Input - Financial statements

Exhibit 1
Income Statement for the year ending Decemeber 31, 2000
(thousands of Italian liras)

Revenues 56,112,408
Private brand 9,934,848
Premium brand 46,177,560

Costs of goods sold (*) 33,233,867

Gross margin 22,878,541

Marketing expenses 4,155,980

R&D expenses Research_1997 3,328,130
Selling expenses Selling_1997 3,574,710
Administrative expenses Admin_1997 4,752,000
Interest expense Interest_1997 3,825,000

Profits 3,242,721
Taxes (40%) 1,297,088
Net profit 1,945,632
Depreciation
(*) includes depreciation (th. liras) 2,593,700 ROE 23.75%
ROA 15.83%

Balance Sheet at December 31, 2000

(thousands of Italian liras)
Assets Liabilities and Shareholders' Equity

Cash 1,121,450 Accounts payable

Raw material inventory 2,907,963 Credit line
Finished goods (174,000 kg.) 1,148,400
Accounts Receivable 9,368,467 Long term debt

Property, plant and equipment (*) 42,374,000 Equity

Depreciation (12,267,080)

Total assets 44,653,200 Total liabilities

(*) includes vacant land with a cost of 13,000,000 th. liras

Page 1
 Input - Financial statements

7,067,721

0.13 1.256626798
ROS Asset turnover

Shareholders' Equity

487,331
25,000,000

10,000,000

9,165,869

44,653,200

Page 2
 Input - Other data

Exhibit 2
Quality D C B BB A AA AAA
Price_private_brand
Prices per kilogram 8,800 19,500 26,600 30,000 35,500 39,000 42,600
VOLUME (kg.)
Advertising /Sales
0% 6,000,000 2,395,000 1,645,000 1,529,000 1,103,000 667,000 127,000
1% 2,455,000 1,696,000 1,566,000 1,145,000 717,000 157,000
2% 2,545,000 1,720,700 1,649,000 1,226,000 799,000 229,000
3% 2,665,000 1,896,000 1,760,000 1,334,000 910,000 325,000
4% 2,800,000 2,024,000 1,884,000 1,456,000 1,034,000 433,000
5% 2,950,000 2,166,000 2,022,000 1,591,000 1,172,000 553,000
6% 3,130,000 2,367,000 2,157,000 1,723,000 1,307,000 667,000
7% 3,196,000 2,417,000 2,195,000 1,792,000 1,345,000 694,000
8% 3,268,000 2,446,000 2,231,000 1,823,000 1,366,000 752,000
9% 3,310,000 2,465,000 2,258,000 1,837,000 1,495,000 875,000
10% 3,340,000 2,494,000 2,286,000 1,843,000 1,523,000 935,000

Page 3
 Input - Other data

Exhibit 3
Quality D C B BB A AA AAA
Prices per kilogram 8,800 19,500 26,600 30,000 35,500 39,000 42,600

Variable_private_brand
Unit cost (liras) 6,600 12,485 14,275 16,288 17,791 19,166 20,441
Fixed costs (th. of liras)* 3,319,500 4,100,500 4,100,500 4,100,500 4,100,500 4,100,500 4,100,500
Fixed_private_brand

Volume (kg.)
400,000 14,899 22,736 24,526 26,539 28,042 29,417 30,692
600,000 12,133 19,319 21,109 23,122 24,625 26,000 27,275
800,000 10,749 17,611 19,401 21,414 22,917 24,292 25,567
1,000,000 9,920 16,586 18,376 20,389 21,892 23,267 24,542
1,200,000 9,366 15,902 17,692 19,705 21,208 22,583
1,400,000 8,971 15,414 17,204 19,217 20,720 22,095
1,600,000 8,675 15,048 16,838 18,851 20,354 21,729
1,800,000 8,444 14,763 16,553 18,566 20,069
2,000,000 8,260 14,535 16,325 18,338 19,841
2,200,000 8,109 14,349 16,139 18,152
2,400,000 7,983 14,194 15,984 17,997
2,600,000 7,877 14,062 15,852
2,800,000 7,786 13,949
3,000,000 7,707 13,852
3,200,000 7,637 13,766
3,400,000 7,576 13,691
6,000,000 7,153

* Fixed costs for premium coffees include private brand fixed costs.

Page 4
 Input - Other data

Exhibit 4
Year 2000 Sales Private Sales Premium Percent of total
(kilograms) (kilograms)
January 81,792 84,916 7.1% 5,280,230
February 103,680 107,640 9.0% 46466027.52
March 135,936 141,128 11.8%
April 86,400 89,700 7.5%
May 93,312 96,876 8.1%
June 57,600 59,800 5.0%
July 48,384 50,232 4.2%
August 38,016 39,468 3.3%
September 78,336 81,328 6.8%
October 150,912 156,676 13.1%
November 139,392 144,716 12.1%
December 138,240 143,520 12.0%

1,152,000 1,196,000 100.0%

average price 8.62 38.61

Page 5
 ASSUMPTION = the ending FG inventory in the 2000 BS is all private brand coffee

Beginning inventory Production Sales 2000 Actual Ending inventory

Sales Percent

January 174,000 500,000 426,000 7.1% 248,000

February 248,000 500,000 540,000 9.0% 208,000
March 208,000 500,000 708,000 11.8% -
April - 450,000 450,000 7.5% -
May - 486,000 486,000 8.1% -
June - 390,000 300,000 5.0% 90,000
July 90,000 500,000 252,000 4.2% 338,000
August 338,000 500,000 198,000 3.3% 640,000
September 640,000 500,000 408,000 6.8% 732,000
October 732,000 500,000 786,000 13.1% 446,000
November 446,000 500,000 726,000 12.1% 220,000
December 220,000 500,000 720,000 12.0% -

6,000,000 100.0%

ASSUMPTION = same monthly sales (in %) as 2000

maximum monthly production capacity = 500,
ending finished goods inventory = 0
 Sales + ending inventory

674,000
748,000
708,000
450,000
486,000
390,000
590,000
838,000
1,140,000
1,232,000
946,000

SALES + ENDING INVENTORY = PRODUCTION + BEGINNING INVENTORY

um monthly production capacity = 500,000 kg

finished goods inventory = 0
Strategy: Private-brand only BASIC SOLUTION GIVEN TO PARTICIPANTS

Price private brand 8,800

Income Statement 2001
(thousands of Italian liras) ASSUMPTIONS

Revenues 52,800,000 = 6 million kgs X 8,800 L (from ex. 2). Expected level of sales = 6 million kg
Private brand 52,800,000
Premium brand
Costs of goods sold 42,919,500 = COGS var = 39,600,000 = 6 million kgs X 6,600 L (from ex. 3). Expected level of sales = 6 million kg
+COGS fix = 3,319,500 = assumption in ex. 3
Gross margin 9,880,500
Marketing expenses - = assumption in ex. 2
R&D expenses 832,033 = 25% of actual R&D spending (saving assumption pg. 3)
Selling expenses 1,251,149 = 35% of actual selling costs (saving assumption pg. 3)
Administrative expenses 2,376,000 = 50% of actual administrative costs (saving assumption pg. 3)

Ebit 5,421,319
Interest expense 3,625,432 = see calculation of monthly cash flows. ASSUMPTION: excess cash (relative to the initial cash= 1,121,450) is used to repay debt as soon as it is available each month
same interest rate as in 2000
Ebt 1,795,887
Taxes (40%) 718,355
Net profit 1,077,532

Cash flow: Direct Method

Cash In Cash Out Add back Selling R&D Admin Interest(*) Taxes Monthy cash flow Monthly Debt (*) Interest
A/R A/R COGS COGS depreciation (calculated on average debt)
Private Premium Variable Fixed
35,000,000
January 1,328,026 5,597,280 3,300,000 276,625 249,475 104,262 69,336 198,000 318,750 2,907,807 32,092,193 305,509
February 1,226,650 3,300,000 276,625 249,475 104,262 69,336 198,000 292,268 (2,764,367) 34,856,560 304,856
March 1,216,512 3,300,000 276,625 249,475 104,262 69,336 198,000 317,444 (2,799,680) 37,656,240 330,192
April 3,748,800 3,748,800 2,970,000 276,625 249,475 104,262 69,336 198,000 342,941 3,785,911 33,870,329 325,701
May 4,752,000 3,207,600 276,625 249,475 104,262 69,336 198,000 308,462 287,342 549,848 33,320,481 305,958
June 6,230,400 2,574,000 276,625 249,475 104,262 69,336 198,000 303,454 2,954,197 30,366,284 290,002
July 3,960,000 3,300,000 276,625 249,475 104,262 69,336 198,000 276,550 (15,299) 30,381,583 276,620
August 4,276,800 3,300,000 276,625 249,475 104,262 69,336 198,000 276,689 301,362 30,080,221 275,317
September 2,640,000 3,300,000 276,625 249,475 104,262 69,336 198,000 273,945 (1,332,693) 31,412,914 280,013
October 2,217,600 3,300,000 276,625 249,475 104,262 69,336 198,000 286,082 (1,767,230) 33,180,144 294,129
November 1,742,400 3,300,000 276,625 249,475 104,262 69,336 198,000 302,176 431,013 (2,689,538) 35,869,682 314,423
December 3,590,400 3,300,000 276,625 249,475 104,262 69,336 198,000 326,670 (435,019) 36,304,700 (1,304,700) 328,651
36,929,587 9,346,080 38,451,600 3,319,500 2,993,700 1,251,149 832,033 2,376,000 3,625,432 718,355 (1,304,700) Yearly cash deficit 3,631,373
1,121,450 Initial cash
(1,304,700) Cash needed
ASSUMPTION
Taxes in Italy paid in May (40%) and Nov. (60%) ASSUMPTION
ASSUMPTION ASSUMPTION ASSUMPTION ASSUMPTION Each month we want to maintain the initial cash amount
90-day policy for brand retailers (private) Based on production plan with 0 ending inventory Costs are paid monthly Costs are paid monthly ASSUMPTION 2000 yearly average cost of debt 10.9%
30-day policy for premium clients Costs are paid monthly
Same monthly sales % as previous year
ASSUMPTION
2,593,700.00 +
Accounts receivable 2000 (AS IN BS EX. 1) 9,368,467 400,000.00 ARE FOR THE ADDITIONAL CAPACITY (EXPANSION FINISHED IN DECEMBER. 6 BILLION LIRAS ON 15 YEARS)
2,993,700.00 YEARLY DEPRECIATION
Accounts receivable 2001 19,641,600 249,475.00 MONTHLY DEPRECIATION

Cash: Indirect method

Net profit 1,077,532

Depreciation 2,993,700

Var in Inventory 1,148,400 ASSUMPTION No variation in A/P and raw materials inventory
Var in A/R (10,273,133) Ending FG Inventory = 0

Operating Cash flow (5,053,500)

Debt 1,304,700
Cash flow (3,748,800)
Beginning cash 1,121,450
Ending cash (2,627,350) ASSUMPTION Beginning cash = ending cash

Balance Sheet 2001

Cash -2,627,350 AP 487,331

Raw materials inventory 2,907,963 Credit line 26,304,700.49 ASSUMPTION We can increase our credit line to fund the cash deficit (negative operating cash flow)
Finished goods inventory 0 Other alternatives: increase the long term debt or the equity (in this case, beware of the decrease in the ROE)
AR 19,641,600
Property, plants and equipment (PPE) 42,374,000 Long term debt 13,748,800
Depreciation -12,267,080 Shareholders' equity 9,165,869
Depreciation of the year -2,993,700 Retained earnings of the year 1,077,532
Total assets 47,035,433 Total liabilities + equity 50,784,233
Strategy: Private-brand only

Price private brand 8,800

Income Statement 2001
(thousands of Italian liras)

Revenues 52,800,000
Private brand 52,800,000
Premium brand
Costs of goods sold 44,503,500 recalculated NEW ASSUMPTION

Gross margin 8,296,500

Marketing expenses -
R&D expenses 832,033
Selling expenses 1,251,149
Administrative expenses 2,376,000

Ebit 3,837,319
Interest expense 3,974,941 recalculated

Ebt (137,622) THE NEW STRATEGY BECOMES "NOT VIABLE"

Taxes (40%) -
Net profit (137,622)

ROE n.a.
ROA 8.37%
 We can not meet the unitary variable production cost target (we assume an increase by 4% vs. original estimate)

OMES "NOT VIABLE"

by 4% vs. original estimate)
Strategy: Private-brand only

Price private brand 8,800

Income Statement 2001
(thousands of Italian liras)

Revenues 52,800,000
Private brand 52,800,000
Premium brand
Costs of goods sold 42,919,500

Gross margin 9,880,500

Marketing expenses -
R&D expenses 1,664,065
Selling expenses 1,787,355
Administrative expenses 2,851,200

Ebit 3,577,880
Interest expense 3,974,842

Ebt (396,962)
Taxes (40%) -
Net profit (396,962)

ROE na
ROA 7.80%

Cash flow: Direct Method

Cash In
 A/R A/R
Private Premium

January 1,328,026 5,597,280

February 1,226,650
March 1,216,512
April 3,748,800
May 4,752,000
June 6,230,400
July 3,960,000
August 4,276,800
September 2,640,000
October 2,217,600
November 1,742,400
December 3,590,400
36,929,587 5,597,280

Accounts receivable 2000 (AS IN BS EX 9,368,467

Accounts receivable 2001 19,641,600

Cash: Indirect method

Net profit (396,962)

Depreciation 2,993,700

Inventory 1,148,400
A/R (10,273,133)

Operating Cash flo (6,527,995)

Debt 5,814,250
Cash flow (713,746) ASSUMPTION
Beginning cash 1,121,450
Ending cash 407,704

BS 2001

cash 407,704 AP
raw materials inv 2,907,963 credit line
fin good inv 0
AR 19,641,600
ppe 42,374,000 l-t debt
depr -12,267,080 SE
depr year -2,993,700 retained earnings of the year
Total assets 50,070,487 Total liabilities + equity
 NEW ASSUMPTIONS

= 50% of actual R&D spending (saving assumption pg. 3) vs.

= 50% of actual selling costs (saving assumption pg. 3)
= 60% of actual administrative costs (saving assumption pg. 3)

recalculated

THE NEW STRATEGY BECOMES "NOT VIABLE"

Cash Out
COGS COGS
Variable Fixed

3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
3,300,000 276,625
39,600,000 3,319,500

no variation in A/P
inventory = 0 at the end of the year

487,331
30,814,250

10,713,746
9,165,869
-396,962
50,784,233
= 25% of actual R&D spending (saving assumption pg. 3)
= 35% of actual selling costs (saving assumption pg. 3)
= 50% of actual administrative costs (saving assumption pg. 3)

Add back Selling R&D

depreciation

249,475 104,262 69,336

249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
249,475 104,262 69,336
2,993,700 1,251,149 832,033
Admin Interest Taxes Monthy cash flow Monthly Debt
 35,000,000
198,000 318,750 2,907,807 32,092,193
198,000 292,268 (2,764,367) 34,856,560
198,000 317,444 (2,799,680) 37,656,240
198,000 342,941 (292,889) 37,949,129
198,000 345,608 707,643 37,241,486
198,000 339,164 - 2,192,488 35,048,998
198,000 319,196 (57,945) 35,106,942
198,000 319,724 258,328 34,848,615
198,000 317,371 (1,376,120) 36,224,734
198,000 329,904 (1,811,052) 38,035,787
198,000 346,397 - (2,302,746) 40,338,532
198,000 367,369 (475,717) 40,814,250
2,376,000 3,956,136 - (5,814,250) Yearly cash deficit
1,121,450 Initial cash
(4,692,800) Net cash needed

ASSUMPTION 2000 average cost of debt 10.9%

(5,814,250)
Strategy: Private-brand only Ending FG inventory = Beginning FG inventory = 174,000

Price private brand 8,800

Income Statement 2001
(thousands of Italian liras)

Revenues 52,800,000
Private brand 52,800,000
Premium brand
Costs of goods sold 42,919,500

Gross margin 9,880,500

Marketing expenses -
R&D expenses 832,033
Selling expenses 1,251,149
Administrative expenses 2,376,000

Ebit 5,421,319
Interest expense 3,977,682

Ebt 1,443,637
Taxes (40%) 577,455
Net profit 866,182

Cash flow: Direct Method

Cash In Cash Out Add back Selling R&D Admin Interest Taxes Monthy cash flow Monthly Debt
A/R A/R COGS COGS depreciation
Private Premium Variable Fixed
35,000,000
January 1,328,026 5,597,280 3,300,000 276,625 249,475 104,262 69,336 198,000 318,750 2,907,807 32,092,193
February 1,226,650 3,300,000 276,625 249,475 104,262 69,336 198,000 292,268 (2,764,367) 34,856,560
March 1,216,512 3,300,000 276,625 249,475 104,262 69,336 198,000 317,444 (2,799,680) 37,656,240
April 3,748,800 3,300,000 276,625 249,475 104,262 69,336 198,000 342,941 (292,889) 37,949,129
May 4,752,000 3,300,000 276,625 249,475 104,262 69,336 198,000 345,608 288,727 418,916 37,530,213
June 6,230,400 3,300,000 276,625 249,475 104,262 69,336 198,000 341,793 2,189,859 35,340,354
July 3,960,000 3,300,000 276,625 249,475 104,262 69,336 198,000 321,850 (60,598) 35,400,953
August 4,276,800 3,300,000 276,625 249,475 104,262 69,336 198,000 322,402 255,650 35,145,302
September 2,640,000 3,300,000 276,625 249,475 104,262 69,336 198,000 320,073 (1,378,822) 36,524,124
October 2,217,600 3,300,000 276,625 249,475 104,262 69,336 198,000 332,630 (1,813,779) 38,337,903
November 1,742,400 3,300,000 276,625 249,475 104,262 69,336 198,000 349,149 288,727 (2,594,225) 40,932,128
December 3,590,400 3,300,000 276,625 249,475 104,262 69,336 198,000 372,775 (481,123) 41,413,251 (6,413,251)
36,929,587 5,597,280 39,600,000 3,319,500 2,993,700 1,251,149 832,033 2,376,000 3,977,682 577,455 (6,413,251) Yearly cash deficit
1,121,450 Initial cash
NEW ASSUMPTION FG ending inventory = 174,000 (no variation from year 2000) (6,413,251) Cash needed

ASSUMPTION 2000 average cost of debt 10.9%

Accounts receivable 2000 (AS IN BS EX. 1) 9,368,467

Accounts receivable 2001 19,641,600

Cash: Indirect method

Net profit 866,182

Depreciation 2,993,700

Inventory - NEW ASSUMPTION FG ending inventory = 174,000 (no variation from year 2000)
A/R (10,273,133)

Operating Cash flow (6,413,251)

Debt 6,413,251
Cash flow (0)
Beginning cash 1,121,450
Ending cash 1,121,450

BS 2001

cash 1,121,450 AP 487,331

raw materials inv 2,907,963 credit line 25,000,000
fin good inv 1,148,400
AR 19,641,600
ppe 42,374,000 l-t debt 10,000,000
depr -12,267,080 SE 15,579,120
depr year -2,993,700 retained earnings of the year 866,182
Total assets 51,932,633 Total liabilities + equity 51,932,633
 Select strategy

Strategy: Private-brand and Premium-brand

from Exhibit 3
Unit cost (lires) 6,600 12,485 14,275 16,288 17,791
Fixed costs (th of lires)* 3,319,500 4,100,500 4,100,500 4,100,500 4,100,500

Quality D C B BB A
Prices per kilogram 8,800 19,500 26,600 30,000 35,500
Margins including
advertising (*)
0% 9,880,500 12,700,425 16,174,125 16,865,148 15,432,527
1% 12,642,600 16,351,564 16,902,692 15,769,830
2% 12,760,125 16,191,715 17,521,188 16,740,274
3% 13,035,450 17,754,692 18,448,620 18,102,596
4% 13,357,500 18,691,764 19,472,108 19,616,284
5% 13,717,500 19,714,670 20,592,164 21,250,494
6% 14,194,350 21,295,043 21,593,684 22,742,117
7% 13,956,900 21,188,571 21,387,840 23,180,908
8% 13,726,440 20,841,362 21,136,572 23,005,687
9% 13,310,100 20,379,415 20,764,596 22,561,718
10% 12,816,600 20,004,010 20,387,132 21,994,537

(*) This is the contribution margin (volume from exhibit 2 times unit margin) minus the fixed costs minus the advertising expense

The alternative in the yellow cell/bolded margin is chosen in this example for a mixed strategy. It is c
=1792000 KG X (35,500-17,791) - 4100500000 - 1792000 KG X 35,500 X 7%
You can start from this alternative if you want to build a business plan for a mixed strategy

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 Select strategy

19,166 20,441
4,100,500 4,100,500

AA AAA
39,000 42,600

9,128,778 (1,286,307)
9,840,848 (688,419)
11,123,646 778,803
12,883,740 2,685,825
14,794,816 4,756,515
16,859,548 6,975,537
18,764,158 8,974,701
18,904,380 9,208,338
18,730,824 10,000,252
20,303,880 11,933,875
20,166,982 12,635,065

costs minus the advertising expense

mple for a mixed strategy. It is chosen because it gives the highest contribution, calculated as

or a mixed strategy

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Select strategy

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