The questions in this exercise are based on the Benetton Group, a company headquartered in Italy and known in the United States primarily for one of its brands of fashion apparel—United Colors of Benetton. To answer the questions, you will need to download the Benetton Group’s 2004 Annual Report at www.benetton.com/investors. Once at this website, click on the link toward the top of the page called “Site Map” and then scroll down to the heading called “Financial Reports” and click on the year 2004. You do not need to print this document to answer the questions.

Required:

1.         How do the formats of the income statements shown on pages 33 and 50 of Benetton’s annual report differ from one another (disregard everything beneath the line titled “income from operations”)? Which expenses shown on page 50 appear to have been reclassified as variable selling costs on page 33?

2.         Why do you think cost of sales is included in the computation of contribution margin on page 33?

3.         Perform two separate computations of Benetton’s break-even point in euros. For the first computation, use data from 2003. For the second computation, use data from 2004. Why do the numbers that you computed differ from one another?

4.         What sales volume would have been necessary in 2004 for Benetton to attain a target income from operations of €300 million?

5.         Compute Benetton’s margin of safety using data from 2003 and 2004. Why do your answers for the two years differ from one another?

6.         What is Benetton’s degree of operating leverage in 2004? If Benetton’s sales in 2004 had been 6% higher than what is shown in the annual report, what income from operations would the company have earned? What percentage increase in income from operations does this represent?

7.         What income from operations would Benetton have earned in 2004 if it had invested an additional €10 million in advertising and promotions and realized a 3% increase in sales? As an alternative, what income from operations would Benetton have earned if it not only invested an additional €10 million in advertising and promotions but also raised its sales commission rate to 6% of sales, thereby generating a 5% increase in sales? Which of these two scenarios would have been preferable for Benetton?

8.         Assume that total sales in 2004 remained unchanged at €1,686 million (as shown on pages 33 and 50); however the Casual sector sales were €1,554 million, the Sportswear and Equipment sector sales were €45 million, and the Manufacturing and Other sector sales were €87 million. What income from operations would Benetton have earned with this sales mix? Why is the income from operations under this scenario different from what is shown in the annual report?