Question

Petal Providers Corporation opens and operates “mega” floral stores in the U.S. The idea behind the super store concept is to model the U.S. floral industry after its European counterparts whose flower markets generally have larger selections at lower prices. Revenues were $1 million with net profit of $50,000 last year when the first “mega” Petal Providers floral outlet was opened. If the economy grows rapidly next year, Petal Providers expects its sales to growth by 50 percent. However, if the economy exhibits average growth, Petal Providers expects a sales growth of 30 percent. For a slow economic growth scenario, sales are expected to grow next year at a 10 percent rate. Management estimates the probability of each scenario occurring to be: rapid growth (.30); average growth (.50), and slow growth (.20). Petal Providers net profit margins are also expected to vary with the level of economic activity next year. If slow grow occurs, the net profit margin is expected to be 5 percent. Net profit margins of 7 percent and 10 percent are expected for average and rapid growth scenarios, respectively. Hint: fill in the table below.

Estimate the average sales growth rate for Petal Providers for next year.

Estimate the dollar amount of sales expected next year under each scenario, as well as the expected value sales amount.

Estimate the dollar amount of net profit expected next year under each scenario, as well as the expected value net profit amount.

Hint: use the following table to complete the calculations.

	Probability	growth rate	sales	net profit
Rapid growth	?	?	?	?
average growth	?	?	?	?
slow growth	?	?	?	?
Expected (average)		?	?	?

Answer 1

The completed table is as shown below:

	Probability	Growth Rate	Sales	Net profit
Rapid growth	0.3	0.5	1500000	75000
Average growth	0.5	0.3	1300000	65000
Slow growth	0.2	0.1	1100000	55000
Expected Average		0.30	1300000	65000

The excel screen shot is as shown below: