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Chapter 2

FROM THE IDEA TO THE BUSINESS PLAN
EXERCISES/PROBLEMS AND ANSWERS

1. Following is financial information for three ventures:

Venture XXVenture YY Venture ZZ
After-tax Profit Margins5% 15%25%
Asset Turnover2.0 times1.0 times 3.0 times

A. Calculate the return on assets for each firm.

Venture XX: 5% x 2.0 = 10%
Venture YY: 15% x 1.0 = 15%
Venture ZZ: 25% x 3.0 = 75%

B. Which venture is indicative of a strong entrepreneurial venture opportunity?

Venture ZZ seems to represent a strong entrepreneurial venture opportunity based on a very high return on assets financial measure.

C. Which venture seems to be more of a commodity type business?

Venture XX seems to be more of a commodity type of business as indicated by a relatively low return on assets.

D. How would you place these three ventures on a graph similar to Figure 2.8?

Venture ZZ would be a Case 1 type of venture opportunity (very high profit margin). However, Venture ZZ’s also high turnover would place the venture above the ROA curve. Venture XX would be a Case 2 type of venture opportunity (low profit margin). Venture YY would fall between the other two ventures (both in terms of profit margin and asset turnover ratios).

E. Use the information in Figure 2.7 relating to pricing/profitability, and “score” each venture in terms of potential attractiveness.

Pricing/ProfitabilityVenture XXVenture YYVenture ZZ
Gross marginsNANANA
After-tax margins123
Asset intensity222
Return on assets223
Total points568

2.In 2005, Brandie Cook founded Brandie’s Micro-Batch Frozen Yogurt, which was based on the idea of applying the microbrew beer strategy to the production and sale of frozen yogurt. She began producing small quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2005 and were estimated at $1.2 million in 2006. Since Brandie was selling premium frozen yogurt containing premium ingredients, each small cup of yogurt sold for $3 and the cost of producing the frozen yogurt averaged $1.50 per cup. Other expenses plus taxes averaged an additional $1 per cup of frozen yogurt in 2005 and were estimated at $1.20 per cup in 2006.

A. Determine the number of cups of frozen yogurt sold each year.

Revenue = Price per unit x units sold, and Revenue / Price per unit = units sold:

Units Sold for 2005 = 600,000/3 = 200,000 units
Units Sold for 2006 = 1,200,000/3 = 400,000 units

B. Estimate the dollar amounts of gross profit and net profit for Brandie’s venture in 2005 and 2006.

2005 2006
Revenue $ 600,000$ 1,200,000
COGS (Units x COGS per Unit) 300,000 600,000
Gross Profit 300,000 600,000
OE + Tax 200,000 480,000
Net Profit $100,000 $120,000

C. Calculate the gross profit margins and net profit margins in 2005 and 2006.

Gross Profit Margin = Gross Profit/Revenues
Net Profit Margin = Net Profit/Revenues

Gross Profit Margin in 2005 = Gross Profit/Sales = 300,000/600,000 = 50% Net Profit Margin in 2005 = Net Profit/Sales = 100,000/600,000 = 16.7%

Gross Profit Margin in 2006 = Gross Profit/Sales = 600,000/1,200,000 = 50% Net Profit Margin in 2006 = Net Profit/Sales = 120,000/1,200,000 = 10%

D. Briefly describe what has occurred between the two years.

The gross profit margins are the same in the two years because the “cost of goods sold per unit” stays the same. However, 2006’s net profit margin declines because of the increase in the other expenses category.

3. Brandie’s Micro-Batch Frozen Yogurt venture described in Problem 2 required some ivestment in bricks and mortar. Initial specialty equipment and the renovation of an old warehouse building in...
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