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10.4Projecting Gross Profit: The Effects of Volume versus Price. Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competit
10.4
Projecting Gross Profit: The Effects of Volume versus Price. Suppose you are analyzing a firm that is successfully executing a strategy that differentiates its products from those of its competitors. Because of this strategy, you project that next year the firm will generate 6.0 Percent revenue growth from price increases and 3.0 percent revenue growth from sales volume increases. Assume that the firm’s production cost structure involves strictly variable costs. (That is, the cost to produce each unit of product remains the same.) Should you project that the firm’s gross profit will increase next year? If you project that the gross profit will increase, is the increase a result of volume growth, price growth, or both? Should you project that the firm’s gross profit margin (gross profit divided by sales) will increase next year? If you project that the gross profit margin will increase, is the increase a result of volume growth price growth, or both?
10.9
Store-Driven Forecasts. The Home Depot is a leading specialty retailer of hardware and home improvement products and is the second-largest retail store chain in the United States. It operates large warehouse-style stores. Despite declining sales and difficult economic conditions in 2007 and 2008. The Home Depot continued to invest in new stores. The following table provides summary data for The Home Depot.
The Home Depot (amounts in millions except number of stores)
2007
2008
Number of Stores
2,234
2,274
Sales Revenues
$77,349
$71,288
Inventory
$11,731
$10,673
Capital Expenditures, net
$3,558
$1,847
Required
a. Use the preceding data for The Home Depot to compute average revenues per store, capital spending per new store, and ending inventory per store in 2008.
b. Assume that The Home Depot will add 100 new stores by the end of Year +1. Use the data from 2008 to project Year +1 sales, revenues, capital spending, and ending inventory. Assume that each new store will be open for business for an average of one-half year in Year +1. For simplicity, assume that in Year +1, Home Depot’s sales revenues will grow, but only because it will open new stores.
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