Hollistic Inc. is a coffee grower and exporter operating in the Brazilian Arabica segment of the industry.
Question:
Hollistic Inc. is a coffee grower and exporter operating in the Brazilian Arabica segment of the industry. The most recent financial year, 20X2, has been highly profitable. Three industry analysts covering the company hold different views regarding the company's future. Brazil's long-run nominal GDP is forecasted to grow at an annual rate of 6%.
Exhibit 1: Hollistic Inc.'s Partial Income Statement
For the Year 20X2 (in BRL Millions)
Sales revenue*
860
Cost of sales, including depreciation**
645
Gross profit
215
Selling, general and administrative (SG&A) expenses
43
Other operating expenses
40
Operating profit
132
*Units sold = 430 million pounds
Sales price per unit = BRL 2 per pound
**Coffee beans represent 40% of cost of sales and expected to remain the same percentage in the future
Kimberly Davis has generated the following projections with respect to the company:
- Projection 1: In 20X3, inflation is projected to increase the price of coffee beans by 2%. The company intends to pass 50% of the increase to consumers in the form of higher selling prices. Consequently, the volume is expected to decline by 8%.
- Projection 2: Beginning in 20X4, Hollistic Inc.'s cost of sales-to-sales is expected to decline at a rate of 10% per annum to a constant ratio in 20X7.
- Projection 3: The government intends to decrease the statutory tax rate by 2% for years 20X3 and 20X4. The rate will return to its current level in 20X5.
- Projection 4: Selling, general and administrative expenses are projected to increase at the rate of inflation (2%) each year.
Martin Pithers is comparing Hollistic Inc.'s revenue growth rate with Mocha's, a competitor with a similar operating structure. The two growers are the only participants operating in the Arabica segment. Annual revenues (current and projected) for the two growers have been collected by Pithers (Exhibit 2).
Exhibit 2: Current and Projected Revenues:
Hollistic Inc. & Mocha (in BRL Millions)
20X2 (Current)
20X3 (Expected)
Hollistic Inc.
860.0
877.2
Mocha
900.0
918.0
Total
1,760.0
1,795.2
Pithers expects the Arabica industry's revenues to increase by 2% per annum and Hollistic Inc.'s market share to remain constant for the foreseeable future; this trend is based on the industry's past revenue pattern.
Pithers also expects the ratio of SG&A-to-gross profit to increase at a rate of 3% per annum for the next four years. This increase reflects a sudden policy announcement by the government to improve employee lifestyle by increasing salary, wages and other benefits.
Rachel Barrett agrees with the data presented in Exhibit 2. She, however, feels that Hollistic's projected revenue growth rate for 20X3 will increase linearly by 10 basis points per annum from 20X4 onwards, due to higher competition from Mocha until the nominal GDP growth rate is achieved. Thereafter, sales revenue will grow at the latter rate (nominal GDP growth rate).
Question
Based on Davis' first projection and Exhibit 1, what is the gross profit margin in 20X3 (in BRL millions)?
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain