MANAGERIAL ACCOUNTING

Group Assignment
On

“CASE ANALYSIS- CAFÉS MONTE

BLANCO:
BUILDING A PROFIT PLAN”

POST GRADUATE DIPLOMA MANAGEMENT

PGDM (M); Term –II; Batch 2019-21
Under the Supervision of
CA RAVI AGGARWAL

Submitted by:
AYUSH JAIN (PGMA1946)
VIPUL TUTEJA (PGMA1947)
AAISHIK SEN (PGMA1948)
VICTOR PAUL (PGMA1949)
MILIND PANT (PGMA1950)

NOVEMBER, 2019
Introduction of Company
Cafes Monte Bianco is a luxury coffee maker and retailer founded in Milan. Monte Bianco
coffee products have a reputation as the best coffee in mainland Europe and are marketed
throughout Europe. Mario Salvetti, who previously worked in a coffee farm in South America,
founded the company Cafes Monte Bianco at the beginning of the century, and finally went to
Italy to open a coffee mill. The taste and quality of Monte Bianco Coffee soon became famous in
Milan. The initiative was transferred to the Salvetti estate, and finally to the great-grandson
Giacomo Salvetti of Mario Salvetti.
They has been a huge expansion in capacity in the last five years by constructing complex and
costly facilities. The performance of the company displayed outstanding results during 2000. The
production of private brands on two supermarkets in Italy was one of the reasons for this
achievement. In fact, some retailers contacted Giacomo to request the delivery of coffee on their
own private brand label. The organization has a balance between private label and luxury coffee
production capacity, though. The total volume of output for 2000 is 350,000 kg per month. An
added capacity of 150.000 kg is possible with the new expansion completed in December 2000.
The management and Giacomo addressed how manufacturing capacity could be distributed. The
management approaches are divided up into two: on one side the complete transition to private
brand production and on the other side the production of premium coffee. The private label
strategy-sharing groups say this is a more stable market sector. Full production capacities are
available at a price of 8,800 liras. Fixed costs may also be lowered by 781 million liras if the
business only manufactures the private label. The manufacturing strategy is also more simple
because the warehouse will hold private brand coffee, whereas branded coffee cannot be kept in
storage due to quality issues. Many cost savings can be made, such as selling 65% saving R&D
expenses, 75% saving and 50% saving administration costs. But this private label approach has
its drawbacks. Private label consumers are to compensate for more liabilities (from the normal
30-day period 90 days). At the end of the year, the company will thus be in full line of credit (25
billion liras) due to lower summer orders. A dilemma has taken Giacomo and the consequences
of this private brand strategy were clearly and comprehensively illustrated.

CASE ANALYSIS
The decision to determine the next strategy is a difficult one for Café Monte Bianco (CMB). You
have to choose either to continue with the present mix of private and high-quality coffees or to
change all private brand coffee to a lower cost. Giacomo is worried about how Giacomo
perceives the business to turn to all private labels, but he's ready to explore this path if it's in the
best interest of the company. As they grow quickly, they need to identify the best strategy. Both
scenarios have advantages and disadvantages. Only private companies could create a market that
would be constant, full capacity could be used, stock retained and cost savings significant.
Nonetheless, because of the lag in compensation from distributors, the cash flow is negative and
the profit profits are far less than that of the premium brand.

Based on taking on private brands only, CMB’s financials would look as follows:
Profit Wheel:

SALES PLAN 2001 FOR PRIVATE BRAND ONLY

MONTH SALE PRIVATE SALES (%) SALES REVENUE

JANUARY 426000 7.10 3748800000
FEBRUARY 540000 9.00 4752000000
MARCH 708000 11.80 6230400000
APRIL 450000 7.50 3960000000
MAY 486000 8.10 4276800000
JUNE 300000 5.00 2640000000
JULY 252000 4.20 2217600000
AUGUST 198000 3.30 1742400000
SEPTEMBER 408000 6.80 3590400000
OCTOBER 786000 13.10 6916800000
NOVEMBER 726000 12.10 6388800000
DECEMBER 720000 12.00 6336000000
TOTAL 6000000 100 52800000000

The 2001 sales rate, which rely solely on private brand coffees, fell by 5.9%, as this product
could generate a turnover only of 52,800,000 liras , compared with the levels of preceding year
product sold (which included private brand coffee and premium coffee), which reached
56,112,408,000 liras.
Many primary conclusions about the subsequent benefit development input are not sequential,
and management will reboot right from the start to check if the enhancement planner
parameters are matched to the strategic business and economically desirable. Profit planning
remains linear and shows a positive outcome. The summary of earnings or the projected
income report below is as follows:-

The projected income statement for the year 2001, based on exhibit 5 (for Private Brand only)
(all numbers are in thousand Italian liras)
 INCOME STATEMENT FOR YEAR END DECEMBER 2000 vs 2001 (PRIVATE
BRAND ONLY)
(Thousand Italian Liars)
2000 2001 Change
Private Brands 9934848 52800000 42865152

Premium Brands 46177560 -46177560

Revenue 56112408 52800000 -3312408

Cost of Goods Sold 33233867 42918000 9684133

Gross Margin 22878541 9882000 -12996541

Marketing Expenses 4155980 0 -4155980

R&D Expenses 3328130 832033 -2496097

Selling Expenses 3574710 1251149 -2323561

Administrative 4752000 2376000 -2376000

Expenses
Internet Expenses 3825000 3825000 0

Profit 3242721 1597818 -1644903

Taxes (40%) 1297088 639127 -657961

Net Profit 1945633 958691 -986942

On the basis of the above chart, although it indicates positive results (which still produces
profit), the option of applying 100 percent transfer strategy for private label coffee is shown,
however, relative to the financial variables for the previous year. This is because if you look at
productivity, you have a higher profitability ratio than the fresh (only based on the brand coffee
market), which is the old strategy (selling branded coffee and private brand coffee items
jointly):
old strategy profitability = 1,945,633,000 or equal as 3.47% of sales level
new strategy profitability = 958,691,000 or equal as l.82% from the sales level.
Then, with 100% strategic sales of private brand coffee, the company achieved a profit of
986,941,000 liras or 5.73%.

CASH WHEEL
 CASH PLAN 2001, PREPARED USING EBITDA
( IN THOUSANDS OF ITALIAN LIARS)
Cash from operation activities
Profit after Tax 958691
Tax Payment 639128
Interest Payment 3825000
Add: Depreciation & other non- 2993700
cash expenses
EBITDA 8416519

Changes in Working Capital

Decrease in account receivables 553036
Decrease in Inventory 4056363
Decrease in account payable (487331)
4122068
Cash Flow From Operating 12538587
Activities

Cash From Investment activities

Investment in new assets 0

Cash from financing activities

Pay back debt 0
Additional borrowing required 0
Tax payment (639128)
Interest payment (3825000)
(4464128)
Total Cash flow 8074459
Cash at the beginning of the year 1121450
Cash at the end of year 9195909

The above estimate indicates that the company receives net cash income of 8,074,459,000 lira
if it follows the 100 per cent approach to market private flagship goods in 2001. It is important
to note that there was no significant event in expenditure in 2001 and that there was enormous
amount of money invested, as there was in 2000.
The cash flow of the business is smaller because payroll receivables are late due to a 90-day
billing schedule with private label distributors. If reported in money, this damages the credit
line of the business and at the end of the year, it will break the credit line. If a corporation
depends on more loans than on money, the company's profit will be challenging. If you do not
adjust your plan and stick to your current approach, it would be wise to do so because the 30-
day payment schedule for premium brand stores would provide you with better cash flow. It
also protects the company's credit line and it provides more money.

ROE WHEEL
The company's shareholders must supervise their investment returns well. This is because the
company's ability to benefit from their assets relies on its share prices and dividend payments..
Return on Investment (ROI) is one of the instruments used to measure investor investment
returns. The manager uses internal measurements to estimate the investor's capital return on
investment, i.e. Capital Return (ROE).
Of ROE plates, such as ROE, ROCE, Working Capitals Turn Over or Changes Resource Turn Over,
measurement of the accounting factors needed information, in particular the balance sheet and
the income report. Since the 2001 balance sheet does not yet appear, we will present the
Balance sheet for 2000 and 2001 as following based on the estimates and measurements we
made in benefit wheel and money wheel:

BALANCE SHEET AS AT DECEMBER 2000 & 2001

(in Thousands of Italian Liras)
Assets 2000 2001
Cash 1211450 9195909
Raw Material Inventory 2907963 0
Finished goods(174000 1148400 0
kg)
9368467 8815431

Property, plant & 42374000 42734000

equipment
Depreciation (12267080) 30106920 (15260780) 27473220
44653200

Liabilities and 2000 2001

Shareholders’ Equity
Accounts payable 487331 1318691
Credit Line 25000000 25000000
Long Term Debt 10000000 10000000
Shareholders’ Equity 9165869 9165869
44653200 45484560

The next step is to calculate the accounting variables in ROE Wheel following that our financial
data report shows the Variables calculation is as follows:
 Variable Summary Value by Year 2000 Value by Year 2001

ROE Net Income/ shareholder’s 0.21 0.10

equity
Year 2000 =
1945632.6/9165869
Year 2001 =
958690.8/9165869
ROCE Net Income/ Capital 0.06 0.03
Employed
Year 2000 =
1945632.6/34165869
Year 2001 =
958690.8/34165869
Working Capital Sales/ (Current assets- 3.99 3.16
Turn Over current liabilities)
Year 2000= 56112408
/(14546280-487331)
Year 2001 = 528000000
/(18011340-1318691)
Fixed Asset Turn Sales / Property, plant & 1.32 1.25
Over Equipment
Year 2000 = 56112408/
42374000
Year 2001= 528000000/
42374000

The table above shows that all of those variables are more profitable and attractive for
investors than the new approach, i.e. only the sale of private branded coffee products and
premium coffee together, indicated in 2000. That is because ROE, ROCE, work capital shifts and
fixed asset shifts are more important than the new strategy in the older strategy.
As shown in the previous equation, if you only change your plan to private labels, the ROE will
become less. Their return on equity, productivity, capital revenues and economic leverage
factors are rising thanks to the new future approach. When I made calculations, I took the book
expansion as an asset, as well as the expansion debt, since nothing was said about how the
expansion would be payable or what the current long-range debt was. The expanded efficiency
and the capability of keeping coffee as private label stock was anticipated to raise the asset
sales ratio.

CONCLUSION
 1. Because of very small margins / units of new products the complete expansion into new
products has caused losses (100 percent). Even if no full capacity is used, the business
would lose just approx. 1500,000 kg, because manufacturing costs are higher than sales.
To order to achieve optimum benefit, the company needs to increase the maximum
level of production capacity (6,000,000 kg per year). This is enough to cover the funds of
the company. If there are no sufficient funds available to expand its production capacity,
interest will be borne by the company for additional expansion financing. These
expenses will further reduce the profit of the company
2. When the new approach was used, the business remains short of working capital owing
to the private brand coffee product's tax receivable set, 90 days to 60 days longer than
the prime coffee consumer. The business could has a cash flow shortfall and need new
loans that increase interest rate payments and boost new loans.
3. Premium coffee is a high margin producer for the company and the private branded
coffee product is simply a supplement to the product distinctive strategy and does not
become the core competence and benefit of the company. The management still should
keep premium coffee products.
4. Because of the stock system new products need not just be sold in time, like premium
coffee, the stock turnover of the company should be increased. Automatic inventory
balances must be added to the working capital in order to be supported by corporate
funding.

D C B BB A AA AAA
Sales per unit 8800 19500 26600 30000 35500 39000 42600
Variable Cost Per Unit 6600 12485 14275 16288 17791 19166 20441
contribution margin 2200 7015 12325 13712 17709 19834 22159