Forecasting Example: Assume you own a retail store that sells everything in it for $1. Last year you sold 100,000 items so your revenue was $100,000. The average cost to obtain merchandise was $0.60 per item. What was your Gross profit margin last year? Gross profit margin last year You also spent $25,000 on advertising, rent and insurance(operating costs). What was your operating profit margin last year? Operating profit margin last year = You spent $3000 on interest expense last year and were in a 20% tax bracket. What was Net Income last year in dollars? Net Income = $ What was your Net Profit Margin last year If you have 1000 shares outstanding, what is the EPS reported for last year? EPS last year = 5 Scenario A) This year you are forecasting 6% increase in items sold. The average cost to obtain merchandise is forecast to go down to $0.58 per item for next year but you are not going to lower your prices (still $1). What will happen EPS next year if you still spend $25,000 on operating costs, 53,000 on interest expense and are in a 20% tax bracket? Assume that shares outstanding are still 1000 Forecasted EPS next year = $ Why is it higher next year? Compare Gross margins, operating margins and net margins forecasted for next year to last year. Scenario B) This year you are forecasting 6% increase in items sold. The average cost to obtain merchandise is forecast to go up to $0.63 per item for next year but you are not going to raise your prices (still $1). What will happen EPS next year if your operating costs goes up to $28,000, you spend $3.000 on interest expense and are in a 20% tax bracket? Assume that shares outstanding are still 1000 Forecasted EPS next year = $ Compare Gross margins, operating margins and net margins forecasted for next year to last year under scenario B