Question

Dog-Ann is a pet supplies company serving in Midwest. It sells pet supplies and provides pet grooming and training services. The table below shows the income statement of Dog-Ann for the previous year.

Sales	$250,000
Cost of Goods	$150,000
Fixed Assets	$105,000
Variable Expenses	$25,000
Fixed Expenses	$35,000
Inventory	$10,000
Accounts Receivable	$5,000
Other Current Assets	$5,000

A.) Develop the strategic profit model of this organization and draw the diagram.

B.) What is the firm’s profit margin?

C.) What is the firm’s ROA

Suppose the firm undertakes a supply chain improvement project. It improves its service level to customers by opening more warehouses which means it will be able to deliver more quickly to customers. The result is a 10% increase in sales. Assume the cost of goods sold increased by 6%. The new warehouse requires additional new asset investment of $40,000. Fixed expenses increased by $1,000 because of the expense of operating the warehouses. Assume other variables do not change. Answer the following three questions based on this information. `

C.) Show the NEW strategic profit model (Please don't forget this part)

D.) What is the new asset turnover?

E.) What is the firm’s new return on assets?

Answer 1

	Old Model
1	Sales	$250,000
2	Cost of Goods	$150,000		Strategic Profit Model	ROE	=	Proft Margin * Asset Turnover *Equity Multiplier
3	Fixed Assets	$105,000				=	16%*2*1
4	Variable Expenses	$25,000				32%
5	Fixed Expenses	$35,000
6	Inventory	$10,000
7	Accounts Receivable	$5,000
8	Other Current Assets	$5,000
9	Profit (1-2-4-5)	$40,000
10	Profit Margin = Profit/Sales	16%
11	Asset Turnover = Ttotal Revenue / Total Assets (Fixed asset+ Inventory + Current Assets+ Receivable	2
12	Equity Multiplier	1
	New Model
1	Sales	$275,000	10% higher	Strategic Profit Model	ROE	=	Proft Margin * Asset Turnover *Equity Multiplier
2	Cost of Goods	$159,000	6% higher			=	20*1.66*1
3	Fixed Assets	$145,000				33%
4	Variable Expenses	$25,000
5	Fixed Expenses	$36,000
6	Inventory	$10,000
7	Accounts Receivable	$5,000
8	Other Current Assets	$5,000
9	Profit (1-2-4-5)	$55,000
10	Profit Margin = Profit/Sales	20%
11	Asset Turnover = Ttotal Revenue / Total Assets (Fixed asset+ Inventory + Current Assets+ Receivable	1.666666667
12	Equity Multiplier	1