big macs decision

big macsdecision

Resources for Courses

Michael McDonald (Mac), owner of Big Macs Burgers Ltd is looking at ways to increase revenue. He is trying to decide whether to increase his advertising or launch a new type of burger, theMagic Mac. He has decided to use a decision tree to assist him in the decision making process.

Increase Advertising

If Mac increases his advertising, there is a possibility that this could result in a big impact on sales(high) or a smaller impact on sales (low).

The expected value of high sales is £21,000. The probability that sales will be low is 0.3. The (total)expected value of increasing his advertising is £25,500 and the cost of increasing advertisingwould be £10,000.

BUSINESS

SAM

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big macs decision Resources for Courses

Question 1How much revenue would Mac receive if there was a smaller (low) impact on sales?

Question 2How much revenue would Mac receive if the increase in advertising had a big (high) impact on sales?

Question 3If the Magic Mac is in low demand, what would the forecasted revenue be?

Launch a New Type of Burger – The Magic Mac

The cost of launching the Magic Mac is £3,000. Mac forecasts that if the burger is in high demand then the revenue will be £10,000. The probability of the Magic Mac being in high demandis 0.6. If the Magic Mac is in low demand then the expected value would be £2,800.SA

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thethethethetheMagicmac


Question 4What is the net gain of the Magic Mac?

Question 5Draw a Decision Tree based on the information above. Calculate the expected value of eachoutcome, total expected value of each decision and the net gain for each decision.

SAM

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thethethethetheMagicmac


Big Macs Decision – Answers

Question 1 How much revenue would Mac receive if there was a smaller (low) impact on sales?

£15,000

Broken down as follows:£25,500 - £21,000 = £4,500 / 0.3 = £15,000

Question 2 How much revenue would Mac receive if the increase in advertising had a big (high)impact on sales?

£30,000

Broken down as follows:£21,000 / 0.7 = £30,000

Question 3 If the Magic Mac is in low demand, what would the forecasted revenue be?

£7,000

Broken down as follows:£2,800 / 0.4 = £7,000

Question 4 What is the net gain of the Magic Mac?

£5,800

Broken down as follows:£2,800 + (£10,000 x 0.6) - £3,000 = £5,800

SAM

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Question 5

INCREASEADVERTISING

High

0.7

Low

0.3

High

0.6

Low

0.4

LAUNCH THEMAGIC MAC

£10,000

£3,000

DO NOTHING

£30,000

£15,000

£10,000

£7,000

£0

Increasing Advertising

High Demand: Expected Value 0.7 x £30,000 = £21,000Low Demand: Expected Value 0.3 x £15,000 = £4,500Total Expected Value £25,500Net Gain £25,500 - £10,000 = £15,500

Launch the Magic Mac

High Demand: Expected Value 0.6 x £10,000 = £6,000Low Demand: Expected Value 0.4 x £7,000 = £2,800Total Expected Value £8,800Net Gain £8,800 - £3,000 = £5,800

SAM

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SAM

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Resources for CoursesDicing with Markets

Teacher InstructionsThis resource will help your students understand the concept of market size, marketgrowth and market share and provide opportunity to practice the calculations involved. The resource also allows students to consolidate their understanding ofindex numbers. An extension activity has also been provided which consolidates students understanding of fractions and constructing a graph.

Resources Needed

To complete all three activities you will need:• A dice per pair• A calculator per pair• A Dicing with Markets sheet per pair• A copy of the dicing with markets question sheet for each student

Teaching and Learning Strategy

Below is a suggested order for their use. Group size can be amended for this activitydepending on how many students you have, however this example assumes threepairs working as a group of six. These activities are likely to work best when studentshave some basic understanding of market share, size and growth and index numbersbut perhaps need practice with the calculations.

1 Give each pair a ‘Dicing with markets’ sheet and a dice. They will also need a penand a calculator.

2 Explain that each pair of students represent a business. This business is competingagainst two other businesses and together, the three firms represent the wholemarket. Label each pair Company A, B and C. Their aim is to be the largest company in their industry.

3 Students are to roll the dice. This represents the number of units they have sold that year, in thousands. They should record this number, in thousands, on their sheet next to the relevant company name (A,B or C) for 2012.

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4 They should then roll the dice to decide what price they charged and record thisin the appropriate box. Students should then calculate their firm’s revenue.

5 Students should compare with the two other businesses in their group and transfer their data over. They can now work out the size of the market for 2012 by volume and by value.

6 You can now proceed to do the same for 2013 and 2014 or complete the marketshares for 2012 first.

7 Students should complete the market size and share data for all years. They cannow calculate their market growth rates as well.

8 Once the students have calculated the market growth they can then complete theindex number calculation on the sheet. Teachers may want to remind studentsthat they must use the base year.

9 An extension activity has also been provided which can be used to consolidatestudents understanding of fractions. Students transpose key information from the sheet, Dicing with markets calculation sheet 1 and then use the information to calculate the fraction of the total market by volume and value represented byeach company as well as average sales by volume and value.

10 If time permits, or perhaps for homework (however see below) the teacher couldask students to construct a graph illustrating parts of the activity, for example:a A line graph of the revenue for all 3 companies over the 3 year periodb A bar chart of the revenue of all 3 companies over the 3 year periodc A pie chart illustrating market share by volume/ value for any of the years

11 Students can then complete the question sheet, perhaps as a homework, a test,or in pairs in class.

Dicing with Markets

SAM

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SAM

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2012

Company A

Company B

Company C

Total market size by volume

Total market size by value

Number ofunits sold

PriceCharged

TotalRevenue

Index 100

Index 100

Market Share by Volume

Market Share by Value

2013

Company A

Company B

Company C



Number ofunits sold

PriceCharged

TotalRevenue



2014

Company A

Company B

Company C



Number ofunits sold

PriceCharged

TotalRevenue



Market grow

th by volume (2012-2013)

Market grow

th by value (2012 – 2013)

Market grow

th by volume (2013-2014)

Market grow

th by value (2013 – 2014)

calculation sheet 1

Index

Index

Index

Index

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2012

Company A

Company B

Company C



Average by volume

Average by value

Number of units sold Total Revenue Fraction of total market by volume

Fraction of total market by value

calculation sheet 2

2013

Company A

Company B

Company C



Average by volume

Average by value



2014

Company A

Company B

Company C



Average by volume

Average by value



SAM

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SAM

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According to the society of motor manufacturers and traders:• In 2012 2,044,609 new cars were sold, an increase of 5.3% compared to the previous year.

By 2013 this figure had risen to 2,264,737 new cars.

• In 2013, the specialist sports segment of this market, 46,127 cars were sold, 6,668 of whichwere Mercedes-Benz SLK. Audi TT captured 13.4% of this market segment..

Questions1 Calculate the market growth from 2012 to 2013.

2 Using your data, is the market being measured by volume or by value?

3 How many new cars were sold in 2011?

4 In the specialist sports segment, what was the market share of the Mercedes-Benz SLK?

5 How does your answer above change, when you look at the share of Mercedes-Benz SLK for the whole car market?

6 How many Audi TTs were sold in 2013?

SAM

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Questions1 Calculate the market growth from 2012 to 2013.

220128/2,044,609 x 100 = 10.8%

2 Using your data, is the market being measured by volume or by value?

Volume – quantity of new cars sold

3 How many new cars were sold in 2011?

2011 = 100% 2012 = 105.3% 1% of 2012 = 19416

Number of cars sold in 2011 = 1941699

4 In the specialist sports segment, what was the market share of the Mercedes-Benz SLK?

6668 / 46,127 = 14.5%

5 How does your answer above change, when you look at the share of Mercedes-Benz SLK for the whole car market?

It falls to 0.3%, a fall of 14.2 percentage points

6 How many Audi TTs were sold in 2013?

1% of the market equals 461.27 cars. 13.4% is therefore 6181 carsSA

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Teaching

budgets

BrideDon’t tell

the


SAM

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Don’t tell the BrideResources for Courses

Teachers InstructionsDon’t tell the bride is an activity used to introduce students to the concept of budgetingas well as allowing students to perform some basic variance analysis.

The activity involves telling students that their only daughter is getting married andas a surprise they have offered to pay for everything. Working together studentsneed to come up with a wedding budget, identifying all the items that would need to be included.

There are two different teaching and learning strategies that can be carried out withthe students.

Teaching and Learning Strategy 11 Put the class into small groups or pairs

2 Tell the class that they need to discuss and list all the items that would need to be included/ paid for when planning a wedding. At this stage students DO NOTneed to put a value next to each item. This gets students thinking about whatwould be included in a wedding budget

3 After this activity has taken place the teacher collates the group’s responses andleads a discussion with the students about what should be included. Invariablystudents miss key areas out which allows the teacher to illustrate one of the key reasons why budgets are often inaccurate.

A ‘wedding planner’ has been provided which covers the key areas that should be included. This could be given to the students to compare and contrast with what they came up with.

Teaching and Learning Strategy 2This activity can be done individually or in pairs/ small groups

1 Give each student/ pair/ group a copy of the average wedding cost card

2 Students need to decide the average cost of the items on the card/ how much they would budget for in relation to the selected items on the card

3 Once students have entered their amounts the teacher then reveals the actual amount/ average cost of eachitem

4 The teacher can then introduce the concept of variance analysis. From here the students can work out the variance per item and then the total variance.

SAM

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Apparel

Gown

Bridal Shoes

Bridal slip

Lingerie

Hosiery

Jewelry

Bridal Headpiece/veil

Bridal gloves

Bridesmaid dresses

Bridesmaid accessories

Bridesmaid shoes

Groom's tux

Groomsmen tuxes

Garters

Gown preservation

Alterations

Going-away outfit

Honeymoon clothes

Children's apparel

Flowers

Brides bouquet

Bridesmaids bouquets

Corsages

Boutonnière

Reception centerpieces

Altarpiece

Pew/chair bows

Throw away bouquet

Flower girls' flowers

Stationary

Invitations

Announcements

Map/direction cards

Reply cards

Ceremony cards

Save the date cards

Postage

Calligrapher

Newspaper announcement

Thank you notes

Rehearsal dinner invitations

Bridesmaid luncheon invitations

Bachelor party invitations

Wedding programs

Address labels

Reception

Location fee

Caterer

Food

Baker

Musician

Bar tender

Liquor

Security

Wedding cake

Groom's cake

Cake knife

Cake decorations

Servers

Table decorations

Other decorations

Dishes

Glassware

Napkins

Linens

Tables

Chairs

Guest book

Entertainment

Rice/Rose petals/bubbles

Parking

Gratuities

Limousine/Carriage

Transportation

Childcare

Balloons

Gifts & Favors

Attendant gifts

Gift for fiancee

Favors

Miscellaneous

Marriage license

Bridesmaids' luncheon

Hairdresser

Manicure/pedicure

Manicure/pedicure for attendants

Make-up

Wedding planner/organizer

Consultant/coordinator

Hotel for guests

Ceremony

Clergy

Location fee

Altar decorations

Chair/pew rental

Pew/chair decorations

Guest book/pen

Ring bearer pillow

Flower girl basket

Unity candle

Aisle runner

Ushers

Gratuity

Transportation

Childcare

Rehearsal dinner

Caterer

Bartender

Liquor

Tables/chairs

Decorations

Security

Music

Sound system

Guest parking

Dishes

Centerpieces

Linens

Food

Servers

Photography / Videography

Bridal portraits

Reception

Ceremony

Photo albums

Engagement portraits

Videography

Rings

Wedding bands

Engagement ring

Engraving

Honeymoon

Air fare

Accommodations

Rental Car

Entertainment

SAM

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Budget (£) Actual (£) Variance (£)Item

Wedding Dress

Honeymoon

Rings

Wedding Cars

Flowers

Photography

Bridesmaids outfits

Wedding Cake

Invitations (75 guests)

Reception (75 guests)

Total

Don’t tell the Bride

SAM

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Budget (£) Actual (£) Variance (£)Item

Wedding Dress 1,340

Brides Shoes 107

Honeymoon 3,931

Rings 647

Wedding Cars 308

Flowers 560

Photography/ Video 1,399

Bridesmaid/ Ushers outfits 465

Wedding Cake 296

Invitations (75 guests) 240

Reception (75 guests) 4,189

Evening Entertainment 682

Total 14,164

Don’t tell the Bride

SAM

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SAM

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Austin Flowers Ltd

Teacher InstructionsThis activity can be used after students have been taught the ratios for analysis ofprofitability, liquidity and, for some exam boards, efficiency. It provides practice notonly of calculation of ratios, but also of using and interpreting quantitative and non-quantitative information in order to make decisions.

Give the students a copy of pages 3-6 with the information and data about AustinFlowers Ltd and Florist Gump.

Students should work in pairs though first of all both could do the relevant calculationsindividually such that they can check answers against each other. They need to thenjot down some notes about the trend in the figures and make comparisons betweenthe two firms. Figures for liquidity can also be compared to text book norms.Eventually they should prepare their findings using PowerPoint or alternatively largedisplay paper could be used. They have to prepare and present their findings as ifthey are talking to their client, Standor Ltd and they have to make an overall justifieddecision about which company Standor should purchase of the two flower shops.

It is probably worth selecting 2 groups at random to present their findings and therest of the class can compare their notes and calculations while they watch. Discussafterwards whether any teams reached a different conclusion and why.

Teacher answers and suggestions for qualitative analysis can be found on pages 7-8.SAM

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Student Worksheet

You work for Milner and Hart Accountants and have been appointed by a client, Standor of Grasmere. Standor is a grocery delivery service for hotels in the Lake District. Standor CEO Stan Collins has asked you to look at the company accounts for 2 florist businesses he is considering buying as part of his diversification and expansion plans and to recommend which one is financially the most attractive. He has asked you to consider appropriate ratios in making your judgements. Youwill need to present your findings using PowerPoint to Standor and make a final recommendation.

This year Last year£000 £000

Turnover 850 820

Cost of sales (410) (350)

Gross profit 440 470

Expenses (308) (310)

Operating profit 132 160

Finance costs - (20)

Finance income 16 -

Exceptional item - (40)

Profit for the year (net profit) 148 100

Statement of comprehensive income/Profit and Loss account

Austin Flowers Ltd

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Non-current assets 2700 2650

Inventories 40 50

Receivables 120 140

Cash 70 90

Total current assets 230 280

Current liabilities (160) (140)

Net current assets 70 140

Non-current liabilities (200) (250)

Net assets 2570 2540

Share capital 2200 2200

Reserves 370 340

Total equity 2570 2540

Statement of financial position/ Balance Sheet

Notes: Austin Flowers sell the majority of their flowers to hotels at present wherethey offer a generous 60 day credit period before payment. Rare flowers are oftenused in their presentations that rivals do not stock but these are expensive to purchase. Flowers are generally made to order.

SAM

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Student Worksheet


Turnover 690 630

Cost of sales (220) (190)

Gross profit 470 440

Expenses (170) (190)

Operating profit 300 250

Finance costs - (5)

Finance income 10 -

Exceptional item - 80

Profit for the year (net profit) 310 325

Statement of comprehensive income/Profit and Loss account

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Non-current assets 1900 1900

Inventories 110 100

Receivables 80 100

Cash 10 20

Total current assets 200 220

Current liabilities (160) (170)

Net current assets 40 50

Non-current liabilities (400) (320)

Net assets 1540 1630

Share capital 1200 1100

Reserves 340 530

Total equity 1540 1630

Statement of financial position/ Balance Sheet

Notes: Large stocks of flowers are always held to cope with sudden new orders.Most flowers are sold to individuals from the shop and online. Florest Gump pays afee to be a member of global flower network Interflora. Last year Florest Gump madea one off profit selling some shares in a bakery firm for £80,000 above the amountthey thought the shares were worth.SA

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Teacher Answers

Austin Flowers LtdThis is the safest but least profitable investment. Since liquidity ratios are withincomfortable norms the firm should be fairly safe in paying bills which is important forsurvival. ROCE is worsening, and is significantly lower than Florist Gump, which is a disadvantage, although Austin Flowers have a better Gearing ratio, which has improved this year. However, profits are falling over time so students may argue thatit is not the most financially attractive – especially given the profitability ratios aremuch lower than Florist Gump. The firm needs to keep a better control over variablecosts as gross margins have fallen significantly – this could be due to the expensiveflowers used in their arrangements.

Receivables days are slightly improved this year, but are lower than Florist Gump.Stock turnover for this year is much higher than Florist Gump, which suggests greaterefficiency, and for a business such as floristry is a very significant factor.

Profitability ratios are much higher than Austin Flowers and rising. With lowerturnover figures the company has made a significantly higher profit than Austin FlowersLtd. Rising operating profit margins coupled with stable gross margins suggest thefirm is keeping down it’s expenses successfully. ROCE is much better than the figurefor Florist Gump and is improving. However the liquidity ratios are falling to dangerouslevels and gearing, while still fairly low, is higher and rising. This is a riskier investmentas they may struggle to pay their bills with just a 0.56 acid test ratio this year. Byholding a bit more cash and less in stock they may be able to address these concerns.Flowers are perishable so it makes sense to use a more flexible supplier and holdless in inventory.

Receivables days are lower than for Austin Flowers and falling, so credit control appears to be good.

The stock turnover figure is lower, which suggests excess stock compared to Austin Flowers.

Note: There is no overall best answer so long as students calculate the ratios accurately and draw appropriate conclusions.

SAM

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Teacher Answers

Calculations

Profitability Austin Flowers Ltd Florest Gump Ltd

This year Last year This year Last year

Gross profit margin 51.76% 57.32% 68.12% 69.84%

Operating profit margin 15.53% 19.51% 43.48% 39.68%

Net profit margin 17.41% 12.20% 44.93% 51.59% *

Liquidity Austin Flowers Ltd Florest Gump Ltd


Current ratio 1.44:1 2:1 1.25:1 1.29:1

Acid test ratio 1.19:1 1.64:1 0.56:1 0.7:1

ROCE 4.76% 5.73% 15.46% 12.82%

Gearing 7.22% 8.96% 20.62% 16.41%

Efficiency Austin Flowers Ltd Florest Gump Ltd(not required by all exam boards)


Receivables Days 51.53 days 62.32 days 42.32 days 57.94 days

Stock (inventory) turnover 9.11 2.09

*Without exceptional item 39%

Average stock figure not available

Average stock figure not available

Austin Flowers Ltd

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Documents

big macs decision