Exercise 1 Procurement impact on economic performance Consi

Exercise 1) - Procurement impact on economic performance

Consider the following data:

Income statement:

Purchases: 1,000 €

EBIT: 280 €

No other costs

Balance Sheet:

Total Assets: 2,000 €

Inventory: 700 €

Question: How much ROA changes by reducing 5% cost of purchases?

Exercise 2) - Procurement impact on financial performance

Consider the following situation:

A supermarket buys shampoo from a supplier and keeps it on the shelf about one week before the customer buys it

Customers pay cash or via credit card, so the average payment time from customers is two weeks

The supermarket pays suppliers eight weeks after the purchase

Question: What is the value of the C2C (or Cash-to-Cash or Cash-Generation-Cycle)?

Solution

Exercise 1. ROA = Net income/ Total Assets           = 280/2000           = 0.14           = 14% If cost of purchase reduce by 5% Cost of purchases = 1000-(1000x5%)                                      = 950 Increase in EBIT = 280+50                                  = 330 Inventory = 700-35                      = 665 Total Assets = 2000-700+665                           = 1965 ROA = 330/1965           = 0.1679           = 16.79% ROA will increase by 2.79% by reducing 5% cost of purchases. Exercise 2. C2C = Days inventory on hand + Days sales outstanding - Days payable outstanding         = one week + two weeks - eight weeks         = -five weeks this means a company can easily pay off its outstanding 5 weeks after receiving it. A negative C2C is a good thing.