Hassan Tariq GhaniSyed Saad ShahSyed Muhammad HamzaSyed Ather WaqarSyed Fayyaz Hasnain

Case Presentation - Accounting for Decision Making

Founded in the early part of the 19th century, Cafes Monte Bianco is manufacturer and distributor of Premium Coffee, throughout Europe

Known for its “premium” quality standards and taste

Grow business aggressively

Consideration of private brand manufacturing and selling

Stable performance for the year 2000 because of manufacturing and selling private brands

Projection of financial health of the business considering private and premium brand manufacturing

Premium Brand Private BrandSales are volatile particularly in times of economic downturn

Sales are relatively stable

Margin is relatively high Low margin

DSO is relatively low resulting in healthy cash flow

Cash flow is hurt when payments are delayed by the retailers

Production is planned to meet market demand

Production is kept to meet contract requirements, stability of demand allows the company to use full capacity of production

Cannot stock premium coffee due to concerns of freshness

Simplifies Manufacturing plan as inventory can be maintained easily

Heavy R&D and marketing expenditures are incurred to meet sales targets

Reduced administrative, R&D and selling costs (in particular marketing costs)

Income StatementIncome Statement

Balance SheetBalance Sheet

Current ratio = 0.57 Quick ratio = 0.41

Fixed Asset Turnover = 1.86 Total Asset Turnover = 1.26 Inventory turnover ratio = 11.43 Days Sales Outstanding = 61

days

Higher liabilities, poor liquidity

Indicating lower quality of Accounts Receivables

Reason being private brand retailers delayed payments up to 90 days, reducing cash flow into the company

Debt Ratio = 0.79

Debt-to-Equity Ratio = 3.87

Times Interest Earned = 1.85

Much of this company’s financing is in form of debt

Company owes $3.87 in debt for every $1 in equity

More borrowing prospects are not feasible

Advertising Expenditure per Sales Advertising Expenditure per Sales VolumeVolume

Estimated Cost per Unit for Selling Estimated Cost per Unit for Selling VolumeVolume

Sales during 2000Sales during 2000

Production Plan for Private BrandProduction Plan for Private Brand

52,800,000,000

Raw Materials & Labor @ 6,600 39,600,000,000 Fixed Costs 3,319,500,000

Total Cost of Goods Sold 42,919,500,000

Gross Profit 9,880,500,000

Marketing / Advertising Expenses ZEROR&D Expense (Down by 75%) 832,032,500 Selling Expense (Down by 65%) 1,251,148,500 Admin Expense (Down by 50%) 2,376,000,000 Interest Expense (Constant at 25 billion Liras) 3,825,000,000

Profit Before Tax 1,596,319,000 Tax @ 40% 638,527,600 Profit After Tax 957,791,400

Café Monte BiancoIncome Statement

For the Year Ended Dec 31, 2001

Sales (6,000,000 kg @ 8,800) Private Brand

Cost of Goods Sold

Brand Year 2000 Revenue Quantity Price Per UnitPRIVATE Revenue/Quantity 9,934,848,000 1,152,000 $8,624

PREMIUM Revenue/Quantity 46,177,560,000 1,196,000 $38,610

Café Monte BiancoProjected Cash Flows

For the Year 2001Jan Feb Mar Apr May Jun

Opening Balance 1,121,450,000 4,136,804,905 1,511,504,129 (1,123,731,494) (947,324,877) (25,382,261) Payment Received

Private 1,301,465,088 1,202,116,608 1,192,181,760 3,673,824,000 4,656,960,000 6,105,792,000 Premium 5,541,307,200 - - - - -

Add: Depreciation 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667 Less: Disbursements

Raw Material/Labor 3,300,000,000 3,300,000,000 3,300,000,000 2,970,000,000 3,207,600,000 2,574,000,000 R&D Expense 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042 Selling Expense 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375 Interest Expense 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000 Admin Expense 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000 Taxes 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633

Closing Balance 4,136,804,905 1,511,504,129 (1,123,731,494) (947,324,877) (25,382,261) 2,978,992,356

Café Monte BiancoProjected Cash Flows

For the Year Ended 2001Jul Aug Sep Oct Nov Dec

Opening Balance 2,978,992,356 3,032,374,973 3,396,221,589 2,156,004,206 501,834,823 (1,618,030,561) Payment Received

Private 3,880,800,000 4,191,264,000 2,587,200,000 2,173,248,000 1,707,552,000 3,518,592,000 Premium - - - - - -

Add: Depreciation 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667 216,141,667 Less: Disbursements

Raw Material/Labor 3,300,000,000 3,300,000,000 3,300,000,000 3,300,000,000 3,300,000,000 3,300,000,000 R&D Expense 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042 69,336,042 Selling Expense 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375 104,262,375 Interest Expense 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000 318,750,000 Admin Expense 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000 198,000,000 Taxes 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633 53,210,633

Closing Balance 3,032,374,973 3,396,221,589 2,156,004,206 501,834,823 (1,618,030,561) (1,926,855,944)

For Premium Brand (Year 2000)= Gross Profit / Sales * 100= 22,878 / 56,112 * 100 = 40.77%

For Private Brand (Year 2001)= Gross Profit / Sales * 100= 9,880 / 52,800 * 100= 18.71%

Gross Profit Margin in Year 2000 was greater by 22% when compared with GP Margin of 2001

Contribution Margin is the lowest for private brand (D)

2nd lowest CM is at least 3 times greater than the CM for private brand

Grade D C B BB A AA AAASelling Price 8,800 19,500 26,600 30,000 35,500 39,000 42,600 Variable Cost 6,600 12,485 14,275 16,288 17,791 19,166 20,441 Contribution 2,200 7,015 12,325 13,712 17,709 19,834 22,159

ROE = Net Income / Shareholders Equity

ROE (2000) = 1,945 / 9,165 = 21.2 %

ROE (2001) = 958 / 9,165 = 10.45 %

The ROE on the premium brand is twice the return earned on private brand.

Café Monte Bianco should opt for premium brand or a mixture of private and premium

A major chunk of sales should come from premium brand

A complete shift to private brand will have negative impact on cash flows due to delay in account receivables on the part of retailers

By selling premium brand, Salvetti family will able retain their hard earned position in premium market.

Q & A