Solved Problems • Chapter 7 ½ 3
Solved Problems
Chapter 5: Enterprise Integration and Supply chain Management: a strategic perspective
1. Suppose a fashion retailer buys a certain line of clothing from one of its suppliers. The retailer expects that if they buy only 100 units of this clothing line, all 100 units can be sold at $40 per unit. The retailer expects the most they can sell is 400 units, but selling that number will require offering discounts, reducing the average selling price to $20 per unit. At present, the retailer buys this clothing line from its supplier at $20 per unit, but is considering a revenue sharing arrangement under which 25% of the company’s sales revenue would be shared with its supplier, but the cost per unit to the retailer would also be only 25% of what it would be under the traditional arrangement. The following information applies:
Revenue
Retailer Traditional Sharing
Number purchased from supplier 100 400
Cost per unit $20 $5
Expected sales 100 400
Sales revenue per unit $40 $20
Supplier
Number sold to retailer 100 400
Revenue per unit $20 $5
Production and distribution cost per unit $5 $5
Calculate the respective profits for the supplier and retailer under the traditional approach and the revenue sharing approach.
SOLUTION
Using the preceding information, and completing the appropriate parts of Exhibit 5.6, we have:
Revenue
Retailer Traditional Sharing
Number purchased from supplier 100 400
Cost per unit $20 5
Total purchase cost of tapes $20x100 = $2000 $5x400 = $2000
Expected sales 100 400
Sales revenue per unit $40 $20
Total revenue $40x100 = $4000 $20x400 = $8000
Retailer’s share of revenue @100% = $4000 @75% = $6000
Retailer’s Profit $4000-$2000 = $2000 $3600-$1000 = $4000
Supplier
Number sold to retailer 100 400
Revenue per unit $20 $5
Total revenue from sales $20x100 = $2000 $5x400 = $2000
Supplier’s share of revenue @0% = $0 @25% = $2000
Supplier’s total revenue $2000+$0 = $2000 $1000+$3600 = $4000
Production and distribution cost per unit $5 $5
Supplier’s prod. & dist. cost $5x100 = $500 $5x400 = $2000
Supplier’s profit $2000-$500 = $1500 $4000-$2000 = $2000
2. A company wants to use the Strategic Profit Model. Use the following information and Exhibit 5.9 to calculate their return on assets.
Sales = $10000 Cost of Goods Sold = $5000 Variable Expenses = $2000
Fixed Expenses = $2000 Inventory = $4000 Accounts Receivable = $1000
Other Current Assets = $1000 Fixed Assets = $6000
SOLUTION
Substituting the preceding values into the Strategic Profit Model of Exhibit 5.8, we have the following values:
(see exhibit on following page)
Vonderembse and White • Operations Management