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Deluxe Toys, Inc., produces electronic toys for 2–12-year-olds. The most recent income
statement for Deluxe is given below:
Revenues
1,500
Cost of goods sold
630
Selling expenses
120
Administrative expense
330
Operating profit
420
Ben Sharpe, analyst with AP Partners, is forecasting Deluxe's operating profit for the next
fiscal year. Sharpe believes that a new sales tax of 10% is going to be imposed on electronic
toys. Sharpe also believes that cost of goods sold will remain the same per unit sold. Selling
expenses are a fixed percentage of gross sales, while administrative expenses are fixed.
Deluxe is expected to pass on the entire cost of the sales tax to the consumer. The price
elasticity of demand for Deluxe's toys is 0.75 (e.g., volume will decrease by 7.5% when the
effective price increases by 10%.) Forecasted operating margin (as % of net sales) for the
next year is closest to:
A) 23%.
B) 26%.
C) 21%.
Janet Smith has gathered the following information for the Power Tools Manufacturer
market in the U.S. and this is part of the first phase of analyzing the businesses in the
industry. The following issues are relevant:
1. Raw material and component purchases consist mainly of plastics (for casing) and
motors (for power). Some hardened steel is required to make drills and bits.
2. Access to a reliable and efficient source of supply is critical, especially with regard to
the electric motor.
3. Two manufacturers in the U.S. produce over 90% of the electric motors for the U.S.
markets.
4. Workers in the industry have a strong and well-organized union. As a result, the rate
of compensation growth is a cause for concern, as is the associated health and
pension benefits accruing to the work force.
5. Industry revenues have tended to track the fluctuations of the wider economy.
6. Sales growth in the industry has been 5% compounded annually over the past eight
years.
7. Non-U.S. sales grew 10% compounded annually over the last eight years.
8. The rate of growth in home ownership and new home starts is directly related to the
future volumes of power tool sales.
9. The three largest global producers of power tools control 80% of the U.S. markets,
down from 85% five years ago.
10. Economies of scales are critical to efficient and cost effective use of manufacturing
resources.
11. High capital expenditure is required to maintain plant and equipment.
12. The major areas for competition for all the manufacturers are price and delivery
times, these are the critical areas of concern for the major retail outlets.
13. China has become the third largest global market for power tools, and significant
production facilities in this market have led to the potential for major export growth
to the U.S. In other industries, Chinese producers have been able to match and often
better local producers on price and delivery times.
14. 75% of sales in the U.S. market are made through 12 major retail chains. They are
always looking for ways to reduce the price they pay to manufacturers.
15. Sales of power tools is highly seasonal due to customer buying patterns often related
to the weather.
16. Consumers are looking for value for money but surveys indicate that they are not only
looking for the lowest price. They do value quality and surprisingly the look of the
product is more important than many thought.
17. Taking a broad view of the markets, it is difficult to envisage alternative products and
technologies playing a significant role in the development of the market for the
foreseeable future.