Cafe Monte Bianco
Essay by Daniel Sanchez • July 7, 2015 • Case Study • 854 Words (4 Pages) • 4,119 Views
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Using the projected production plan for private-brand coffee, estimate key accounting variables for the profit wheel, cash wheel, and ROE wheel.
Cafe Monte Bianco is an Italian coffee manufacturer and distributor with more than 80 years of experience in the market. Traditionally focused on the premium coffee market, the company is nowadays contemplating to restructure its business to satisfy the private brand demand. Over the last market downturn in 1998, private label sales were critical to fill up capacity and cover fixed costs. Nowadays, the company’s CEO is considering the alternative of dedicating all manufacturing capacity to supply the private brand market.
In order to analyse the viability of the abovementioned alternative, a financial analysis has been made according to predicted sales by the marketing department. As seen in exhibit 1, the predicted cash flow for 2001, if all capacity is dedicated to private brands manufacturing, is negative. This situation is due to the following:
- Private brand customers pay invoices 90 days after delivery, which requires the company to have constant access to short-term finances in order to sustain production. Based on the fact that the company has almost used all of its credit line, it is unlikely that it will have access to enough finances to carry on the manufacturing allocation change.
- The seasonality of predicted sales, lower than mean during the third quarter of the year and higher on the fourth quarter, leads to a complicated financial situation for the company at the end of the year. There is a cash imbalance of -19.9 billion which has to be financed, as the company is meant to have 19.6 billion on accounts receivable.
- Furthermore, the exclusive production of private labels is not profitable for the company, as there are predicted losses of more than 616 million. This figure is shown on Exhibit 2, representing the forecasted income statement.
The key accounting variables on the 2011 forecast for the profit wheel, the cash wheel and the ROE wheel present on Exhibit 3 are represented on the following table:
Cash Wheel | Profit Wheel | ROE wheel | |||||
Operating cash | - 19.9 billion | Sales | + 52.8 billion | Profits | -616 million | ||
Accounts receivable | +19.6 billion | Operating expenses | +14.59 billion | Asset utilization | - 1 % | ||
Inventory finished goods |
-------- | Investment in assets | -------- | Stockholder’s equity | 8.55 billion | ||
Sales | + 52.8 billion | Profits | - 616 million | ROE | - 7.21 % |
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