MonteBianco-Solution_with Comments and Alternatives

Input - Financial statements

Exhibit 1 Income Statement for the year ending Decemeber 31, 2000 (thousands of Italian liras) Revenues Private brand Premium brand

56,112,408 9,934,848 46,177,560

Costs of goods sold (*) Gross margin

33,233,867 22,878,541

Marketing expenses R&D expenses Selling expenses Administrative expenses Interest expense

4,155,980 3,328,130 3,574,710 4,752,000 3,825,000

Research_1997 Selling_1997 Admin_1997 Interest_1997

Profits Taxes (40%) Net profit

3,242,721 1,297,088 1,945,632 Depreciation 2,593,700 ROE ROA

(*) includes depreciation (th. liras)

Balance Sheet at December 31, 2000 (thousands of Italian liras) Assets

23.75% 15.83%

Liabilities and Shareholders' Equity

Cash Raw material inventory Finished goods (174,000 kg.) Accounts Receivable

1,121,450 2,907,963 1,148,400 9,368,467

Property, plant and equipment (*) Depreciation

42,374,000 (12,267,080)

Total assets

44,653,200

(*) includes vacant land with a cost of 13,000,000 th. liras

Page 1

Accounts payable Credit line Long term debt Equity

Total liabilities

Input - Financial statements

0.13 ROS

1.2566268 Asset turnover

d Shareholders' Equity 487,331 25,000,000 10,000,000 9,165,869

44,653,200

Page 2

Input - Other data

Exhibit 2 Quality Prices per kilogram VOLUME (kg.) Advertising /Sales 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

D Price_private_brand 8,800

6,000,000

C

B

BB

A

AA

AAA

19,500

26,600

30,000

35,500

39,000

42,600

2,395,000 2,455,000 2,545,000 2,665,000 2,800,000 2,950,000 3,130,000 3,196,000 3,268,000 3,310,000 3,340,000

1,645,000 1,696,000 1,720,700 1,896,000 2,024,000 2,166,000 2,367,000 2,417,000 2,446,000 2,465,000 2,494,000

1,529,000 1,566,000 1,649,000 1,760,000 1,884,000 2,022,000 2,157,000 2,195,000 2,231,000 2,258,000 2,286,000

1,103,000 1,145,000 1,226,000 1,334,000 1,456,000 1,591,000 1,723,000 1,792,000 1,823,000 1,837,000 1,843,000

667,000 717,000 799,000 910,000 1,034,000 1,172,000 1,307,000 1,345,000 1,366,000 1,495,000 1,523,000

127,000 157,000 229,000 325,000 433,000 553,000 667,000 694,000 752,000 875,000 935,000

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Input - Other data

Exhibit 3 Quality Prices per kilogram

D 8,800

C 19,500

B 26,600

BB 30,000

A 35,500

AA 39,000

AAA 42,600

Variable_private_brand Unit cost (liras) 6,600 12,485 Fixed costs (th. of liras)* 3,319,500 4,100,500 Fixed_private_brand

14,275 4,100,500

16,288 4,100,500

17,791 4,100,500

19,166 4,100,500

20,441 4,100,500

24,526 21,109 19,401 18,376 17,692 17,204 16,838 16,553 16,325 16,139 15,984 15,852

26,539 23,122 21,414 20,389 19,705 19,217 18,851 18,566 18,338 18,152 17,997

28,042 24,625 22,917 21,892 21,208 20,720 20,354 20,069 19,841

29,417 26,000 24,292 23,267 22,583 22,095 21,729

30,692 27,275 25,567 24,542

Volume (kg.) 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000 2,200,000 2,400,000 2,600,000 2,800,000 3,000,000 3,200,000 3,400,000 6,000,000

14,899 12,133 10,749 9,920 9,366 8,971 8,675 8,444 8,260 8,109 7,983 7,877 7,786 7,707 7,637 7,576 7,153

22,736 19,319 17,611 16,586 15,902 15,414 15,048 14,763 14,535 14,349 14,194 14,062 13,949 13,852 13,766 13,691

* Fixed costs for premium coffees include private brand fixed costs.

Page 4

Input - Other data

Exhibit 4 Year 2000 January February March April May June July August September October November December

average price

Sales Private Sales Premium Percent of total (kilograms) (kilograms) 81,792 84,916 7.1% 103,680 107,640 9.0% 135,936 141,128 11.8% 86,400 89,700 7.5% 93,312 96,876 8.1% 57,600 59,800 5.0% 48,384 50,232 4.2% 38,016 39,468 3.3% 78,336 81,328 6.8% 150,912 156,676 13.1% 139,392 144,716 12.1% 138,240 143,520 12.0% 1,152,000

1,196,000

8.62

38.61

100.0%

Page 5

ASSUMPTION = the ending FG inventory in the 2000 BS is all private brand coffee Beginning inventory Production

January February March April May June July August September October November December

174,000 248,000 208,000 90,000 338,000 640,000 732,000 446,000 220,000

500,000 500,000 500,000 450,000 486,000 390,000 500,000 500,000 500,000 500,000 500,000 500,000

2000 Actual Sales Percent

Sales

Ending inventory

426,000 540,000 708,000 450,000 486,000 300,000 252,000 198,000 408,000 786,000 726,000 720,000

7.1% 9.0% 11.8% 7.5% 8.1% 5.0% 4.2% 3.3% 6.8% 13.1% 12.1% 12.0%

6,000,000

100.0%

248,000 208,000 90,000 338,000 640,000 732,000 446,000 220,000 -

ASSUMPTION = same monthly sales (in %) as 2000

maximum monthly production capacity = 500,000 ending finished goods inventory = 0

Sales + ending inventory

674,000 748,000 708,000 450,000 486,000 390,000 590,000 838,000 1,140,000 1,232,000 946,000

SALES + ENDING INVENTORY = PRODUCTION + BEGINNING INVENTORY

mum monthly production capacity = 500,000 kg g finished goods inventory = 0

BASIC SOLUTION GIVEN TO PARTICIPANTS

Strategy: Private-brand only Price private brand Income Statement 2001 (thousands of Italian liras)

8,800 ASSUMPTIONS 52,800,000 = 6 million kgs X 8,800 L (from ex. 2). Expected level of sales = 6 million kg

Revenues Private brand Premium brand Costs of goods sold

52,800,000 42,919,500 = COGS var = +COGS fix = 9,880,500 = assumption in ex. 2 832,033 = 25% of actual R&D spending (saving assumption pg. 3) 1,251,149 = 35% of actual selling costs (saving assumption pg. 3) 2,376,000 = 50% of actual administrative costs (saving assumption pg. 3)

Gross margin Marketing expenses R&D expenses Selling expenses Administrative expenses Ebit Interest expense

39,600,000 = 6 million kgs X 6,600 L (from ex. 3). Expected level of sales = 6 million kg 3,319,500 = assumption in ex. 3

5,421,319 3,903,897 = see calculation of monthly cash flows. ASSUMPTION: excess cash (relative to the initial cash= 1,121,450) is used to repay debt as soon as it is available each month same interest rate as in 2000 1,517,422 606,969 910,453

Ebt Taxes (40%) Net profit

Cash flow: Direct Method

Cash In A/R Private January February March April May June July August September October November December

Cash Out COGS Variable

A/R Premium

1,328,026 1,226,650 1,216,512 3,748,800 4,752,000 6,230,400 3,960,000 4,276,800 2,640,000 2,217,600 1,742,400 3,590,400 36,929,587

5,597,280

3,300,000 3,300,000 3,300,000 2,970,000 3,207,600 2,574,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 38,451,600

5,597,280

Add back depreciation

COGS Fixed 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 3,319,500

Selling

249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 2,993,700

R&D

104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 1,251,149

Admin

69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 832,033

198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 2,376,000

Interest(*)

Taxes

318,750 292,268 317,444 342,941 342,603 337,500 310,906 311,358 308,930 321,385 337,801 362,011 3,903,897

Monthy cash flow

2,907,807 (2,764,367) (2,799,680) 37,111 560,261 2,920,151 (49,655) 266,693 (1,367,678) (1,802,534) (2,658,331) (470,359) (5,220,580) Yearly cash deficit 1,121,450 Initial cash (5,220,580) Cash needed

242,787

364,181 606,969

ASSUMPTION Taxes in Italy paid in May (40%) and Nov. (60%) ASSUMPTION 90-day policy for brand retailers (private) 30-day policy for premium clients Same monthly sales % as previous year

Accounts receivable 2000 (AS IN BS EX. 1)

ASSUMPTION Based on production plan with 0 ending inventory Costs are paid monthly

ASSUMPTION Costs are paid monthly

ASSUMPTION 2,593,700.00 400,000.00 2,993,700.00 249,475.00

9,368,467

Accounts receivable 2001

ASSUMPTION Costs are paid monthly

19,641,600

ASSUMPTION

2000 yearly average cost of debt

+ ARE FOR THE ADDITIONAL CAPACITY (EXPANSION FINISHED IN DECEMBER. 6 BILLION LIRAS ON 15 YEARS) YEARLY DEPRECIATION MONTHLY DEPRECIATION

Cash: Indirect method Net profit Depreciation Var in Inventory Var in A/R Operating Cash flow Debt Cash flow Beginning cash Ending cash

910,453 2,993,700 1,148,400 ASSUMPTION (10,273,133)

No variation in A/P and raw materials inventory Ending FG Inventory = 0

(5,220,580) 5,220,580 (0) 1,121,450 1,121,450 ASSUMPTION

Beginning cash = ending cash

Balance Sheet 2001 Cash Raw materials inventory Finished goods inventory AR Property, plants and equipment (PPE) Depreciation Depreciation of the year Total assets

1,121,450 2,907,963 0 19,641,600 42,374,000 -12,267,080 -2,993,700 50,784,233

AP Credit line

Long term debt Shareholders' equity Retained earnings of the year Total liabilities + equity

487,331 30,220,579.71 ASSUMPTION

10,000,000 9,165,869 910,453 50,784,233

We can increase our credit line to fund the cash deficit (negative operating cash flow) Other alternatives: increase the long term debt or the equity (in this case, beware of the decrease in the ROE)

Monthly Debt

(*) Interest (calculated on average debt) 35,000,000 32,092,193 34,856,560 37,656,240 37,619,129 37,058,868 34,138,717 34,188,371 33,921,678 35,289,356 37,091,890 39,750,220 40,220,580

########

ASSUMPTION Each month we want to maintain the initial cash amount 10.9%

305,509 304,856 330,192 342,772 340,052 324,203 311,132 310,144 315,157 329,593 349,906 364,153 3,927,669

Strategy: Private-brand only Price private brand Income Statement 2001 (thousands of Italian liras) Revenues Private brand Premium brand Costs of goods sold

8,800

52,800,000 52,800,000 44,503,500

Gross margin Marketing expenses R&D expenses Selling expenses Administrative expenses

8,296,500 832,033 1,251,149 2,376,000

Ebit Interest expense

3,837,319 3,974,941

Ebt Taxes (40%) Net profit

ROE ROA

(137,622) (137,622)

n.a. 8.04%

recalculated

NEW ASSUMPTION

recalculated THE NEW STRATEGY BECOMES "NOT VIABLE"

We can not meet the unitary variable production cost target (we assume an increase by 4% vs. original estimate)

GY BECOMES "NOT VIABLE"

ncrease by 4% vs. original estimate)

Strategy: Private-brand only Price private brand Income Statement 2001 (thousands of Italian liras) Revenues Private brand Premium brand Costs of goods sold

8,800

52,800,000 52,800,000 42,919,500

Gross margin Marketing expenses R&D expenses Selling expenses Administrative expenses

9,880,500 1,664,065 1,787,355 2,851,200

Ebit Interest expense

3,577,880 3,974,842

Ebt Taxes (40%) Net profit

ROE ROA

(396,962) (396,962)

na 7.50%

Cash flow: Direct Method

Cash In A/R

A/R

Private January February March April May June July August September October November December

Premium

1,328,026 1,226,650 1,216,512 3,748,800 4,752,000 6,230,400 3,960,000 4,276,800 2,640,000 2,217,600 1,742,400 3,590,400 36,929,587

5,597,280

5,597,280

Accounts receivable 2000 (AS IN BS EX. 1) Accounts receivable 2001

9,368,467 19,641,600

Cash: Indirect method Net profit Depreciation Inventory A/R Operating Cash flow Debt Cash flow Beginning cash Ending cash

(396,962) 2,993,700 1,148,400 (10,273,133) (6,527,995) 5,814,250 (713,746) ASSUMPTION 1,121,450 407,704

BS 2001 cash raw materials inv fin good inv AR ppe depr depr year Total assets

407,704 2,907,963 0 19,641,600 42,374,000 -12,267,080 -2,993,700 50,070,487

AP credit line

l-t debt SE retained earnings of the year Total liabilities + equity

NEW ASSUMPTIONS = 50% of actual R&D spending (saving assumption pg. 3) = 50% of actual selling costs (saving assumption pg. 3) = 60% of actual administrative costs (saving assumption pg. 3)

vs.

recalculated THE NEW STRATEGY BECOMES "NOT VIABLE"

Cash Out COGS

COGS

Variable

Fixed 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 39,600,000

no variation in A/P inventory = 0 at the end of the year

487,331 30,814,250

10,713,746 9,165,869 -396,962 50,784,233

276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 3,319,500

= 25% of actual R&D spending (saving assumption pg. 3) = 35% of actual selling costs (saving assumption pg. 3) = 50% of actual administrative costs (saving assumption pg. 3)

Add back depreciation

Selling

R&D

249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 2,993,700

104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 1,251,149

69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 832,033

Admin

Interest

Taxes

Monthy cash flow

Monthly Debt

198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 2,376,000

318,750 292,268 317,444 342,941 345,608 339,164 319,196 319,724 317,371 329,904 346,397 367,369 3,956,136

-

-

ASSUMPTION 2000 average cost of debt

35,000,000 2,907,807 32,092,193 (2,764,367) 34,856,560 (2,799,680) 37,656,240 (292,889) 37,949,129 707,643 37,241,486 2,192,488 35,048,998 (57,945) 35,106,942 258,328 34,848,615 (1,376,120) 36,224,734 (1,811,052) 38,035,787 (2,302,746) 40,338,532 (475,717) 40,814,250 (5,814,250) Yearly cash deficit 1,121,450 Initial cash (4,692,800) Net cash needed 10.9%

(5,814,250)

Ending FG inventory = Beginning FG inventory = 174,000

Strategy: Private-brand only Price private brand Income Statement 2001 (thousands of Italian liras) Revenues Private brand Premium brand Costs of goods sold

8,800

52,800,000 52,800,000 42,919,500

Gross margin Marketing expenses R&D expenses Selling expenses Administrative expenses

9,880,500 832,033 1,251,149 2,376,000

Ebit Interest expense

5,421,319 3,977,682

Ebt Taxes (40%) Net profit

1,443,637 577,455 866,182

Cash flow: Direct Method

Cash In A/R Private January February March April May June July August September October November December

Cash Out COGS Variable

A/R Premium

1,328,026 1,226,650 1,216,512 3,748,800 4,752,000 6,230,400 3,960,000 4,276,800 2,640,000 2,217,600 1,742,400 3,590,400 36,929,587

5,597,280

5,597,280

COGS Fixed 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 3,300,000 39,600,000

NEW ASSUMPTION

Accounts receivable 2000 (AS IN BS EX. 1)

276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 276,625 3,319,500

Add back depreciation

249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 249,475 2,993,700

19,641,600

Cash: Indirect method Net profit Depreciation Inventory A/R Operating Cash flow Debt Cash flow Beginning cash Ending cash

866,182 2,993,700 NEW ASSUMPTION (10,273,133)

FG ending inventory = 174,000 (no variation from year 2000)

(6,413,251) 6,413,251 (0) 1,121,450 1,121,450

BS 2001 cash raw materials inv fin good inv AR ppe depr depr year Total assets

1,121,450 2,907,963 1,148,400 19,641,600 42,374,000 -12,267,080 -2,993,700 51,932,633

AP credit line

487,331 25,000,000

l-t debt SE retained earnings of the year Total liabilities + equity

10,000,000 15,579,120 866,182 51,932,633

104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 104,262 1,251,149

R&D

69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 69,336 832,033

FG ending inventory = 174,000 (no variation from year 2000)

9,368,467

Accounts receivable 2001

Selling

Admin

198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 198,000 2,376,000

Interest

318,750 292,268 317,444 342,941 345,608 341,793 321,850 322,402 320,073 332,630 349,149 372,775 3,977,682

Taxes

Monthy cash flow

288,727

288,727 577,455

Monthly Debt

35,000,000 2,907,807 32,092,193 (2,764,367) 34,856,560 (2,799,680) 37,656,240 (292,889) 37,949,129 418,916 37,530,213 2,189,859 35,340,354 (60,598) 35,400,953 255,650 35,145,302 (1,378,822) 36,524,124 (1,813,779) 38,337,903 (2,594,225) 40,932,128 (481,123) 41,413,251 (6,413,251) Yearly cash deficit 1,121,450 Initial cash (6,413,251) Cash needed

(6,413,251)

Select strategy

Strategy: Private-brand and Premium-brand from Exhibit 3 Unit cost (lires) 6,600 Fixed costs (th of lires)* 3,319,500 Quality Prices per kilogram Margins including advertising (*)

12,485 4,100,500

14,275 4,100,500

16,288 4,100,500

17,791 4,100,500

D 8,800

C 19,500

B 26,600

BB 30,000

A 35,500

0% 9,880,500 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

12,700,425 12,642,600 12,760,125 13,035,450 13,357,500 13,717,500 14,194,350 13,956,900 13,726,440 13,310,100 12,816,600

16,174,125 16,351,564 16,191,715 17,754,692 18,691,764 19,714,670 21,295,043 21,188,571 20,841,362 20,379,415 20,004,010

16,865,148 16,902,692 17,521,188 18,448,620 19,472,108 20,592,164 21,593,684 21,387,840 21,136,572 20,764,596 20,387,132

15,432,527 15,769,830 16,740,274 18,102,596 19,616,284 21,250,494 22,742,117

23,180,908 23,005,687 22,561,718 21,994,537

(*) This is the contribution margin (volume from exhibit 2 times unit margin) minus the fixed costs minus the advertising expense

The alternative in the yellow cell/bolded margin is chosen in this example for a mixed strategy. It is chosen =1792000 KG X (35,500-17,791) - 4100500000 - 1792000 KG X 35,500 X 7% You can start from this alternative if you want to build a business plan for a mixed strategy

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Select strategy

19,166 4,100,500

20,441 4,100,500

AA 39,000

AAA 42,600

9,128,778 9,840,848 11,123,646 12,883,740 14,794,816 16,859,548 18,764,158 18,904,380 18,730,824 20,303,880 20,166,982

(1,286,307) (688,419) 778,803 2,685,825 4,756,515 6,975,537 8,974,701 9,208,338 10,000,252 11,933,875 12,635,065

the fixed costs minus the advertising expense

this example for a mixed strategy. It is chosen because it gives the highest contribution, calculated as

s plan for a mixed strategy

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Select strategy

ution, calculated as

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