In the previous group exercise, we performed a what-if analysis of an 8% reduction in the cost of purchased goods on the net profit. In this following exercise, we will analyze the effect of 3% cost reduction on another important financial indicator: Return on Assets (ROA).

A simplified income statement for Lowes Company (in million dollars):

	Income Statement	Normalized .
Sales	$26,491	100%
Cost of Goods Sold (GOGS)	$18,465
Gross Profit	$8,026
Operating Expenses	$5,667
Operating Income	$2,359
All numbers are expressed in 1,000,000s

Key fact: Purchases are approximating 100% of COGS

Selected Balance Sheet Items (As of 1/31/2016)

Selected Balance Sheet Items
Merchandise Inventory	$3,968
Cash	$2,428
Accounts Receivable (AR)	$2,763
Equipment	$6,950
Total Assets	$16,109
All numbers are expressed in 1,000,000s

What is the current profit margin?

This means that every dollar of sales generates about ____________cents in net profit.

Now, lets perform a what-if analysis. In the first scenario, we analyze what would happen if Lowes was able to cut its COGS by just 3 percent. Notice that COGS and merchandise inventory each decreases by 3 percent.

How much is the saving associated with a 3% reduction in COGS?

What is the value of the merchandise inventory after the cost reduction?

What is the New total assets?