Framing and Analyzing Business Problems I

Homework 12: Team Assignment

Liquid Gold (A) Case – Darden

DeSilva Cohort

Team #3:

• Ketan Patel
• Kyle Struble
• Mario Giuseppe Fogliati
• Preet Joban Singh Sidhu
Liquid Gold (A) Case ‐Darden
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Carefully read the Liquid Gold case study. Download the associated
spreadsheet of the cash flow analysis. Perform sensitivity analysis on the
parameters of the spreadsheet model. Identify the four parameters whose
uncertainty you think are most important to capture in any risk analysis of
the Calambra business plan.

Do not create a simulation model. That will come later. Try to give an
intuitive explanation why the parameters you identified are the ones
whose uncertainty is most important.

This homework should be submitted in the form of a short report. This

means there should be a word document with complete sentences
explaining your results. The document should include any supporting
diagrams. The spreadsheet used to generate your conclusions should be
attached as well.
Don’t be sloppy.

The Liquid Gold case discusses the uncertainties involved in the businesses related
to agriculture. In this case, the income generated by the sales of Calambra Olive oil
depends on various factors involved in its production process. By performing the
sensitivity analysis on the given data, we can identify the impact of each of these
factors on the final output.
From the tornado sensitivity chart obtained we observe that the four major
parameters adding to the riskiness of the business are revenue per case sold,
broker take after 1993, demand in 1994, and cost of supplies. This is based on the
sensitivity of the company’s profit to each of the parameters as shown in Chart 1.

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 Chart 1

Chart 2

According to the Tornado sensitivity analysis, revenue per case sold has a far
greater impact on the profit margins and thus the riskiness of the Calambra
business plan than any other potential parameter. As can be seen from the chart 2
above, as the revenue per case increases from $130 to $170, the profit for the
business also takes a leap from $33,468 to $83,468. Such a dramatic jump in the
profit margins over a small increase in the revenue per case makes it the most
influential parameter of all.

Chart 3

After the revenue per case sold, the broker commission after 1993 is the second
most influential parameter to add to the riskiness of the business plan. Intuitively,
since the broker plays a very important role in getting the customers for the
Calambra olive oil, his/her importance cannot be ignored for the business to
succeed. This is also proved from the observations from chart 3 which shows that
with the increase in broker take after 1993 from present value of 10% to 25% there
is a significant drop in the profits for the business from $76,870 to $46,870.

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 Chart 4

Based on the level of demand, we can determine that as demand increases so does
the company profit. For the first 200 bottles demanded, the company would take a
loss due to the overall costs associated with production and distribution. As the
level of demand increases, profit increases up until we reach the actual level of
demand (1150) where the profit margin remains constant. The demand is crucial to
the determination of how many cases to order for 1994 and with the overwhelming
increase in the considered supply for 1994, coupled with 1993 leftover bottles, the
overall demand in 1994 is directly correlated with the expected profit margin. Thus,
its sensitivity to profit is crucial when considering the overall riskiness of the
Calambra business plan.

Chart 5

Cost of supplies is crucial to determine the level of profit the company will receive
on its sales. According to the tornado chart, there lies a correlation between the
profit and cost of supplies where the lower the profit the higher the cost of supplies.
Similar to the last chart with profit vs. demand, cost of supplies has a direct
correlation to how much profit the company will receive. The assumption is, based
on the ranges given, the cost of supplies decreases as the demand for Olive Oil
increases, thus reducing the production cost which increases profit. This data can
provide crucial information about Calambra's potential risks associated with the cost
of supplies and can assist the company in determining how much supply to order
that would yield its optimal profit based on demand.

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