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DVD4LESS.com is one of the many new firms that have a presence

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Case 5-2;DVD4LESS.com is one of the many new firms that have a presence on the Web. It specializes in manufacturing and selling one type of high-end DVD player. By purchasing large volumes from a small number of suppliers, it receives a significant quantity discount. The reduced cost is passed on to its customer. DVD4Less.com manages to sell its DVD player for $200 less than all of its high-end competitors, thereby creating its competitive advantage.;DVD4LESS.com receives 112,000 orders for DVD players annually. Each DVD player sells for $500, of which $200 is retained as gross profit. Last year, it filled 97% of all orders correctly. Of the orders filled incorrectly, DVD4LESS.com estimates that 20% of the customers cancel the order and the remainder will accept a second shipment, which results in a rehandling cost of $20 per order. To maintain customer goodwill, the firm gives a $35 invoice reduction for all units rehandled.;DVD4LESS.com pays $1,950,000 annually for the transportation of its materials and delivery of its products. Its warehousing costs average $1,460,000 annually for the storage of its materials. DVD4LESS.com has $30 million of debt outstanding at an annual interest rate of 10%. The total cost for all selling and general administrative expenses (other operating costs) comes to $750,000, and $50,000 is held in cast at all times.;DVD4LESS.com has an average inventory of $5 million. This large inventory is partially attributed to its purchasing policy and also to its inventory management system. The inventory carrying cost rate is estimated at 25% of the average inventory due to sales to medium-sized retailers. It?s accounts receivable averages $250,000 throughout the year due to sales to medium sized retailers. DVD4LESS.com has a large fixed asset base. It is comprised of land, the manufacturing facility, machinery, and various administrative offices that are valued at $64 million.;DVD4LESS.com has explored a variety of options to improve its correct order fill rate. It is also interested in lowering its average inventory to improve its overall profit-ability. After weeks of presentation and heated debates, the decision is made to outsource its warehousing operations and inventory management. Many third-party logistics providers bid for the contract, in the end, it is awarded to Basileo Logistics for an annual cost of $500,000 (this is classified as other operating cost). By outsourcing, DVD4LESS.com manages to save $760,000 in warehousing expenses, reduces its average inventory by 30%, and now meets its 99% correct order fill rate. All other costs remain the same. The tax rate is 40%.;Case Question;Calculate the net savings of the outsourcing of the warehousing and inventory management to Basileo Logistics.;*The attached spreadsheet has calculations presented by you. My question is do the figures match the scenerio and if not, please revise. Thank you.;Attachment Preview;Bonzo_Case Study_excel_GB570_02_Unit 2.xls;DVD4less;Question 1. Net Savings and Input Data;Original;Modified;Order Fill Rate Order Fill Rate;97%;99%;Annual Orders;10000;10000;Orders Filled Correctly;9700;9900;Service Failure Orders;300;100;Units Redelivered/Rehandled;291;98;Redelivery/Rehandling Cost;$1,455.00;$392.00;Lost Sales Units;9;2;Cost of Lost Sales (Gross Profit);$162.00;$36.00;Total Service Failure Cost;$1,617.00;$428.00;Cost Savings of 1% Improvement;$1,189.00;Sales;Less: Invoice Deduction;Net Sales;Cost of Goods Sold (CGS);Service Failure Cost;Gross Margin;Transportation;Warehousing;Inventory Carrying;Other Operating Cost;Total Operating Cost;Earnings Before Interest and tax;Interest;Tax (40% of EBIT - INT);Net Income;Profit Increase of 1% Improvement;$999,100.00;$2,328.00;$996,772.00;$819,262.00;$1,617.00;$175,893.00;$54,000.00;$35,000.00;$600.00;$43,000.00;$132,600.00;$43,293.00;$22,000.00;$8,517.20;$12,775.80;$999,800.00;$490.00;$999,310.00;$819,836.00;$428.00;$179,046.00;$44,000.00;$28,000.00;$950.00;$38,000.00;$110,950.00;$68,096.00;$22,000.00;$18,438.40;$27,657.60;$14,881.80;Asset Deployment;Inventory;Accounts Recievable;Cash;Fixed Assets;Total Assets;$60,000.00;$25,000.00;$5,000.00;$65,000.00;$155,000.00;$76,000.00;$31,000.00;$5,000.00;$65,000.00;$177,000.00;Ratio Analysis;Profit Margin;ROA;Inventory turns/year;Trans. as % sales;Whse. as % sales;Inv. Carry as % Sales;Asset Turnover;Financial Leverage;1.28%;8.24%;13.65;5.42%;3.51%;0.06%;643.1%;2.58;2.77%;15.63%;10.79;4.40%;2.80%;0.10%;564.6%;2.95;21.29%;46.10%;Return on Net Worth;Input Data;% Correctly Filled;Annual Orders;Revenue/Order;Gross Profit/Order;Lost Sales Rate;Rehandling Cost/Order;Invoice Deduction Rate;Transportation Cost;Warehousing Cost;Interest Cost;Other Operating Cost;Inventory;Cash;Accounts Recievable;Fixed Assets;Inventory Carrying Rate;Net Worth;97%;10000;$100.00;$18.00;3%;$5.00;$8.00;$54,000.00;$35,000.00;$22,000.00;$43,000.00;$60,000.00;$5,000.00;$25,000.00;$65,000.00;1%;$60,000.00;99%;10000;$100.00;$18.00;2%;$4.00;$5.00;$44,000.00;$28,000.00;$22,000.00;$38,000.00;$76,000.00;$5,000.00;$31,000.00;$65,000.00;1%;$60,000.00;Net Saving between the two scenario is $ 14881.80. At;97% it is 12775.80 while at 99% it is 27657.60.;Based on above inventory management has also improved;on analysis of ratio it is more clear. Inventory turnover has;reduced from 13.65 to 10.79 while inventory carrying cost;has increased from.06% to.10%.;ROA has increased for 8.24% to 15.63%.;DVD4less;Strategic Profit Model for 97% Order Fill Rate;Sales;$996,772.00;COGS;Gross Margin;$175,893.00;$820,879.00;Net Profit;$12,775.80;Variable Expenses;$98,117.20;Fixed Expenses;Net Profit Margin %;Total Expenses;Sales;$163,117.20;1.28%;$996,772.00;Return on Assets;Financial leverage;Return on Net Worth;$65,000.00;8.24%;0.01;0.04%;Sales;Inventory;$996,772.00;Financial leverage=Total Assets/Net Worth;$60,000.00;Asset Turnover;Accts. Recievable;6.431;$25,000.00;Financial Leverage=;0.0052;Current Assets;$90,000.00;Total Assets;Other Current Assets;Fixed Assets;$5,000.00;$65,000.00;$155,000.00;Net Worth =;$30,000,000.00;Mark Basile;BLOG 305 Financial Analysis;Modified;Strategic Profit Model for 99% Order Fill Rate;Sales;$999,310.00;COGS;Gross Margin;$179,046.00;$820,264.00;Net Profit;$27,657.60;Variable Expenses;$91,388.40;Fixed Expenses;Net Profit Margin %;Total Expenses;Sales;$151,388.40;2.77%;$999,310.00;Return on Assets;Financial leverage;Return on Net Worth;$60,000.00;15.63%;0.01;0.09%;Sales;Inventory;$999,310.00;Financial leverage=Total Assets/Net Worth;$76,000.00;Asset Turnover;Accts. Recievable;5.646;$31,000.00;Financial Leverage=;0.0059;Current Assets;$112,000.00;Total Assets;Other Current Assets;Fixed Assets;$5,000.00;$65,000.00;$177,000.00;Net Worth =;$30,000,000.00

 

Paper#34622 | Written in 18-Jul-2015

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