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Project Case - Brannigan Foods - Financial Calculations

Tipha proposes increasing advertising spending by $18 million which is projected to increase sales by $41 million based on Clark's forecast. However, the gross profit margin on the new products is only 29% compared to the division's average of 45%. The acquisition of Red Dragon Foods at 7 times EBITDA of $4.2 million would cost $29.4 million. In the first year, Red Dragon is projected to have a net loss of $3.8 million even after accounting for sales growth projections over 5 years. Chong projects $89.19 million in new sales from a 3% growth in new products. The incremental gross profit from new ready-to-eat flavours is estimated

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398 views2 pages

Project Case - Brannigan Foods - Financial Calculations

Tipha proposes increasing advertising spending by $18 million which is projected to increase sales by $41 million based on Clark's forecast. However, the gross profit margin on the new products is only 29% compared to the division's average of 45%. The acquisition of Red Dragon Foods at 7 times EBITDA of $4.2 million would cost $29.4 million. In the first year, Red Dragon is projected to have a net loss of $3.8 million even after accounting for sales growth projections over 5 years. Chong projects $89.19 million in new sales from a 3% growth in new products. The incremental gross profit from new ready-to-eat flavours is estimated

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Project case – Brannigan Foods – Financial calculations

Quantitative Analysis of Tipha’s proposal: All numbers in millions


Proposed increase in advertising and promotion $18
Tipha’s projected increase in sales from Clark’s forecast(*) 41
Projected profit decrease ($303-297 in the case) -6
Incremental margin of increased sales, based on $18 adv/promo overspend 12
(*) transfer into your excel file
Tipha’s product lines, cited in his email, account for $445m in sales. His projected increase is very
siginificant when Clark is forecasting a decrease in sales overall.
The numbers above indicate that the gross profit margin on the new products is only 29% (12/41)
compared to the 45% gross profit margin for the division overall.

Quantitative analysis of Red Dragon Foods Acquisition, Mackey’s favorite ($ millions).


Red Dragron EBITDA $4.2
Acquisition price at 7 times EBITDA 29.4
Debt service at 4% 1.17
Assume 10-year amortisation 2.9

Red Dragon Foods (RDF) present sales 36


RDF gross margin 45% - given in case 16.2
Advertising/promotion at 30% of sales - case 10.8
Cannibalisation of sales 0.3% x 2,973 = 8.9 8.9%
Cannibalised gross profit margin 45% x 8.9 = need to do the 4
calculation
Interest and Amortisation 4
Net earnings for RDF first year -3.8

Five-year sales projection – low growth at 1.5% 44.5


Gross profit for low growth Year 5 20
Five-year sales projection – growth adds 3.5% to sales 104
Gross profit 46.8

Chong – Quantitative analysis of new product investments ($ millions)


Growth of 3% of sales from new products – Chong’s email $2,973 x 0.03 = $89.19

Incremental gross profit from price increase for new RTE flavours – Clark’s 12
estimate (case p.6)
Advertising increase of 6%*$170 adv. in 2013 for the new RTE flavours to 10.2
achieve earnings increase (check this number)
Add the incremental net earnings to the increase in advertising to get total 22.6
gross profit for the new RTE flavours.

Assume a 45% gross profit margin for the new RTE flavours consistent with
average GM.
Calculate total sales from new RTE flavours $22.6/0.45 50
Pugh – Quantitative analysis of investing in the core
Price adjustment – take a $0.05 price decrease on core items
Core canned and RTE soups = 64% of division sales
Wholesale cost per can $1.14 (case footnote on p.7)
Number of cans sold in core products $2,973 x 0.64 / 1.14 1,669 cans
Gross profit per core products now $2,973 x 0.64 x 0.45 $856
Gross profit per can 0.51
Cost of goods – variable costs per can 0.63
Gross profits per can with $0.05 lower selling price 1.09 – 0.63 0.46

Gross profit if low forecast occurs 1,800 cans x 0.46 828


Gross profit if high forecast occurs 2,000 cans x 0.46 920

High forecast requires an increase of 19.8% in unit volume

Justifications, courses with numbers


Marketing metrics

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