Butcher Shop

QUESTION: Your client is a fast food chain that recently bought a meat-processing outlet to supply it with
fresh hamburgers. Cows enter from one end of the shop, meat gets processed in the middle, and
meat gets packaged and delivered at the other end. The manager of the butcher shop needs to
decide whether to have the cows walk or run into the meat processing room.

FACTS: You can make 20 hamburgers from each cow.

The shop is open for 10 hours 5 days per week.
Revenue per hamburger is $1.
If the cows walk in, 10 cows can be processed in 1 hour.
If the cows run in, 25 cows can be processed in 1 hour.
If the cows walk in, overhead costs are $5,000 and labor costs are $1,000 per week.
If the cows run in, overhead costs are $10,000 and labor costs are $2,500 per week.
The fast food chain has 10 restaurants each serving an area of approximately 30,000 people.
40% of all customers fall within the demographic target market.
1/3 of the demographic target market will frequent a fast food restaurant on a regular basis.
Frequent customers will visit an average of two times per week and 50% will order a hamburger.
The fast food chain has 3 competitors.

FRAMEWORK: Profitability if cows walking vs. profitability if cows running

ANALYSIS: Revenue = price of hamburgers x quantity demanded of hamburgers

Revenue = $1 x [10 restaurants x 30,000 people in the vicinity x 40% demographic match x 1/3
frequent visitors x 2 visits per week x 50% hamburger purchasers x ¼ market share]
Revenue = $10,000 per week

Costs if cows walking = $5,000 overhead costs + $1,000 labor costs

Costs if cows walking = $6,000 per week
Costs if cows running = $10,000 overhead costs + $2,500 labor costs
Costs if cows running = $12,500 per week

Profit if cows walking = $10,000 - $6,000 = $4,000

Profit if cows running = $10,000 - $12,500 = ($2,500)

ANSWER: Cows should walk into the meat processing room for a profit of $4,000 per week (versus a loss of
$2,500 per week if cows run into the meat processing room).
Vietnamese Tire Manufacturer

QUESTION: Your client is a tire manufacturer in Vietnam that has dominated the industry due to high tariffs
on imports. The tariff currently accounts for 50% of the total cost to produce and ship a tire to
Vietnam. The Vietnamese government recently decided to lower the tariff by 5% per year for the
next ten years. You have been hired to assess the situation and advise the clients on next steps.

FACTS: The client produces tires at a cost of $40 each.

Raw materials account for 20% of the total cost.
Labor accounts for 40% of the total cost.
Overhead accounts for 40% of the total cost.
Competitors in the US produce tires at a cost of $30 each.
US manufacturers enjoy lower labor costs by replacing manual labor with technology.
US manufacturers must pay $4 per tire for shipping to Vietnam.

FRAMEWORK: Vietnamese cost vs. US cost

ANALYSIS: Vietnamese cost = $40 per tire

US cost = $30 + $4 shipping + tariff = $34 + 50% tariff = $51 per tire
US cost is $51 - $40 = $11 more than Vietnamese cost

Each 5% decrease in tariff = 5% x $34 = $1.70 decrease in US cost

$11 / $1.70 = approximately 6.5 years for US cost to equal Vietnamese cost
Total decrease in tariff = $1.70 x 10 years = $17 = $51 - $17 = $34 per tire

ANSWER: Essentially, the client has 6 years before the US manufacturers become a threat (assuming
constant cost structures). In order to remain competitive, Vietnamese cost per tire must be
lowered below US cost per tire in 10 years of $34. The client should benchmark all costs against
industry best practices and explore cost-cutting measures, especially investing in technology to
replace manual labor intensive production methods.
Infant Formula Producer

QUESTION: Your client is a manufacturer and nationwide distributor of infant formula. The client is bidding
for a contract with a government welfare program that allows individuals living below the
poverty level to receive vouchers for infant formula. Infant formula producers bid on a state-by-
state basis for the right to be the sole supplier of infant formula to welfare recipients in that
state. The contract requires the client to provide rebates to retailers. You have been hired to
determine how much the client should bid on the contract.

FACTS: Infants typically require formula for 22 months.

The average welfare recipient stays in the program for 10 months.
Mothers typically remain loyal to a brand through the infancy of their first child, but often switch
back and forth between brands for subsequent children.
There are 1.2 million welfare recipients enrolled in the program in the state per year.
Assume 50% of welfare recipients enrolled in the program are first-time mothers.
The client normally sells formula for $20 per container.
Each container feeds one infant for approximately 1 week.
Rebates average an additional 10% off the retail price.
The average COGS per container of formula is $15.
Each contract is for 5 years.
Assume four major competitors in the market with equal market share.

FRAMEWORK: Cost of fulfilling contract terms < contract bid < expected profitability of contract

ANALYSIS: Revenues per container = $20

Costs per container = $15 COGS + 10% x $20 = $2 rebate = $17
Profit per container = $3

Total cost of contract = $2 rebate x 1.2 million welfare recipients x 40 containers x 5 years
Total cost of contract = $480 million

Total program profit = profit per container x quantity of containers sold x 5 years
Total program profit = $3 x 1.2 million welfare recipients x 40 containers x 5 years
Total program profit = $720 million

Total post-program profit = profit per container x quantity of containers sold x 5 years
Total post-program profit = $5 x 600,000 new mothers x 48 containers x 5 years + $5 x 20% share
x 600,000 experienced mothers x 48 containers x 5 years
Total post-program profit = $864 million

Total profit = $720 million + $864 million = $1.584 billion

ANSWER: The client should bid no less than $480 million and up to $1.584 billion for the deal to be
profitable. Additional factors to take into consideration when placing the bid include increased
market share from increase in shelf space and boost to reputation, as well as competing bids.
Beer in the UK

QUESTION: Your client is a major US beer company that recently entered the UK market. Two years after
entry, the company is still losing money. Despite a high per capita consumption of beer in the UK
market, sales have been very disappointing. You have been hired to find out why.

FACTS: The company sells two beer products in the UK – a strong tasting beer and a light beer.
The strong tasting beer has been selling slightly below average in the UK.
The light beer has not been selling in the UK.
Market tests show that both brands of beer taste better than competitors.
The company has priced its beers below the competitors to try to capture customers.
The beers are sold everywhere other brands are sold.
There have been no problems with distribution channels.
The company has spent more on marketing than the industry average in the UK.
The beer industry in the UK is fairly fragmented with no dominant players.
There are very few light beers marketed in the UK.
The bestselling beers in the UK are Guinness and Toby.
The bestselling beers in the UK are all moderate in alcohol level, dark, and strong tasting.
The  company’s  strong  tasting  brand  is  higher  in  alcohol  than  the  bestselling  beers.
Both brands are lighter in color than the bestselling beers.

FRAMEWORK: Market Potential & 4 Ps

ANALYSIS: Current market size = large with high per capita consumption of beer in UK
Current market life cycle = mature for strong tasting beer, emerging for light beer
Market saturation = saturated for strong tasting beer, unsaturated for light beer
Environmental factors = no sociocultural low calorie movement for light beer

Product = light color may be preferred less than dark colored beers
Price = low price may translate to cheap image
Promotion = advertising focus may be on wrong message
Place = no issues

ANSWER: There is not currently a market for light beer in the UK, although it may be an attractive
opportunity in the future due to few competitors. The strong tasting beer should be changed to
be a darker colored beer priced similarly to the bestselling beers and advertised as a better
tasting beer based on the market tests.
Specialty Paper

QUESTION: Your client is a leading manufacturer of specialty papers sold to commercial printers. Your
client’s  operations  are  profitable,  but  the  business  has  failed  to  grow  over  the  past  few  years.    
You have been asked to identify opportunities for growth.

FACTS: The current process is configured to package specialty papers in boxes.

The client is not capacity constrained in its manufacturing processes.
There are approximately 24,000 commercial printers in the United States.
Printers are roughly categorized into 3 groups – small, medium, and large.
There are 20,000 small printers, 3,000 medium printers, and 1,000 large printers.
Smaller printers prefer to receive specialty paper in boxes.
Medium printers prefer to receive specialty paper in cartons.
Large printers prefer to receive specialty paper in pallets.
The client has approximately 30% market share with small printers.
The client has approximately 10% market share each with medium and large printers.
Management opposes cutting price to gain market share.
Price is $20 per box, $18 per carton, and $15 per pallet.
Cost of materials is $5.50 and cost of manufacturing is $1.50 per equivalent box.
Cost of packaging is $3 per box, $2 per carton, and $1 per pallet.
Small printers use 100 boxes per year.
Medium printers use 500 cartons per year.
Large printers use 3,000 pallets per year.
The client can gain 20% market share with medium printers.
The client can gain 15% market share with large printers.
Investment and operation of a carton packing line would cost $675,000 per year.
Investment and operation of a pallet packing line would cost $2,300,000 per year.

FRAMEWORK: Increased revenues via new customers; profitability of investment for medium vs. large printers

ANALYSIS: Market of medium printers = 3,000 printers x 20% share = 600 printers
Revenue of medium printers = 600 printers x 500 cartons x $18 per carton = $5.4 million per year
Cost of medium printers = $675,000 + $9 x 600 printers x 500 cartons = $3.375 million per year
Profit of medium printers = $5.4 million – $3.375 million = $2.025 million per year

Market of large printers = 1,000 printers x 15% share = 150 printers

Revenue of large printers = 150 printers x 3,000 pallets x $15 per pallet = $6.75 million per year
Cost of large printers = $2,300,000 + $8 x 150 printers x 3,000 pallets = $5.9 million per year
Profit of large printers = $6.75 million - $5.9 million = $850,000 per year

ANSWER: It is more profitable to invest in a carton packing line than a pallet packing line. Additionally, the
smaller investment required for the carton packing line is less risky.
Supermarket Deli

QUESTION: Your client is a national supermarket chain with a deli department offering two product lines:
deli meats and prepared foods. The $700 million deli business has reported no profit growth
over the last few years. You have been hired to find out why.

FACTS: Deli meat revenues were $260M, $255M, and $260M in 2002, 2003, and 2004 respectively.
Deli meat COGS were $160M, $155M, and $160M in 2002, 2003, and 2004 respectively.
Prepared food revenues were $360M, $400M, and $440M in 2002, 2003, and 2004 respectively.
Prepared food COGS were $190M, $230M, and $270M in 2002, 2003, and 2004 respectively.
Overall industry growth shows deli meat category has been flat to slightly declining recently.
Overall industry growth shows prepared foods category has been growing at 10% per year.
Two new prepared food products were introduced – BBQ chicken wings and sandwiches.
Each of the new products generates $40M annually in revenue.
Price for new products is $5 for 20 pieces of BBQ wings or $4 per sandwich.
Total material cost for new products is $0.10 per piece of BBQ wings and $2 per sandwich.
Total employee cost for new products is $20 per hour with prep time of 15 minutes per batch of
200 BBQ wings and 2 hours of dedicated made to order sandwich time for both lunch and dinner.
Average sandwich sales per store is 20 sandwiches per day.

FRAMEWORK: Revenue and cost analysis; profitability of BBQ wings vs. sandwiches

ANALYSIS: Revenue analysis shows both product lines growing at category averages with deli meat revenues
flat and prepared food revenues growing at 10%. Cost analysis shows deli meat COGS flat and
prepared food COGS growing at approximately 15%. Prepared food line shows declining
margins.

Profit of BBQ wings = Revenue of BBQ wings – Costs of BBQ Wings

Revenue of BBQ Wings = $5 per 20 pieces
Costs of BBQ Wings = $0.10 per piece x 20 pieces + $20 per hour x ¼ hour x (20 pieces/200
pieces) = $2.50 per 20 pieces
Profit of BBQ Wings = $5 - $2.50 = $2.50 per 20 pieces

Profit of sandwiches = Revenue of sandwiches – Costs of sandwiches

Revenue of sandwiches = $4 per sandwich x 20 sandwiches per day = $80 per day
Costs of sandwiches = $2 per sandwich x 20 sandwiches per day + $20 per hour x 4 hours per day
= $120 per day
Profit of sandwiches = $80 - $120 = -$40 per day

ANSWER: Declining margins in prepared food line due to sandwich product being sold at a loss. Client
should eliminate the product or increase sandwich sales either through price increase or demand
increase.
No-Fat Ice Cream

QUESTION: Your client is a manufacturer of no-fat ice cream products and wants to increase its revenues
next year.

FACTS: Each half-gallon of ice cream is priced at $3.50.

Current consumer base is 200,000 consumers purchasing 1 half-gallon container per month.
Two options under consideration are discount and advertising campaign.
Discount would be $1 off purchase of 2 half-gallon containers July through December.
50% of consumers would take advantage of the discount one month.
20% of consumers would take advantage of the discount every month.
Advertising campaign would run June and July.
Advertising campaign would reach 1 million consumers per month.
One out of 12 consumers viewing the advertising campaign would try our product once that
month, and one out of 8 consumers who tried out product once would purchase 1 half-gallon
container per month.

FRAMEWORK: Increase revenues

ANALYSIS: Demand is elastic due to closeness of substitutes and categorization as discretionary purchase.
Elastic demand means consumers are more price-sensitive and more likely to switch if price is
increased; thus, focus on quantity effect.

Increase quantity of existing consumers by increasing dollar amount per purchase or increasing
number of purchases. Increase dollar amount per purchase by offering discount. Increase
number of purchases by offering frequent buyer program. Increase quantity of new consumers
by increasing awareness, availability, and trial usage. Increase awareness by running new
marketing campaign on benefits of no-fat ice cream products. Increase availability by selling in
new retailers, such as additional grocery store chains or specialty ice cream shops. Increase trial
usage by providing free samples in store or coupons.

Current Revenue = $3.50 per half-gallon * 200,000 consumers * 12 half-gallons per consumer per
year = $8,400,000 per year

Additional Revenue from Discount = 50% * 200,000 * ($3.50 - $1) + 20% * 200,000 * ($3.50 - $1)
* 5 = $500,000

Additional Revenue from Advertising = 1,000,000 viewers per month * 2 months * 1/12 trial rate
* $3.50 per half-gallon + 1,000,000 viewers in June * 1/12 trial rate * 1/8 conversion rate * $3.50
* 6 months + 1,000,000 viewers in July * 1/12 trial rate * 1/8 conversion rate * $3.50 * 5 months
= $583,333 + $218,750 + $182,292 = $984,375

ANSWER: Implement advertising campaign to add additional $980,000 in revenue and add an additional
20,000 customers to the current consumer base, nearly double the revenue created by the
discount.
Gift-Wrapping Paper

QUESTION: Your client is a gift wrapping paper manufacturer in the United States who is considering
outsourcing to China to reduce costs.

FACTS: 5 manufacturing factories exist in the United States with rent of $100,000 per month each.
Each manufacturing factory supports 10 machines.
Each machine can produce 100 reams of paper per day.
Annual repair and maintenance fees amount to $200 per machine.
Each factory requires 3 supervisors paid an annual salary of $50,000 per year each in the US.
Each machine requires two employees to operate it.
Employees work one of two 8 hour shifts in the United States.
Employees are paid $10 per hour in the United States and $2 per hour in China.
Raw paper material is $20 per ream.
Ink is $100 per ream in the United States and $50 per ream in China.
Your client is considering outsourcing to China to reduce costs.
Rent is $60,000 per month per factory in China.
Each factory requires 3 supervisors paid an annual salary of $20,000 per year each in China.
Employees work one of two 10 hour shifts in China.
Shipping costs from China to the United States is $150 per ream.

FRAMEWORK: Decrease costs

ANALYSIS: US Facilities Costs = (5 factories * $100,000 rent per month * 12 months) + (5 factories * 10
machines * $200 fees per year) = $6,000,000 + $210,000 = $6,210,000 per year
US Indirect Labor Costs = 5 factories * 3 supervisors * $50,000 salary = $750,000 per year
US Direct Materials Costs = 5 factories * 10 machines * 100 reams per day * $120 per ream per
day * 360 days per year = $216,000,000 per year
US Direct Labor Costs = 5 factories * 10 machines * 2 employees per machine * 2 shifts * 8 hours
* $10 per hour * 360 days = $5,760,000 per year
Total US Costs = $6,210,000 + $750,000 + $216,000,000 + $5,760,000 = $228,720,000 per year

Machines produce 100 reams of paper per 16-hour day in the United States.
Machines produce 6.25 reams of paper per hour in the United States.
Machines produce 6.25*20 = 125 reams of paper per 20-hour day in China.
Demanded Production = 5 factories * 10 machines * 100 reams per day = 5,000 reams per day
5,000 reams per day / 125 reams per day = 40 machines / 10 machines per factory = 4 factories

China Facilities Costs = (4 factories * $60,000 rent per month * 12 months) + (4 factories * 10
machines * $200 fees per year) = $2,880,000 + $8000 = $2,888,000 per year
China Indirect Labor Costs = 4 factories * 3 supervisors * $20,000 salary = $240,000 per year
China Direct Material Costs = 4 factories * 10 machines * 125 reams per day *$220 per ream per
day * 360 days per year = $396,000,000
China Direct Labor Costs = 4 factories * 10 machines * 2 employees per machine * 2 shifts * 10
hours * $2 per hour * 360 days = $1,152,000 per year
Total China Costs = $2,888,000 + $240,000 + $396,000,000 + $1,152,000 = $400,280,000 per year

ANSWER: Outsourcing to China is not an option for reducing costs due to the high shipping costs per ream
leading to a cost increase of over $170 million per year.
Tissue Paper

QUESTION: Your client is a manufacturer of tissue paper. The client is considering increasing the average
price on commercial products by 10% to improve profitability. You have been hired to determine
whether or not the client should implement the price increase.

FACTS: The price elasticity of demand for the product is -2.

Tissue currently sells for $100 per ton.
The client currently sells 1,000 tons of tissue per year.
The client incurs fixed costs of $20,000 and variable costs of $70 per ton per year.
The client currently has a 40% market share.
3 players control 90% of the market.

FRAMEWORK: Profitability if no price increase vs. if price increase

ANALYSIS: Revenue if no price increase = $100 per ton x 1,000 tons = $100,000 per year
Cost if no price increase = $20,000 + $70 per ton x 1,000 tons = $90,000 per year
Profit if no price increase = $10,000 per year

Price increase = 10% x $100 + $100 = $110 per ton

Demand decrease = 10% price increase x -2 elasticity = - 20% x 1,000 tons = -200 tons per year

Revenue if price increase = $110 per ton x 800 tons = $88,000 per year
Cost if price increase = $20,000 + $70 per ton x 800 tons = $76,000 per year
Profits if price increase = $12,000 profit

ANSWER: The client should increase the price by 10% to gain an additional $2,000 of profit per year.
Argentine Bank

QUESTION: Your client is a bank in Argentina who has historically served individuals or large corporations.
There are only three other large banks in the market. Last year, your client was the first bank to
enter the small to medium business market. You have been hired to understand how they can
become more profitable.

What are examples of new products we could offer to small and medium sized businesses?
How can we segment our small and medium sized business customers?

FACTS: The small to medium business market is growing.

Users in the small to medium business market are very price sensitive.
The firm currently makes $1,000 in revenue per product.
The firm currently sells an average of 2 products per customer.
The firm currently makes $160 million in profit.
The cost structure is 20% profit, 20% fixed costs, and 60% variable costs.
The firm predicts that introducing new services will increase the customer base to 600,000
expected customers purchasing an average of 3 products.
Assume revenue per product and variable cost per product stays the same.

FRAMEWORK: Increase revenue via quantity effect

ANALYSIS: Examples of new products = payroll management, funds management services, tax services,
business insurance, etc.

Current revenues = 20% of revenues is $160 million in profit = $800 million

Current fixed costs = 20% of $800 million revenues = $160 million
Current variable costs = 60% of $800 million revenues = $480 million
Number of products = $800 million revenue / $1,000 revenue per product = 800,000 products
Current variable cost per product = $480 million / 800,000 products = $600 per product

New revenues = 600,000 x 3 products x $1,000 per product = $1.8 billion

New fixed costs = $160 million
New variable costs = 600,000 x 3 products x $600 per product = $1.08 billion
New profit = $1.8 billion - $1.08 billion = $560 million

Potential segments = risk susceptibility, size by revenues, size by employees, industry, lender
services, borrower services, etc.

ANSWER: The client should increase quantity of sales to current clients and new clients in the small to
medium business market to increase revenue by $400 million.