1. To illustrate the importance of the assumptions embedded in a profit plan
2. To familiarise students with various sources of business information
3. To learn how to use a profit plan to test key business decisions
The case portrays a series of profit planning decisions in a family-owned publishing company. The case is written by and about the same individual, Ramsey Walker, a young, recent business school graduate. The case begins with a quick overview of Walker & Company's (Walker) history.
Case Theory and Background
Companies use profit plans for several reasons:
１．To translate the strategy of the business into a detailed plan to create value. This helps managers quantify trade-offs and provides a …show more content…
Walker currently has negative cash flows. In the long-term, once one-time editorial and product development costs have been incurred, the backlist (which currently contributes 52% of children's book sales) can generate additional revenue.
Once the strategic decision to focus on the children's segment has been made, an analysis of Walker's operational situation and competitors should be undertaken to know where improvements should be made. Who are the appropriate competitors for benchmarking - all children's book publishers, or those of a size similar to Walker? Should relevant size be judged by sales or by number of titles? When compared to children's publishers with sales of $1 million to $5 million, Walker's performance on gross margins is similar, but there is a marked need for improvement in operating expenses (51% of sales as compared to 40%) and pre-tax income (3% vs. 8%). Other relevant variables for comparison, such as ROA based on operating income (as in the case) and inventory turnover (needs improvement) also need to be chosen. Benchmarking against competitors also enables assessment of the realism of management goals.
Step 2: Product Mix for the Children's Book Line
Assessment of individual segment profitability
To decide whether any product lines within the children's book line should be dropped, the profitability of the individual segments needs to be assessed. Based