentage

-Cinemark has a much higher margin of safety percentage -sales could drop as much as 20% before the company starts losing money -if there is a recession, that means that AMC will suffer more -AMC does have more upside though b/c it has a higher DOL

AMC vs Cinemark: Which firm is doing a better managing its costs?

-Cinemark is doing a much better job at managing costs -metrics on which Cinemark is doing better: operating costs as a percentage of revenue is lower for Cinemark, lower rent as a percentage of revenue (rent costs more for AMC b/c theaters are in cities), lower other costs as a percentage of total revenue -Cinemark's operating margin is more than double AMC's -metrics on which Cinemark is doing better: SG&A (likely due to their larger size), lower exhibition costs as a percentage of revenue -what is the same: food and beverage costs as a percentage of concessions revenue

AMC vs Cinemark: evaluate each company's strategy

-Cinemark is in a better position -Cinemark has higher margins -Cinemark's strategy revolves around operational efficiency, while AMC has a differentiator strategy -AMC hasn't realized all of their cost savings from acquisitions

key takeaways from Dollar General

-DG's strategy is to start in markets that are very small and where there's no competition -DG has a saturation strategy -DG is not international -turnaround was a huge success and they didn't have to fire anyone -key takeaway: not every turnaround has to be about firing people -focused on better inventory management

RMG background

-Recreational Mountain Gear sells outdoor equipment and clothing at 158 retail stores across the US and online -higher quality = higher price point and profit margins -the company is organized as a co-op (exists for the benefits of the members/owned and controlled by the people who use the products or services), so it offers items at a lower price point to its co-op members -the company has dividends b/c it is a co-op, meaning it exists for the benefits of the members -membership: for a one-time payment, a customer can become a member of RMG and receive access to sales and a dividend of 10% on purchases of full-price items (these benefits are attractive enough that most customers have decided to become members) -RMG credit card: members receive an additional 5% dividend on any item with the credit card -RMG must pay 5% of each transaction's gross amount to the sponsoring bank -RMG has a liberal return policy as items can be returned for up to a year for any reason, although customers cannot return clearance items -there are 3 types of customers: 1. non-member 2. member no CC 3. member with CC

Apple background

-Tom Blevins: VP of procurement -budgers suppliers to get costs down -slowing iPhone sales, combined with the increasing cost of new features, makes the job of hammering down expenses critical -the result is a company less identified with visionary leaders and more with cutting costs -they have a high gross margin -these techniques can strain supplier relationships -he rotates staff members every few years to keep them from developing supplier relationships that might dilute their focus on saving Apple money -the biggest threat to suppliers comes when Apple decides to develop a component internally -the first sign of trouble is when it starts hiring away a supplier's engineers (poaching tales)

Might ZBB work better for certain types of firms? If so, which types of firms?

-ZBB is usually implemented at mature companies with decreasing revenue growth -overall, it is easier for companies to manage costs than revenues -startups, on the other hand, may be more focused on revenue growth

describe member no CC

-a "bargain hunter" -they are the most price sensitive -highest number of clearance purchases and highest number of transactions

Soft to the Touch: Based on Aisha's current cost data (Exhibit 3) compare the performance of the product lines

-according to the current cost system, the regular blanket has the lowest margin, the specialty blanket has the next highest margin, and the pillow has the highest margin

Do you agree with Laura's recommendation to construct an indoor exhibit?

-again, we don't really have a problem with number of visits -we should look into an NPV analysis: we many days of bad weather we have and how much revenue we lose from that -the company may not currently have the capital to do so

Do the problems experienced at Kraft Heinz suggest a fundamental flaw with 3G Capital's ZBB strategy?

-all companies could benefit from identifying wasteful costs, but shouldn't cost cut to the bone -the strategy focuses too much on financial numbers/and targets, rather than evaluating the company's long-term strategy as well as focusing on innovation, marketing, and R&D. -3G Capital's ZBB strategy may originally increase profit margins, but it doesn't consider enough the need to keep up with future industry changes -3G did not realize the decreasing interest in legacy food brands coupled with the increasing demand for healthier items -they cut R&D so much, but they need to spend more on new products customers want -key: they have a revenue problem, not a cost problem

How much money would Danforth University save annually if it eliminated both the baseball and softball teams?

-at minimum, it would save just the direct costs -however, there may be some savings for indirect costs, such as if we didn't need one of the trainers anymore -you might not be able to eliminate the baseball field if it was funded with a restricted endowment

Office Depot/OfficeMax background

-at the start of 2013, both Office Depot and OfficeMax were two of the top three firms in the office supplies business, but they were experiencing declining sales and competition from Amazon and Walmart -during 2013, they merged in a stock-for-stock deal (no cash exchanged hands) -as a result of the merger, all OfficeMax locations became part of Office Depot -the Combined Company redacted it would save a lot of money annually form the merger due to closing hundreds of retail stores, moving to a single website, concerting cash registers to a common point of sale system, combining support functions and eliminating redundant roles, and consolidating warehouse operations and the inventory management system -the integration of support functions was completed by the end of 2014 -the consolidation of warehouse functions took place through the end of 2017, with 15 distribution centers ultimately being closed -during 2017 Office Depot acquired the IT services provider CompuCom -Office Depot acquiring CompuCom is due to an effort to reposition itself as a tech-support provider that isn't as dependent on selling printer paper, toner, and other office suppliers -investors reacted harshly to the news -"we're going to lead with the services based approach when you walk into the store"

What is the cost of the entire athletic department (all teams together) as a percentage of Danforth University's total operating expenses?

-athletics is 0.1% if WashU's expenses (1/10 of a percentage)

Which customer type generates the highest operating profit per transaction before allocating indirect costs? What about after allocating indirect costs? Why is there a discrepancy? If you don't see the discrepancy, it might be helpful to create a table.

-before accounting for indirect costs, non-members have the highest operating profit per transaction (since they don't get any discounts/rebates -after accounting for indirect costs, members no CC are the most profitable (this is b/c non-members have a lot of return costs)

what do you think of Rugged Tent's current business strategy?

-benefits: they have a strong brand, focused on product differentiation (high faulty), good relationship with gear shops, once navigated going from an independent gear shop to a large company (REI) -they have flatlining sales -excess capacity (may not be leveraging the good brand they've built) -missed opportunity: only two product lines (need new product development) -would be valuable to ask existing customers what they'd like to see -in looking at their organizational chart, they could probably reduce headcount by only have 1 marketing and sales manager (rather than 1 for tents and 1 for sleeping bags) -they don't sell a ton online, so they may be able to leverage that and sell more online (and possibly get a higher profit margin

Why would combining systems (e.g., the point of sale systems) result in lower costs?

-better inventory management

takeaways from the Rugged Tents case

-biggest takeaway: the new project undermines the underlying strategy of the firm -so while a positive NPV and price exceeding cost matter, you have to consider other things, such as harming current customers by selling a similar tent at a discount to Walmart -ignore fixed MOH when calculating relevant costs -arbitrary cost allocation to a division should be ignored -just b/c the NPV is positive doesn't mean we should accept a project -you need to consider if it goes well with the current strategy -when calculating excess capacity, there's only an opportunity cost if you would otherwise do something with the space -if sales are flat, it could be b/c you've statured the niche market -to improve flat sales, you could sell new products or improve upon existing ones (R&D) -always consider what your other alternatives are (ex. cost cutting or entering new markets, like Europe)

why did Home Depot's ROA decline in 1984 and 1985? Home Depot faced increased competition, but how does that specifically manifest itself in the accounting numbers?

-both profit margin and asset turnover declined -they were expanding into too many stores too quickly

If Vontriece does add capacity, which workstation(s) should Vontriece upgrade? How will this affect the company's capacity?

-capacity of bottleneck = capacity of the plant -workstation #3 is the bottleneck, but it would only get us 5,000 extra units b/c there becomes a new bottleneck -based on the case, she isn't able to upgrade 2 machines

how should Soft to the Touch evaluate their relationship with bed, bath, and beyond

-conduct a customer profitability analysis -look at our receivables (maybe BB&B is taking longer to pay) -if BB&B is responsible for a high percentage of receivables, this is a problem -Soft Touch has cash flow problems, so analysis of receivables is important

What do you predict would be the incremental cost for Danforth University to field a women's lacrosse team?

-could use the football field -might need a new locker room -need equipment, uniforms -possible calculation: take the direct costs of the women's soccer team, which would be the minimum, and add in facilities costs/other indirect costs -you can benchmark against a peer school

RMG is re-evaluating its decision to offer a branded credit card. What should RMG's executives think about when deciding whether to continue offering the credit card?

-credit encourages people to buy more -your other credit cards might be maxed out, so then you can use your REI card -what we'd really want to know is if spending habits changed after people got credit cards (does the profit from the incremental spending outweighs the costs of the credit card?) -psychological benefit to seeing an REI credit card in your wallet, customer loyalty data

Walgreens has not been performing well. In December 2018, Walgreens announced it was implementing ZBB. What do you predict will occur?

-customer service is an important part of Walgreens, and may be hurt by ZBB

which metrics should Dreliing focus on improving?

-days to sell inventory -sales per square foot -same-store sales

Calculate the annual cost for each team on an annual basis. How did you deal with the issue of indirect costs?

-direct cost: -salaries of coaches of each team -travel costs (cost driver: # of away game-days) -participation, game, and equip costs (cost driver: # of game days) -indirect costs: -salaries of non coaches (cost driver: # of athletes) -facilities costs (cost driver: # of home games)

was it a good idea to open the rapid deployment centers? what are the costs of opening the distribution centers? what are the costs of not opening them?

-distribution centers are warehouses, which represent a fundamental change in their business strategy 1. costs: -labor: need to unload off trucks and organize it -need to get inventory from distribution center to the retail store: you might decide to buy your own fleet of trucks -insure the inventory at the distribution center -more issues with shrinkage -$250 million cost to open them (which is not too bad, but you could have earned a return on the capital) 2. costs of not opening it up -losing revenue from the pros due to stock outs

dollar general background: part A

-everything about Dollar General was designed to keep costs low -it opened stores in small towns with low rent and little competition -Dollar General minimally staffed its stores, had a non-union workforce, and paid store managers low wages -buyers purchased whatever they could get their hands on at a good price, so the store often had irregular items -not a single Dollar General store was located outside the U.S. - the Dollar General preferred to saturate one geographic region to take advantage of economies of scale and keep costs low -Dollar General relied on these tactics to target low and middle-income consumers who were price sensitive, and performed well during recessions b/c more high-income consumers were likely to shop -Dollar General's strategy worked well until 2006, when its store-building spree became weighted down by slumping sales in existing stores, serious problems with inventory management, and declining profit margins -they had attempted to capture market share, rapidly opening up almost 2,000 stores -but the expansion was accompanied by neglect of their existing stores -large amounts of merchandise resulted in abnormally high shrinkage -this was partially attributable to the company's "packaway" strategy, whereby it put unsold seasonal items in the storeroom on-site so they might be sold the next year -in 2007, KKR bought Dollar General and took them private as part of an LBO -Dollar General was an attractive target for an LBO (assets are collateralized against debt) because it had: -tangible assets upon which the debt could be pledged, a predictable stream of cash flows (seen as recession proof) that could be used to pay interest on the debt, and opportunities to improve its business operations, thereby increasing cash flows

dollar general background: part B

-from the end of 2006 through 2008, Dollar General implemented significant changes in inventory management, product mix, distribution, process improvements, store layout, and real estate strategy 1. inventory management: -they moved away from their packaway model, starting by drastically marking down out-of-season merchandise - installed additional security cameras and improved its inventory tracking system -reduced employee turnover 2. product mix -began selling more convenience foods and beverages, particularly near the cash registers -started carrying a higher proportion of private-label brands 3. distribution -reduced distribution costs by improving the flow of goods from distribution centers -invested in IT for its distribution centers and began installing computers at each retail store, improving communications and store replenishment 4. process improvement -reduced several non-value-added costs by: -installing equipment to monitor and manage energy usage in its store, recycling, improving workplace safety 5. store layout and operations -remodeled hundreds of retail stores to improve their layout and increase sales -remodelings including the following: impulse racks placed at the checkout stands, taller racks for holding the items in each aisle, better signage, more shopping carts 6. real estate strategy -centralized the decision making process of opening and closing stores -the selection of better store sites, in combination with the low upfront cost of opening a store, meant that Dollar General was able to recoup the initial cost of opening a store quickly -in 2009, Dollar General went public again and in 2013, KKR closed out its position in Dollar General

compare the metrics listed below for FY 2007 with the same metrics five years later. does it look like the Dollar General turnaround worked?

-gross margin percentage: increased -operating margin: increased -sales per square foot: increased -same-store sales: increased -days to sell inventory: decreased

Based on your analysis, what specific action(s) do you recommend that RMG take?

-if credit cards are profitable we can tell the CEO to: -have the cashier ask at point-of-sale (try to sell them on the credit card) -"today you would have saved $40" -give cashiers rewards/incentives to sign people up

During 2017 Office Depot acquired the IT services provider CompuCom. This was part of a broader shift toward service provision, as Office Depot changed its financial reporting to show revenues and costs separately for products sold and services provided. How do you predict this shift toward providing services will affect Office Depot's cost structure?

-if you are already in the store for services, maybe they can sell more more products -providing IT services may diversify the customer base -higher margin of services

what are the ramifications of accepting Walmart's offer?

-important point: you need to consider other stakeholders: REI and other gear shops relationships might get destroyed -losing brand name, not growing the Rugged Tents brand name under Walmart deal -being a supplier to Walmart fundamentally changes the company -becoming a slave to Walmart: losing negotiating power In the future -being seen as a sellout to customers -it's just a tent deal, so we'd just be seen as a tent company -if it goes well: more business, but takes more of our time

Kraft Heinz background

-in 2013, 3G Capital partnered with Berkshire Hathaway to acquire the food company Heinz -3G capital had a reputation for drastic cost-cutting, which it implemented through ZBB -in 2015, 3G capital engineered Heinz's merger with Kraft Foods -ZBB required employees to justify all expenditures, ignoring prior years' spending, and starting at zero to determine the new budget -and nearly always, ZBB was accompanied by layoffs -3G Capital's work at Kraft Heinz was initially heralded as a success: costs were cut and the company's stock price increased -however, sales growth remained flat due to changes in consumers' tastes and preferences -younger people were turning toward healthier, organic foods, and Kraft Heinz had older brands that did not meet these criteria -fearing a takeover attempt by 3G Capital, a number of competing consumer foods companies also adopted ZBB, including Campbell Soup -Kraft Heinz attempted to spark sales by starting to spend money again in 2018 on marketing and fighting for better shelf space in stores, but it was too little too late -in FY 2018, the company's stock price fell by 27% in a single day

how would selling more snack foods and private-label brands affect DG's financials?

-increases sales per square foot: making better use of store by putting snacks near register -selling more private label: higher gross profit margin

Thoughtful Chocolate background

-inventory management problem: close to 20,000 of the chocolate bars had exceeded their shelf life and needed to be discarded, which meant the company would post their first lose -demand for the product from retailers was high, but the seasonality of demand had made inventory management difficult -the customers are the retailers, such as whole foods -Vontriece charges a high price (she works closely with farmers to ensure that no child labor is used, and then pays a higher price for cocoa beans and passes the costs on to retailers) -packaging includes a pledge to source cocoa in the most ethical manner (no child labor), the nutritional info, a story about a cocoa farmer, and the name of the brand -Vontriece entered into a 10-year lease agreement for a small manufacturing facility -the cocoa beans fro mGhana are purchased by large companies, who are able to negotiate better prices than small firms like Thoughtful Chocolate -the competitive advantage: 1. her brand promise to source chocolate ethically 2. her speed in meeting retailers demands for more inventory -Vontriece knew her customers could find cheaper chocolate elsewhere, so she focused on reducing the number of stockout and shortening lead times -Vontriece's retail customers love this responsiveness, as it was difficult for retailers to predict demand for chocolate -they currently make one type of chocolate bar: milk chocolate -Vontriece currently plans production by forecasting the annual demand for chocolate bars and then spreading the production evenly throughout the year -actual demand for each quarter was lower than forecasting demand -Vontriece had two solutions for her inventory management issue 1. launch dark chocolate bars (shelf life of two years) 2. increase her production capacity by acquiring more equipment -Thoughtful Chocolate does not have enough cash to pay for any workstation upgrades, but the company could borrow money -it costs her about $.08/quarter to hold a single chocolate bar in inventory (this includes the cost of property taxes on the inventory plus the return she could have earned on the capital tied up in inventory), not to mention the cost of obsolescence (each cost $1 to produce)

Thoughtful Chocolate key takeaways

-issues with sales are critical -having lots of inventory is a bad thing

When she announced that Campbell Soup was adopting ZBB in 2015, Campbell's CEO said she would also be reorganizing Campbell's divisions according to product line (instead of by geographic region) and that this would eliminate "excess layers of management." Based on Campbell's financial results, do you believe this reorganization (in combination with ZBB) generated the promised cost savings?

-it did not generate the promised cost savings -this would have affected SG&A, which didn't change much after the reorg -in fact, organizing by product line instead of geography might increase transportation costs

Are there any downsides to adding capacity?

-it really only benefits her for Q1 -we still aren't meeting sales targets overall -high interest expense

assume it is the end of fiscal year 1985, and that HD plans to open 10 new stores the following year. how much will it cost to open 10 stores?Did HD have the cash to open 10 stores, and if not, how could it open the stores?

-it would have cost $84 million to open 10 stores -they had $10 million in cash on their BS, so they would have had to borrow a lot of. money and incur a lot of interest

Is there a simple way for Vontriece to improve her forecasting without making any major changes to her business model?

-modify the production quantity in each quarter based on actual demand in the previous quarter -this is a costless way to get better info -you learn something during Q1, so you make an adjustment after -maybe she can get a better relationship with retailers to understand demand better

Should Vontriece begin manufacturing dark chocolate bars? What factors should she take into consideration when making this decision?

-most important factor to consider: do the retailers we are selling to have demand for dark chocolate? -other factors: can we use the same machine? -even if we could use the same machine, we have a capacity problem and are not in a position to buy all new machines -factor: our established customer base will buy our dark chocolate -two biggest considerations: will retailers buy? how would we produce it?

why would hiring practices and employee retention be related to inventory costs?

-new employees have to be trained on proper procedures first -hire more honest employees who won't steal to reduce shrinkage and will be more careful with inventory to avoid breakage

should Rugged Tents accept Walmart's offer? why or why not?

-no -it undermines their current strategy

Do you agree with Tom's recommendation to decrease ticket prices?

-no -the zoo isn't struggling with the number of customers -we actually had more guest visits than previously expected -also should take into consideration elasticity of demand (out-of-towners might come to the zoo either way) -the pro for a cost war is that we have cost advantages, yet are still losing money, so the other zoo is probably losing even more money -cons are that cutting costs would make losses larger and we don't know how much cash the other company has

Do you agree with Laura's recommendation to begin purchasing animals?

-no, b/c it would take the company away from its competitive advantage (its cost advantage) -in addition, half of customers came from annual passes (locals), so they may have built relationships with the animals and those regulars wouldn't care if you bring in new exhibits

customer profitability analysis

-non-members have the highest gross margin percentage at 50% (they can't buy things at discount?) -non-members have the highest percentage of returns -member no CC's have lower average transaction values

Which customer type has the highest operating margin, after allocating indirect costs? Why might this be the case?

-non-members have the highest margin -however, this doesn't mean they are the most profitable -non-members are not eligible to buy clearance items or receive dividends, so this is why their operating margin is highest

Are there alternatives to building inventory that Vontriece has not considered?

-outsource production to a copacker in the first quarter -an advantage of that is that we don't have to update the equipment, but a downside is that they may not have the capacity during business season -or you could outsource everything, basically converting a fixed cost to a variable cost -focus more on why they aren't hitting sales targets (may need to find new retailers) -look into new sales channels, such as hotels

were there any drawbacks to DG's liquidation of out-of-season merchandise in 2007?

-people will wait for things to go on sale: remember that customers are price-sensitive -hurts your margins/big inventory write downs -side note: they only did this one time

if Rugged Tents were to accept Walmart's offer, what would be their relevant per-unit cost of manufacturing the 4-person tent?

-per-unit cost= DM + DL + V. MOH + shipping cost -don't include fixed MOH b/c it exists whether or not we take the project, but shipping cost is a relevant cost b/c it's paid by Rugged Tents -if cost were the only consideration, we'd accept the Walmart project b/c Rugged Tents gets $28 from Walmart and the per-unit cost of manufacturing is $24.04

Do you have any recommendations for improving the profitability of the Missouri Safari Center? Please do not repeat recommendations that were mentioned in the case.

-raise food prices -provide meal-like food options -tiered pricing: offer weekend pricing -gift shop/souevenirs -pay to feed the animals -close the zoo for special events and rent it out to get another revenue stream -market the sanctuary aspect -charge for certain special exhibits

ignore the Walmart offer for a moment. do you see any ways for Rugged Tents to improve its business?

-reducing headcount with reorganization -improving existing products (R&D) -sell new products -sell outside of U.S.

rugged tents background

-reputation for quality -strong brand loyalty -stalled sales growth -an outdoor gear company that sells high-quality tests and recently started selling sleeping bags -sells her tents and sleeping bags through 3 channels: 1. independent gear shops 2. online -lowest percent 3. REI -largest percent -all retailers that carry Rugged Tent's products are located in the US or Canada (and only a very small percentage of sales are shipped to customers outside the US and Canada) -demand for tents is somewhat insulated from the performance of the overall economy (while a camping tent is a luxury good for most consumers, it also serves as a substitute for a recreational vehicle when the economy is doing poorly) -Walmart offered Rugged Tents a 5-year contract to be the exclusive supplier of their 4-person private label tent, which they sell under their brand name Ozark Trail -if they do a good job, Walmart may offer Rugged Tents the opportunity to become the primary supplier of all Ozark Trail tents -Walmart doesn't have a problem with Rugged Tents continuing to sell its own line of tents -Walmart expects the tents to be of similar quality and design to the Rugged Tents model (not identical b/c they will be much cheaper), and should have three months of inventory on hand at all times to prepare for fluctuations in demand -Rugged Tents has excess capacity in its manufacturing facility and could fill the order without investing in a larger factory or buying more production equipment -Kristen, the CEO, had thought about using the excess capacity in its manufacturing facility to expand into new product lines and was concerned that the Walmart deal would come to dominate her company's agenda

the case states that DG was too reliant on sales growth from new store openings in 2006. what evidence is there from DG's financials to support this claim?

-revenue was growing, but same-store sales growth was very low -so most revenue was coming form non-organic growth

sales and EPS increased every year during Robert Nardelli's tenure. yet some people argued that HD retail stores performed poorly during this same time frame, and that HD's sales were propped up by the performance of HD Supply. to better evaluate the performance of HD's retail stores, which metrics would you focus on? what do you conclude from those metrics?

-sales per square foot dropped dramatically -same-store sales wasn't great -days to sell inventory went up -average customer ticket went up (this is b/c whatever metrics you evaluate people on will improve)

what happened to DG's sales per square foot after the takeover? how do you account for this change?

-sales per square foot increased -accounting for this change: taller racks, improvements in IT

contribution margin

-sales revenue - variable costs

what challenges does HD face as it rolls out its "One Home Depot" strategy? how might the company's cost structure change, both in the short-term and long-term?

-same-day delivery will be very costly -Home Depot typically has large heavy products

Missouri Safari Center might benefit significantly from a customer profitability analysis. Why might this be the case?

-seasonal passes are not. a bad idea if we can figure out how to monetize the regulars -you have out-of-towners who are less price sensitive and the regulars

Why is Vontriece building up inventory? What is preventing her from manufacturing chocolate bars as needed?

-she is building up inventory b/c there is not enough capacity to meet Q1 demand and she doesn't want to stock out (overproduce in weak quarters to satisfy high quarters) -the max she can make in one quarter is 45,000, but demand in Q1 is greater than that

balanced scorecard

-shows how the company will create long-term value by identifying financial and non-financial goals and measures, focusing attention on the most critical measures-critical assumption: for a balanced scorecard to have value, the relationships it describes must be based on cause-and-effect 1. learning and growth 2. internal process 3. customer 4. financial

flexible budget

-shows what the original budget should have been, had the activity level been correctly anticipated -compare adjusted/flexible budget to the company's actual results

shrinkage

-shrinkage is the difference between the amount of inventory a company actually has and the amount of inventory it should have, per its accounting books -shrinkage is caused by a variety of factors, such as theft, vendor mistakes, loss and breakage -companies usually bury shrinkage in COGS

the case states the DG was having issues with inventory management and shrinkage prior to the LBO in 2006-2007. what evidence is there from DG's financials to support this claim?

-shrinkage is usually curried in COGS (includes costs to sell product and shrinkage) -it was on a bad trend prior to the LBO, but post-LBO they were able to reduce COGS as a percentage of revenue

Office Depot said it planned to reduce costs by combining support functions. What does this mean? Do Office Depot's financials suggest that the company was successful in achieving these cost savings? Think about the line item you would expect this to affect...

-support functions are functions that support the stores, such as marketing, IT, and accounting -ex. you can have you manager who is now overseeing more people (give this manager a raise, but the amount that you are giving them more would be less than the pay for a second manager) -the line item this would affect is SG&A as a percentage of revenue -their financials suggest that they were successful in achieving these cost savings as SG&A as a percentage of revenue was significantly reduced

Should Sergio start loaning out the tiger for breeding purposes to generate more revenue?

-sure -tigers don't really fit into the interactive experience and it might help create a partnership with the zoo, who might send them animals

describe non-member

-the "returner" -they return a bunch of stuff -they also aren't really buying online

Danforth university sports program background

-the athletic department brought in 3,600,000 in revenues in fiscal year 2019, most of which came from the student activity fee (other sources were game ticket, concessions, clinics, etc) -the athletic department incurred 3,500,000 in total expenses over this same time frame -Danforth University belongs to Division 3 -even though Danforth University prioritizes academics, the sports teams provide value by improving recruitment and enhancing the university's brand -in addition, the NCAA notes that student athletes have a higher graduation rate, manage their time better, and feel more closely connected to the university than non-athletes -the most important benefit may simply be the joy and pride that the sports team provides to the school -while Danforth University was technically a nonprofit, it was run like a business, and Vicky needed to provide a compelling argument as to how the athletic department added value instead of merely being a cost center that was subsidized by the university (balanced scorecard can help do this) -overall, Vicky is supposed to: estimate the cost of each sports team, show how the costs of the teams would change if the baseball and softball teams were eliminated, and calculate the costs on a per-athlete basis to see if the university was spending at least as much on female athletes as it was spending on males

did you notice that Lowe's has a higher average ticket than HD? why is this surprising, given what was stated in the case?

-the case says that pros account for a larger portion of HD's sales revenue than Lowe's and that pros prefer Home Depot

Assuming no teams are eliminated, what is the cost of the men's basketball team? What would be the cost of the men's basketball team if the baseball and softball teams are both eliminated? Explain the reason for any change in the cost of the men's basketball team.

-the cost of the basketball team increased after you got rid of the baseball and softball team -this is b/c more of the indirect costs are transferred to them (which is a natural mechanism b/c of shared costs)

Do you see any issues with Aisha's current cost system with respect to the blankets? What about the pillow? If so, revise the table in Exhibit 3 using a different cost system to come up with information that would be more useful in decision-making.

-the current cost system equally allocates overhead to products on a per-unit basis (regular blankets vs. specialty blankets) -however, the different types of blankets are consuming resources at different rates -this is a problem b/c setup costs are higher for the specialty blanket than the regulator blankets (since you have shorter more frequent production runs) -therefore, the current cost system doesn't allocate for set-up costs -a possible solution is activity-based costing: calculate a set-up rate and a machine-hour rate and create 2 cost pools with 2 activity rates -conclusion: you are actually losing money on the specialty blankets!

AMC vs Cinemark: compare the contribution margin ratio of each firm (not discussed)

-the firms have basically the same contribution margin ratio, at 60% -this means that for every dollar of sales, the firm generates 60 cents

How would you evaluate the merger, in terms of achieving the promised cost savings? Does it appear that the combined firm has lower costs?

-the merger appears to have achieved the promised cost savings -SG&A and advertising as a percentage of revenue both dropped substantially -operating margin improved

AMC vs. Cinemark: should AMC attempt to acquire Cinemark

-the most important thing to think about is how the two firms will be more than the sum of their two parts (creating value) -we should think about the #1 cost of movie theaters: exhibition costs b/c if we can't bring it down, then it might not be worth doing -they have different strategies: Cinemark has a cost leadership strategy, while AMC has a differentiation strategy -it is a big thing to acquire a firm that has theaters in two different markets (language, culture issues, etc.)

AMC vs. Cinemark background

-the movie theater industry experienced its best year ever in 2018 -the movie theater industry is highly consolidated in the U.S. and Canada, with four firms responsible for the majority of the box office revenues during the record-breaking year -international markets are also doing very well -across both US and international markets, competition in the movie theater industry is intense -consumers spend a small proportion of their time at the movies and the industry is characterized by overcapacity, so there is considerable room for growth in movie theater revenues -the movie theater business is seasonal in nature, with film distributors releasing blockbuster movies during the summer and winter holiday season 1. AMC -largest movie theater in the chain -top 5 markets are cities in the US -AMC is currently pursuing a three-pronged strategy: enhance, engage, and expand a. enhance -put recliner seats in theaters and increased the ticket price to reflect that enhanced consumer experience -remodeled theaters tend to draw more adults who pay higher ticket prices -offer a larger selection of food and beverages, such as bars and a dine-in option b. engage -has an AMC Stubs loyalty program c. expand -has expanded aggressively by buying other theater chains -AMC believes that these acquisitions provide opportunities related to both revenue (expand food and beverage options) and costs (economies of scale related to purchasing and procurement, reducing SG&A by combining operating functions) -AMC has 3 categories of operating revenue: admissions, concessions, and other 2. Cinemark -while Cinemark has roughly half as many theaters as AMC, Cinemark is the market leader in Latin America (majority of theaters are located in the US) -Cinemark doesn't provide many specifics regarding its strategy in its 10-K, but it does cite its "Disciplined Operating Philosophy" as a competitive strength in achieving solid operating performance: "centers on building new, and reinvesting in our existing, high-quality theatres, focusing on the guest experience, maintaining favorable theatre-level economies, controlling operating costs, and effectively reacting to economic and market changes" -another difference b/w Cinemark and AMC is theater location -while AMC touted its prime real estate in major metropolitan areas, Cinemark theaters tend to be located in smaller markets -thus, Cinemark and AMC aren't directly competing in many markets -Cinemark and AMC have made similar efforts to improve guests' theater experience, including recliner seats and meal-type foods/alcohol

Should Aisha attempt to turn around the regular blanket product line? Why or why not?

-the regular blanket product line is actually profitable, so the company should NOT shut down regular blankets -in fact, they should focus on it -for one thing, the CEO was thinking about producing specialty blankets and shutting down regular blankets, but regular blankets are actually profitable and specialty aren't -Aisha is worried though about the declining sales for the regular blanket/that it's just a fad -one consideration is that the sales channel for the regular blankets is Bed, Bath, and Beyond, which has declining same-store sales -product cannabilization: we started selling more specialty around the time that regular sales decreased (therefore, this may mean that the unprofitable product is stealing sales from the profitable product)

in calculating the relevant per-unit cost of manufacturing and the NPV, are there any additional information you'd like to have?

-there are other things we could potentially make (they have excess capacity), so if they are serious about producing a new product, by accepting the Walmart offer, you are giving up the new project, meaning it is a relevant cost and the opportunity cost should be included -storing inventory is not free: need to consider storage costs, costs of capital (not earning a return), damage to inventory when in storage, insurance costs, shrinkage (difference b/w what you have and what you should have: lost or stolen), property costs -benefit: buffer stock for variability (weight the cost of the stock our vs. cost of storage) -customization costs (do you need Walmart's logo?) -forecasted canabilization of sales -brand damage of dealing with Walmart

do you agree with HD's decision to close Expo Design? HD executives said that Expo Design stores were unprofitable. In the absence of data for Expo Design, what factors should have been considered in making the decision to shut down the stores? Did having the Expo Design stores bring any cost or other benefits?

-there's not that much cost savings in combining the businesses - not economies of scale with marketing managers -Expo Design offered home decorating and remodeling projects by showing you a floorroom/finished product and then you hire a contractor to set it up for you -one factor is asking if the stores really needed to be that big (were about the same size as HD and located next to them) -consider the fact that wealthy people would buy less often b/c they don't remodel homes often and obsolescence (it might be hard to keep up with customer demands)

how is Rugged Tents doing financially at the end of 2019? what is the segment profit and margin for each of Rugged Tent's divisions?

-they are a profitable company: NI = $118,500 -most revenue comes from tents -sleeping bags seem to be more profitable, but this is due to arbitrarily allocating less indirect costs

what are the benefits of DG liquidating its out-of-season merchandise in 2007?

-they reduce shrinkage and empty out storage rooms -improve appearance of stores and provides room for new products -makes it easier for managers to manage stores

AMC said it would realize cost synergies from its acquisitions with respect to purchasing and procurement. Since AMC now has twice the number of theaters as Cinemark, we might infer from AMC's statements that it would be able to negotiate better prices on concessions from its vendors. Do the numbers support this?

-this was not the case, as AMC was not able to bring food and beverage costs down after the acquisitions -to get more bargaining power, you would need to centralize the purchasing department (meaning that one AMC person would need to do all the bargaining for a product, such as soft drinks) -it is not enough to just acquire stores! -to save the most money, you NEED to centralize the purchasing department -if they were to do this, food and beverage as a percentage of concessions revenue should go down

DG improved its trailer utilization during FY 2009. how might it have accomplished this?

-trailer utilization: how full the trucks are -invested in an IT system to know what's in the stores -if you increase same-store sales, you are selling more, so you need more from distribution stores

Do you see any issues with the way Aisha measures the performance of the St. Louis plant and the Farmington plant?

-we currently don't allocate SG&A costs to the plants, but some of the costs should be, such as the costs of salespeople who sell blankets vs. pillows

Assuming the company is going to continue building inventory... What should Vontriece consider when deciding the amount of buffer stock?

-weigh the benefits of buffer stock against the costs -benefits: if stockouts happen often, retailers may stop buying -costs: costs of holding inventory

Should Aisha disregard the advice of the accountant and launch the Patchwork Pillow? Why or why not?

-yes -the accountant assigned $10 of DM costs even though its made from 100% scraps (so the material is a sunk cost) -that would you give you $6 profit/unit

do you agree with Home Depot's decision to sell HD Supply to focus on its retail stores? what cost savings or other benefits were accrued by having Home Depot and HD Supply combined?

-yes, b/c it is a lot for HD to capture every segment of the market -HD Supply were free-standing locations for large contractor customers -that meant that they were trying to cater to do-it-yourself customers and small contractors through HD and large contractors through HD Supply -small vs. large contractors are pretty different businesses, so you'd need separate management, marketing, etc. -it is hard for them to market to. both small and large contractors b/c large contractors want better prices -however, there would some some economies of scale with respect to buying power and distribution

In a 2016 Harvard Business Review article, Daniel Mahler argued that companies which implemented ZBB focused too much on SG&A because it was a benchmark that could easily compared to that of competing firms. After looking at the financial data for Kraft Heinz and Campbell Soup, do you agree with this assessment?

-yes, companies implementing ZBB first slash SG&A costs -SG&A expenses greatly declined post-ZBB

Advertising (as a percentage of revenue) declined significantly following the merger. Why might combining the two firms result in fewer marketing dollars being needed?

-you don't have to market to the same people twice -don't need to run ads trying to steel customers from competitors (each other) -it's possible that they cut advertising too much in an attempt to cut costs (but could also be b/c they are moving towards being more of a service provider so don't need to advertise for stores as much)

contribution margin IS

1. sales revenue 2. variable costs 3. contribution margin: sales revenue - variable costs 4. fixed costs 4. operating profit

what should Dreiling, the new CEO of Dollar General, do to reduce costs at Dollar General? how will this affect the income statement?

1. stop opening new stores: -increases top-line revenue, but reduces long-term value -opening stores costs money (so we can save capital) 2. need quicker inventory turnover -reduce holding and storage costs 3. making better use of their space -normally, the #1 way to reduce costs in a turnaround is by reducing headcount, but they don't really have this option b/c they are already at the minimum

The combined firm did not appear to enjoy cost savings for the line item, "Cost of goods sold and occupancy costs." Why might this have been the case? One of the worksheets in the accompanying spreadsheet tells you which costs are included in that line item.

This might have to do with the freight costs incurred to bring merchandise to stores and warehouses. The case mentions that the warehouse functions were consolidated, resulting in fifteen distribution centers being closed. This would increase transportation costs and may hurt the efficiency of the supply chain.

exhibition costs

-amount of money paid to the movie producers -can usually get better deals if they have more screens that will be running the movies -studios get the majority of the money in the first couple of weeks, and after that, the theaters get more -AMC gets almost all their ticket sales from 7 movie studies, so while they have some bargaining power, the studios have most of the leverage -the theaters are the middle-man: they don't make the core product, so they have to try to capture more of the value, such as by having a bar and restaurant

Home Depot background

-Home Depot introduced discount retailing to the home improvement industry through its warehouse format -suppliers shipped products directly to Home Depot retail stores, eliminating the need for warehouses or distribution centers -the no-frills, warehouse experience allowed Home Depot to pass cost savings on to customers in the form of lower prices -the stores were large, allow HD to buy in bulk, vertically stack unused inventory for use at a later date, and allowing for a massive selection of items -while HD's strategy was geared toward lowering costs, they do not skimp on labor -they hired former carpenters, which enabled them to provide unmatched customer service and helped create strong customer loyalty -thus, HD managed to position itself as the cost leader while simultaneously providing a high level of customer service -in the company's early days, do-it-yourself customers were responsible for most of Home Depot's business -professional contractors (pro's) were another group of customers who didn't shop as frequently as the do-it-yourself customers, but tended to spend more money when they did shop -Home Depot did not target heavy industrial companies but focused instead on small contractors such as plumbers, carpenters, etc. -Home Depot rolled out new stores at a rapid pace, despite the high cost of doing so -customers were attracted to the low prices, great customer service, and the ability to get everything they needed for their home improvement project from a single store -other reasons for their success include their saturation strategy, in which they blanketed the suburban areas of a large metropolitan area with multiple HD stores -while this approach led to some cannibalization among stores, it saved costs in several ways: reduced the cost of advertising per store, cheaper and easier for executives to oversee the stores, and it reduced logistics costs (ex. have one fully loaded truck go to that city than multiple partially loaded trucks going to different cities) -an additional benefit of the saturation strategy was that it prevented HD's competitors from getting the best locations for their stores -after experiencing phenomenal growth with its main locations, HD experimented with two additional store formats: 1. Expo Design: targeted upscale customers, aka the "do it for me" customers b/c they purchased materials but hired someone else to handle the installation -Expo Design stores did not do well financially 2. Villager's Hardware -a small-format hardware store -was not profitable either -Home Depot also attempted to capture more of the professional contractor customer segment by acquiring firms to create HD Supply, a wholesale company that served as a supplier to larger contractors -in 1999, HD had experienced several consecutive years of earnings declines and saw that Lowe's was opening up locations right next to HD, attracting female customers with better lighting and cleaner stores -2000: the board hires Nardelli, a business man, to increase profitability by standardizing HM's business practices -Nardelli's actions disrupted the company culture in several ways: 1. he centralized the purchasing function to get cost savings through more negotiating power with suppliers, but it angered store managers whose autonomy was being undermined (they no longer had discretion on what to buy) 2. he focused on metrics, which took away employees' focus from providing a high level of customer service (ex. refusing returns or pushing large ticket items) 3. encourage the hiring of part-time, unexperienced, labor which hurt customer service -Nardelli's changes had successfully increased earnings, but customers began to rate HD poorly on customer service -turnaround with Blake: -Blake eliminated many of the metrics upon which stores were evaluated to send the message that they would be returning to their core value of placing the customer first -brought back the inverted pyramid, which had the CEO at the bottom and the associates/customers near the top to emphasize the CEO's role in supporting the associates -Blake also sold HD Supply, which was controversial b/c they accounted for more than 10% of HD's revenue, but he wanted to get out of the wholesale distribution business and focus exclusively on improving HD's stores -in 2012, he decided to exit China (Chinese preferred to pay experts since they have access to cheap labor and did not enjoy having large garages with power tools), so now nearly all HM's stores are located in the US, Canada, and Mexico -finally, Blake made improvements to HD's supply chain by investing in a centralized inventory management system to improve inventory forecasting and replenishment and opening regional warehouses (rapid deployment centers) -the purpose of the rapid deployment centers was to carry buffer stock to guard against fluctuations in demand and make it so that individual HD stores didn't have to worry about meeting vendor minimums -the newest CEO (2014), Menear, was tasked with dealing with the rise of e-commerce and competing against Amazon -Menear laid out the strategic vision for "One Home Depot," a vision to blend its bricks and mortar stores with its online experience, including an investment to provide same-day delivery to customers -HD's largest competitor is Lowe's -both Lowes's and HD are placing increased emphasis on pro customers, but HD is winning the battle -pro's are driving HD's growth despite being a percentage of HD's customer base b/c they have a higher average ticket and pro sales growth is outpacing sales growth from do-it-yourself customers -pros might prefer HD b/c there stores are laid out with pros in mind or b/c they have a larger selection of national brands

Home Depot had negative Stockholders' Equity in 2018. This is usually a bad thing, as it tends to occur when a company has been incurring large losses. In Home Depot's case, however, the negative Stockholders' Equity occurred because Home Depot has been repurchasing large amounts of its own shares for years. How does this fit with the company's overall strategy? How do the share repurchases affect Home Depot's financial statements?

-HD has negative SE b/c they are buying back shares -treasury stock increases, while shareholders equity decreases

based on the data, is Lowe's or HD doing a better job managing its costs? why or why not?

-HD is doing a much better job managing their costs -HD has lower COGS, SG&A, and operating profit -b/c shrinkage gets buried in COGS, there is likely less shrinkage for HD -COGS also reflects the price you're getting for inventory, so HD might get better prices

Missouri Safari Center background

-Sullivan started a zoo in the remote town of Sullivan, Missouri b/c there was no competition from other zoos, people in the Sullivan community knew and trusted him, so he was unlikely to run into regulatory hurdles, and Sullivan was right next to Meramec Caverns -tourists came to see the Bear Show on the way to the cavern, and Tom put all of the profits back into the zoo, adding more animal exhibits, opening a concession stand, and obtaining unique artifacts -while Missouri Safari Center was much smaller than a city zoo and had fewer animals, it provided visitors with a more intense/interactive zoo experience -Tom simply accepted animals that came his way by way of donation -Tom frequently referred to Missouri Safari Center as a "sanctuary" or "rehabilitation center" for exotic animals -MSC is considered an "animal exhibitor" and must be licensed by a agency that has the power to shut the zoo down if it does not provide the animals with a minimum standard of care -thus, it is absolutely critical that the zoo maintain a good environment for the animals at all times - both from a business and a moral perspective -being a for-profit zoo, the MSC does not receive government funding -they rely on two sources of revenue 1. ticket sales (one-day admission pass for an adult or child or a one-year admission pass) 2. concession sales -after succeeding Tom as CEO, Sergio was approached by several organizations about paying to use the zoo's tiger for breeding -the zoo spends nothing on advertising or promotion, and it saves a significant amount of labor costs by relying on volunteers to show guests around the exhibits -the use of "rescue" animals means that the company has little discretion over which animals it will feature, but it never has to spend money to acquire new animals -in 2019, the zoo had a loss b/c they had both less revenue and more expenses than had been budgeted -Sergio found the low revenue figure particularly surprising given that the zoo had more guests than expected -the arrival of competition: a competing zoo opened: it operates more like a traditional zoo in that it purchases animals from other zoos and has a larger number of exhibits, but it does not have the same goodwill in the community -Tom, who is now on the board, is concerned with new competition and has encouraged Sergio to deal with the prelim by slashing ticket prices -after the competing zoo opened, Sergio attempted to address Tom's concerns by offering guests the chance to buy a one-year admission pass for $50 instead of paying $20 per visit -Tom believes they should wage a complete price war to drive the competing zoo out of business -the zoo's accountant has encouraged Sergio to borrow money to acquire new animals, as new animal exhibits tend to increase the number of guest visits -Laura also encouraged Sergio to start building indoor enclosures, as the number of guest-visits is also affected by the weather (they are currently an outdoor zoo) -the zoo had never lost money before 2019

based on the data, which company would you say is performing better: HD or Lowe's?

-Home Depot is performing better -HD has a higher asset turnover, profit margin, and ROA -the only think Lowe's has is a higher average ticket -in evaluating how to improve Lowe's, you would want to figure out why COGS is so high

did Robert Nardelli do a good job? If you had been hired to run HD in 2000, what would you have done differently?

-Nardelli was a cost cutter who didn't focus on HD's competitive advantage -the focus on metrics and cutting wages undermine their strategy/culture of customer service -while EPS went up every year, it was due to short-term value -cost cutting is important, but not when it undermines value

Take a look at the financials of Kraft Heinz in the spreadsheet that accompanies this case. Do you see a noticeable effect on Kraft Heinz's costs following the merger? Which costs do you believe are the most relevant?

-SG&A expenses greatly declined -COGS as a percentage of revenue also decreased (could be due to shrinkage/inventory management, but note that is is hard to reduce COGS b/c it is made up of DM, DL, and MOH and these costs are hard to rim down since they are directly associated with the product, but maybe some room in MOH)

Soft to the Touch key takeaways

-just b/c you have a cost system that is spreading costs, doesn't mean it's good data (don't take cost info at face value -the cost system would have been fine if they were only producing one product -targeting products to different customer segments (marketing) -don't just accept a free building: consider labor, transportation costs, etc. -don't give away the farm (agreed to stop selling on Amazon) -poor cost systems lead to poor decisions -never just accept the client's diagnosis -do a customer profitability analysis

prior to KKR, DG opened and closed hundreds of stores each year. why is store siting so critical for DG? you might think about what costs are incurred when DG closes a store

-lease termination fee and severance pay costs are very high

why would improving workplace safety affect DG's profitability?

-less lawsuits -might be connected to SG&A

cost reduction was a large focus of DG's turnaround effort. thus, why would the company spend money raising the height of shelves in its retail stores?

-making better use of vertical space increases sales per square foot

Which customer type is currently the most valuable to RMG? If you don't know how to answer this, ask yourself the following question: the disappearance of which customer type would hurt RMG's financial results the most?

-member no CC -they are responsible for the most amount of profit

Why was sales revenue lower than expected in 2019?

-more of the guest visits came from annual passholders -if we can get guests buying more concessions, it may overcome lost revenue

ROA

-profit margin * asset turnover

Do you have recommendations for Aisha, aside from those you have mentioned earlier?

-start selling online -why are we doing the Patchwork blanket by hand? consider outsourcing production to lower cost of labor as no specialized expertise is needed -the company is not spending a lot of money on R&D, so they could try and roll out new products (ex. a pillowcase) -break out the sales by geographic region

If sales are declining, why would closing retail stores help Office Depot?

-stores are losing money/are unprofitable -save on SG&A costs, including labor wages, freight costs, and regional VPs that have to visit the stores -if they have two stores close together/in the same location (redundancies)

How much does the sports program spend per male athlete and per female athlete? Is this the best way to measure whether the university is spending equitably by gender with respect to sports?

-the spending per female athlete is higher than males -this is not the best way to measure whether the university is spending equitably b/c there are fewer female athletes in general -possible solutions: -look at a sport, such as basketball, that is more equitable (same # of athletes)

member CC

-they buy the most online -one explanation is that these people are less price-sensitive (they are willing to buy a credit card)

what should we do about the unprofitable specialty blanket?

-we should raise the price: it is more expensive to make the specialty blankets, so you need to mark up -marking up the price might drive customers away, but its probably the best option -shutting down the product line is the last resort -if we give a minimum order quantity, we might drive the customer away -another option would be to do a sliding scale: the bigger the order size, the cheaper the product

Does Missouri Safari Center have any competitive advantage(s) relative to other zoos?

-yes, they have low costs -free labor -more loyal local customers -don't have to pay for any animals -don't have to worry about regulation as much since they have goodwill in the community -more interactive experience

Should RMG allocate any of its indirect operating costs to the different customer types? If you believe the answer is yes, specify which cost drivers RMG should use. Then calculate operating profit after allocating the indirect costs to each customer type

-yes, they should allocate indirect operating costs to each customer type -what cost drivers should be used?

Why didn't the combined firm do all the store closures in the first year? Why spread the store closures across multiple years?

-you want to continually assess the effects of a store closure: you would want to spread the store closures across multiple years b/c you might have two stores next to each other where if you close one, the other one becomes profitable -early termination fees for leases -employee severance pay -what to do with inventory

Prepare a Balanced Scorecard for the Danforth University sports program.

1. -learning and growth: train recruiters to identify talented student athletes -process: athletic success -customer: athlete satisfaction -financial: alumni giving 2. -learning and growth: learn to create a supportive environment -process: academic success -customer: athlete retention -financial: marketing

profit margin

income / revenue

contribution margin ratio

unit contribution margin / selling price per unit

assume you are HD's CEO at the end of fiscal year 1985. what would you do to increase the company's profitability?

-focus on improving existing stores, rather than opening new stores -when opening new stores, put them near each other b/c it will be easier for managers to visit and manage them (with the downside being cannablization)

transportation costs at the plants

-freight in: what we pay to have the material brought in -freight out: the cost of shipping the product to the customer (not accounted for in the financials) -it probably costs more to go to Farmington b/c CEO lives in St. Louis and auditors have to go out (normally, it would also be a problem b/c it'd be hard to attract talent, but factory is unskilled labor, so its not an issue)

Calculate the spending per-athlete for each team. Which team had the highest total cost? Which team has the lowest cost per athlete? Briefly explain your findings.

-gold has the highest total cost per athlete -this is b/c there's always going to be a certain number of fixed costs for each team, so if there's less athletes for a team, then the cost per athlete will be higher

Missouri Safari Center takeaways

-how to extract more revenue from existing guests -how you frame the problem affects the solution you give

What are the three largest spending variances? For each of these three variances, speculate as to what might be the cause of the variance. Then identify which of the three variances you believe is most likely to be a serious problem.

1. COGS -costs of the concessions they are providing to people -they are selling more low-margin items (a different sales mix than they originally thought), resulting in an unfavorable spending variance -may also be due to spoilage 2. maintenance -maybe the maintenance budget was set too low or there was some kind of machine breakdown 3. food for the animals -the most serious spending variance -they may be underfeeding the animals (this is morally wrong but there is also a legal issue and the business side of things as animals may not be active if they are underfed) -just b/c a variance is favorable doesn't mean it's a good thing

margin of safety percentage

1. break even sales: total fixed costs/contribution margin ratio 2. margin of safety = budgeted sales - break even sales 3. margin of safety percentage: margin of safety / budgeted sales

If you treat Walmart's offer as a 5-year project, what is the NPV of the project?

Step 1: figure out cash inflow -Walmart will buy 60,000 tents * $28/tent Step 2. figure out cash outflow -60,000 tents * $24.04 Step 3. subtract the inflow from the outflow and discount it back 5 years at a 12% discount rate -the NPV is positive, so you would accept it based on this

What was the total cost of holding inventory for 2019, ignoring obsolescence?

[(actual beg inv + actual end inv) / 2] * cost to hold 1 unit of inventory for 1 quarter -use the actual budget

asset turnover

revenue/ average assets

degree of operating leverage

total contribution margin / operating profit

operating profit

total revenues - total costs