Below is a description of a hypothetical industry. Read carefully and answer the questions below.

Question 1.

Below is a description of a hypothetical industry. Read carefully and answer the questions below.

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Hickory Divine is one of the leading manufacturers in the hardwood furniture industry. Hickory Divine has many small competitors, none of which controls a significant portion of the industry. Hickory, like most of the furniture manufacturers, sells its products to a broad variety of small furniture stores throughout the country, none of which represents a large percentage of Hickoryʹs sales. When purchasing the products it uses for manufacturing its furniture, Hickory is able to choose from many suppliers since the wood it uses is an undifferentiated commodity, and Hickory is able to easily switch to any supplier that has the best price and delivery times. While growth in the hardwood furniture industry has historically been in the double digits, the industry growth rate has slowed considerably into the single digits, to approximately 5% in recent years; consumers have been purchasing less expensive furniture made of composite wood that is considerably less expensive than hardwood furniture but that looks and functions very similarly once it is painted.

Answer all the questions below. 

Question 1a. Based on the description of the hardwood furniture industry, how can you describe the threat level posed from Hickory Divine’s suppliers? Is it high? Is it low? Why? Provide an explanation by using the logic and measurements of the 5 Forces model.

Question 1b. Based on the description of the hardwood furniture industry, how can you describe the threat level posed from Hickory Divine’s competitors (rivalry)? Is it high? Is it low? Why? Provide an explanation by using the logic and measurements of the 5 Forces model. 

Question 1c. Based on the description of the hardwood furniture industry, how can you describe the threat level posed from Hickory Divine’s buyers? Is it high? Is it low? Why? Provide an explanation by using the logic and measurements of the 5 Forces model.

Question 2.

Below is a hypothetical income statement, based on the income statement of Starbucks, Inc.[1] in 2019, 2018, and 2017

Item 8.

Financial Statements and Supplementary Data

STARBUCKS CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (INCOME STATEMENT)

(in millions)

Fiscal Year Ended                 Sep 29, 2019        Sep 30, 2018      Oct 1, 2017

Revenue (Sales Volume)                                               22,386

Cost of Goods Sold (COGS)                                            7,065 

Operating expenses                10,494               9,472            8,486 

Depreciation and amortization expenses  1,377            1,247            1,011

Interest expense                    331               170            92

Income tax expense                   871               1,262            1,432 

Answer all the questions below.

Question 2a. Let’s assume that the ratio (percentage) of the COGS to its Revenue (Sales Volume) of Starbucks hasn’t changed in 2017, 2018, and 2019. If so, what is the COGS and Revenue in 2018 and 2019? Show your calculations below, and fill in the Summary Table. Note that the numbers above are in millions.

Calculations: 

Summary Table

                               2019             2018

Revenue (Sales Volume)

Cost of Goods Sold (COGS)

[1] https://investor.starbucks.com/financial-data/sec-filings/default.aspx

Question 2b. Break-even point question. If there were 31,256 Starbucks stores world-wide in 2019, how many cups of coffee did a Starbuck store need to sell in a week to break even? Assume that Starbucks only product is a cup of coffee (one size), all stores are the same in size and sales, and the price of a cup of coffee is equally priced at $5 a cup in 2019. Note that the numbers above are in millions.

[1] https://investor.starbucks.com/financial-data/sec-filings/default.aspx

Question 2c. Based on the income statement above (Item 8), what is the gross profit, gross profit margin, net profit, net profit margin in 2019, 2018, and 2017? Show your calculations below, and then fill in the summary table below. Note that the numbers above are in millions.

Calculations:

Summary Table

                       2019        2018       2017

Gross profit

Gross profit margin

Net profit

Net profit margin

Question 2d: Based on your answers to Question 1, how is Starbucks doing in terms of their sales in 2019 and in terms of their operations in 2019? Make sure that your explanation includes what you have found in the Summary Table, and also make a comparison across the three years.

Question 2e: Based on your answers to Question 3, what should Starbucks be doing in the next 5 years? What would be a good strategy to achieve what they should be doing for the next 5 years?

Question 3

Below is a list of annual financial information for a hypothetical lemon juice start-up business. 

Advertising – $3,000

Administrative salaries and wages – $5,000

Bank charges – $200

Charitable contributions – $100

Depreciation expense – $650

Insurance – $2,000

Interest expense (loans, credit cards, etc.) – $250

Maintenance contracts – $600

Office supplies – $310

Payroll taxes – $2,600

City & state taxes – $200

Permits and licenses – $70

Postage and delivery expense – $300

Rent expense – $8,000

Repairs (office equipment, etc.) – $500

Utilities (electricity, water sewage) – $3,000

Answer all the questions below.

Question 3a: Calculate the annual sales estimate based on the information above. Assume that the cost of goods sold (COGS) is 55% of the total annual sales volume of the business. Show your calculations below.

Calculations:

Annual sales estimate:

Question 3b: Given your answer above, what would be a reasonable price point for a glass of lemonade? Why is the price point reasonable (provide evidence for your support)? You can use external sources of information. HINT: show many glasses of lemonade the business needs to sell in a day with your price point.

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