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PREVIEW

You own the Choc candy shop, which sells delicious Chocolate candy bars. From the beginning, you followed the same model as Amazon.com. That is, you have no retail shops, but only offer your candy bars on the Web. Your candy has garnered a loyal following and even has its own blog. Sales have increased steadily over the years. As a responsible business owner, you keep up with all the latest developments in Chocolate production and consumption. In recent months, you have seen many news articles on the health benefits of eating dark Chocolate. Dark Chocolate is the most expensive type of bar to produce, and you wonder how changes in the market will affect your bottom line. In this case, you will use Excel to see whether Choc can continue to achieve profits and manage its debt.

BACKGROUND

You have run all aspects of Choc since 1994. The company started as an online shop for the world’s best and least expensive candy bars, and has kept that niche ever since. Choc produces four types of candy bars: a solid milk Chocolate bar, which is by far the best seller; a milk Chocolate bar with peanuts; a milk Chocolate bar with almonds and raisins, known as the fruit and nut bar; and a dark Chocolate bar. Each candy bar is two ounces of Chocolate goodness. The essential ingredients in making milk Chocolate are cocoa powder, cocoa butter, sugar, and milk. Dark Chocolate has the same ingredients, except that it has no milk. Cocoa powder and cocoa butter, which vary in quality by region, are widely available in the world trading markets. Just as futures markets exist for wheat, corn, and pork bellies, there are also cocoa powder futures. For every portion of cocoa powder that is produced from cocoa beans, an equal part of cocoa butter is produced. Therefore, cocoa powder and cocoa butter prices are exactly the same in the world market. You read a lot of Chocolate trade journals and keep up with all the latest data in Chocolate consumption. The health benefits of dark Chocolate have been known for some time, but more and more of these benefits are being proven scientifically every day. It is becoming very fashionable to eat dark Chocolate. While you certainly want to promote healthy eating habits, dark Chocolate is the most expensive candy bar for you to produce. Plain Chocolate bars, dark and milk Chocolate, are also gaining in popularity over Chocolate bars with nuts and fruit. When you started Choc in 1994, you had some of the necessary money, but you also borrowed money from your silent partners - your parents and your two sisters. While you run the company day to day, you distribute earnings equally to the partners and keep them informed about the business. Your continuing success will depend on two factors: rho rate of sales growth, and what percentage of each type of candy bar you make. You assume that if you forecast your financial model over the next five years, you can accurately predict how your business will fare. In your decision support system (DSS), the inputs would he for (1) your projected rate of sales growth (low. medium, or high), and (2) the percentage of each type of candy bar you will make. Your DSS needs to account for the effects of input values on variables such as costs and selling prices. Your model will let you develop ―what-if’ scenarios with the inputs, see the results, and then decide what to do.

**PART1: CREATING A SPREADSHEET FOR DECISION SUPPORT.
**

First, you will create the spreadsheet model of the proposed program’s financial situation. The model is for five years, 2010 - 2014, inclusive. The following sections provide guidance on how each spreadsheet section should be set up before entering cell formulas. Your spreadsheet should have the following sections: • Constants; • Inputs; • Summary of Key Results; • Calculations; • Income and Cash Flow Statements; • Debt Owed

Constants Section

Your spreadsheet should have the constants shown in Figure below. An explanation of the line items Assignment #3-Choc Excel Page 1

which are expected to increase each year. The percentage of each ingredient in each of the four types of candy bars is shown in this field. M. which are purchased by the ton. and raisins. Enter the percentage of each type of candy bar that you will make each year to form your total output.Fixed costs include the cost of salaries. Inputs Section Your spreadsheet should have the following inputs for years 2010. Your banker will lend you whatever you need at the end of a year to begin the new year with S1 million. insurance. almonds.The cost of peanuts. 2012. as shown in Figure below: The rate of sales growth is entered as L. they are shown in this section because they are constants.The cost of milk.The interest rate you owe on your debt to the bank. which are purchased by the ton. or High). You do not need to enter the same numbers for all five years. Assignment #3-Choc Excel Page 2 . peanuts. electricity. Format this number as a percentage with no decimal places. • Minimum cash required . • Recipe for one bar . which is purchased by the pound.The cost of raisins. • Cost of almonds per ton . Each year this price is expected to increase. The price is the same for any of the four types of candy bars.You want to have at least Si million in cash at the beginning of each year. • Cost of raisins per ton . 2013. cocoa butter. • Cost of cocoa powder per ton . • Cost of peanuts per ton .The cost of sugar. Note: these values are not associated with the years. sugar milk. Medium. and so on. buildings. or H (for Low. • Price per bar . Regardless of the levels you choose. the choice will remain constant for all years from 2010 to 2014.Each of the four candy bars consists of some portion of cocoa powder. and is purchased by the ton. • Cost of sugar per pound . • Fixed Administrative Costs . cocoa powder and cocoa butter cost the same. • Tax Rate . It is expected to change each year. which are purchased by the ton. • Cost of milk per 100 pounds .The price at which you expect to sell each candy bar. and 2014. which is purchased in 100-pound increments.follows. • Interest Rate .As stated earlier.The tax rate is applied to pretax profits. Make sure the percentages for each year add up to 100%.The cost of almonds. 2011.

The cost for a ton of cocoa powder is given in the Constant section. Calculations Section You should calculate various intermediate results that will be used in the income and cash flow statements that follow Calculations.The cost for a ton of peanuts is given in the Constants section.Summary of Key Results Section Your spreadsheet should contain the results shown in Figure below. Cost of milk per ounce .The cost for 100 pounds of milk is given in the Constants section. and al the cost data.000 pounds in a ton and 16 ounces in a pound. Cost of cocoa powder per ounce . (2) cash on hand at the end of the year. These values are all computed elsewhere in the spreadsheet and should be echoed here. may be based on year-end 2009 values. as shown in Figure below. When called for. your spreadsheet should show (1) net income after taxes.The cost for a pound of sugar is given in the Constants section. For each year. The cells should be formatted as currency with zero decimals.The cost for a ton of almonds is given in the Constants section. as currency with six decimal places. Cost of almonds per ounce . Display this field. Page 3 Assignment #3-Choc Excel . Cost of sugar per ounce . Cost of peanuts per ounce . use absolute and mixed referencing properly. An explanation of each item in this section follows the figure. and (3) the debt owed at the end of the year to bankers. There are 2. An explanation of each item in this section follows the figure.

and the percentage of those bars that are milk Chocolate with peanuts bars. Income and Cash Flow Statements The forecast for net income and cash flow starts with the cash on hand at the beginning of the year. Revenue .The number of bars sold per year depends on the expected growth rate.The product of the cost of a dark Chocolate bar. 0.The product of the cost of a milk Chocolate bar. If the sales growth rate is expected to be medium. This is followed by the income statement and concludes with the calculation of cash on hand at the year’s end. total bars sold per year.The product of the number of bars sold per year and the selling price per bar.hand . A discussion of each item in the section follows each figure. Material costs of one candy bar . Cost of milk Chocolate bars with fruit and nuts .on. and the cost per ounce of each ingredient used. calculate the costs of making each type of bar in each year.8 of an ounce of cocoa is needed to produce one 2-ounce milk Chocolate bar. Number of bars sold in a year . and the percentage of those bars that are dark Chocolate bars. if done using absolute and mixed referencing properly. the number of bars sold per year will be 4% less than in the previous year. bar . If the sales growth rate is expected to be low. Cost of dark Chocolate bars . Cost of milk Chocolate with peanuts bars .The cash on hand at the end of the prior year.The product of the cost of a milk Chocolate with peanuts bar.The cost for a ton of raisins is given in the Constants section. If the sales growth rate is expected to be high. and the percentage of those bars that are milk Chocolate bars. Cost of raisins per ounce . For readability. Recipe for one 2 oz. total bars sold per year. total bars sold per year. Each bar weighs 2 ounces. 40% of a milk Chocolate candy bar is cocoa powder. • • • • • • Beginning-of-year cash. the number of bars sold per year will be 4% more than in the previous year. These calculations. format cells in this section as currency with zero decimals.Using the materials needed for each type of bar. Calculate how much of each ingredient is needed for each type of bar in this field. Your spreadsheets should look like those in Figures below.The product of the cost of a milk Chocolate bar with fruit and nuts. For example. and the percentage of those bars that are milk Chocolate bars with fruit and nuts. Therefore. Page 4 Assignment #3-Choc Excel . total bars sold per year. will be easy to copy and paste across the years and down for each candy bar type. Make sure to calculate each ingredient for each type of bar.The proportions of ingredients are given in the Constants section. the number of bars sold per year will be 10% more than in the previous year. Cost of milk Chocolate bars .

Debt Owed Section This section shows a calculation of debt owed to the state at year’s end. Total Costs . Less: Repayment to bank .This value is zero if the income before taxes is zero or negative.the difference between total revenue and total costs.000 debt is owed at the end of 2009. Column B is for 2009. and so on. The next items to discuss are the line items for the year-end cash calculation.This amount equals the NCP plus any borrowing and less any repayments.The income before interest and taxes minus the interest expense.The NCP at the end of a year equals the cash at the beginning of the year plus the year’s net income after taxes.Debt owed at the beginning of a year equals the debt owed at the end of the prior year. of course. Net income after taxes . Year 2009 values are NA. Year 2009 values are NA.• • • • • • • Fixed Administrative Costs . Interest Expense . as shown in Figure below. Repayments reduce cash on hand. you must then pay off as much debt as possible (but not let the amount of cash fall below the minimum amount required to start the next year).This amount has been calculated elsewhere and can be echoed to this section. which is $1. so the amount is entered there. income tax expense is the product of the year’s tax rate and the income before taxes. column C is for 2010. Add: Borrowing from bank . • • Beginning-of-year debt owed . Add: Borrowing from bank . If the NCP is less than this minimum.Fixed administrative expenses are given in the Constants section and can be echoed here. Income tax expense . Borrowing increases the amount of debt owed. Equals: End-of-year cash on hand . • • • • Net Cash Position (NCP) . Income before taxes . of course. except that a $1. Income before interest and taxes .000. except for End-of-year cash on hand. which is a constant.The difference between the income before taxes and income tax expense. Borrowing increases the cash on hand.If the NCP is more than the minimum amount of cash needed at the end of a year and debt is owed.000. Otherwise.The product of the debt owed at the beginning of the year and the annual Interest rate on debt.Assume that a bank will lend you enough money at the end of the year to get to the minimum cash needed to start the next year.the sum of the costs for each type of candy bar and fixed administrative expenses. you must borrow enough to start the next year with the minimum. Page 5 Assignment #3-Choc Excel .000. An explanation of each item follows the figure.

The moderate change would be implemented as shown in Figure below. Equals: End-of-year debt owed . The moderate change would be implemented as shown in Figure below. and Low sales growth. and the change in the combination of candy bars.In this scenario.This total equals the amount owed at the beginning of a year. • High sales growth. • High sales growth. Repayment to bank . • Medium sales growth. and (2) documenting recommendations in a memorandum. I ______________________________________________ 2010 2011 2012 2013 2014 % Milk Chocolate bars made 50% 50% 50% 50% 50% % Milk Chocolate with peanuts bars made 25% 23% 21% 19% 17% % Milk Chocolate bars with fruit and nuts made 15% 13% 11% 9% 7% % Dark Chocolate bars made 10% 14% 18% 22% 26% Assignment #3-Choc Excel Page 6 .This amount has been calculated elsewhere and can be echoed to this section.In this scenario. Moderate change . you expect sales to grow at a high rate.In this scenario. and the change in the combination of candy bars sold to be implemented at a moderate pace. The slow change would be implemented as shown in Figure above. You want to know the 2014 net income after taxes. Slow change . and with a product line of different sets of candy bars. and the change in the combination of candy bars sold to be implemented slowly.In this scenario. The key variables are the sales growth rate and the percentage of each type of candy bar you expect to make and sell. and the change in the combination of candy bars sold to be implemented slowly. and the change in the combination of candy bars sold to be implemented at a moderate pace. less repayments in the year.This scenario. The moderate change would be implemented as shown in Figure below. you expect sales to grow at a moderate rate. Slow change – In this scenario. Medium. Moderate change . 2A: Using the Spreadsheet to Gather Data. Part2: Using the SpreadSheet for Decision Support. and the change in the combination of candy bars sold to be implemented slowly. Repayments reduce the amount of debt owed. Slow change . • Low sales growth. you expect sales to grow at a moderate rate. You envision nine scenarios that would he reasonable.• • Less. sold to be implemented at a moderate pace. The goal is to make money and keep debt to a minimum. plus borrowing in the year. and cud-of-year debt owed in each of the following nine scenarios: o Low sales growth. you expect sales to grow at a high rate. and you need to know the financial results of each. You will now complete the ease by (1) using the spreadsheet to gather the data needed to determine your strategy. you expect sales to grow slowly. • You have built the spreadsheet to model the business situation. The slow change would be implemented as shown in Figure below: I ______________________________________________ 2010 2011 2012 2013 2014 % Milk Chocolate bars made 50% 50% 50% 50% 50% % Milk Chocolate with peanuts bars made 25% 24% 23% 22% 21% % Milk Chocolate bars with fruit and nuts made 15% 14% 13% 12% 11% % Dark Chocolate bars made 10% 12% 14% 16% 18% • Medium sales growth. end-of-year cash on hand. Moderate change . The slow change would be implemented as shown in Figure above. You will try the scenario with High. you expect sales to grow slowly. You want to know what quantity of each candy bar you should produce given different sales growth rates.

• Low sales growth. The fast change would be implemented as shown in Figure below. want to know which scenarios will yield the best results. These cell addresses are arbitrary. When you finish. • High sales growth. not less. I ______________________________________________ 2010 2011 2012 2013 2014 % Milk Chocolate bars made 50% 50% 50% 50% 50% % Milk Chocolate with peanuts bars made 25% 22% 19% 16% 13% % Milk Chocolate bars with fruit and nuts made 15% 12% 9% 6% 3% % Dark Chocolate bars made 10% 16% 22% 28% 34% The financial results in each scenario will help you figure out how or whether to make changes to your business. and your recommendation. The 21 changing cells are used to input the sales growth rate and the combination of bars that will be made each year Make sure that each year’s percentages add up to 100%—not more. what variables seem most important? What is the effect of sales growth rate on your bottom line and your debt? Documenting Your Recommendation in a Memorandum Open Microsoft Word and write a brief memorandum to your partners explaining the results of your analysis and asking each of them for their opinions on which option to choose. Slow change High sales growth. you can enter noncontiguous cell ranges as follows: C19. and then set up the nine scenarios. and the change in the combination of candy bars sold to be implemented at a fast pace. using the Scenario Manager (Consult Tutorial for the Scenario Manager procedures). of course. if negative net income and debt occur in some scenarios. end-of-year cash on hand. you expect sales to grow at a moderate rate. Slow change Etc … 2014 Income 2014 Cash on Hand 2014 Debt Owed The memo and summary of results will be submitted in class (hard copy) Your excel file will be posted by March 18th 2010 Assignment #3-Choc Excel Page 7 .) The three output cells are the 2014 net income after taxes. your sales growth model. briefly define your business. • You may support your statements graphically. The fast change would be implemented as shown in Figure below. (Note that in the Scenario Manager. You may want to use conditional formatting to make sure the percentages add up. Fast change – In this scenario. D19. Fast change . The fast change would be implemented as shown in Figure below • Medium sales growth. Fast change—In this scenario.In this scenario. and end-of-year debt owed from the Summary of Key Results section. and then save the spreadsheet file for the last time. You hope to see positive net income and no debt in all scenarios. you expect sales to grow slowly. C20:F20. You will run ―what-if‖’ scenarios with the nine sets of input values. Make a summary table in Word. and the change in the combination of candy bars sold to be implemented at a fast pace. print the Scenario Manager summary sheet. Slow change Medium sales growth. • In the first paragraph. you expect sales to grow at a high rate. Example Scenario Low sales growth. and the change in the combination of candy bars sold to be implemented at a fast pace. print the spreadsheet with the input for any of the scenarios. which would make it easy to decide how to make changes in your business. However. The partners. based on the Scenario Manager summary sheet result. Run the Scenario Manager to gather the data in a report.

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