1) In 1986, what is the NutraSweet division’s operating margin (i.e. operating income as a percent of sales)? Calculate two figures: (3 points)
• One that includes the $173 million annual amortization charge against income for the aspartame patents (See p. 5.) Let's call this "unadjusted operating margin."
• And one that excludes this charge against income. Let's call this NutraSweet's "adjusted operating margin."
(No discussion is necessary. Just show your calculations and properly label each answer.)
2) Compare these margins with those for DSM, Ajinomoto, Tosoh, and Monsanto’s other divisions.
• What does this suggest regarding the relative attractiveness of NutraSweet's margins? (Space constraint: one sentence.) (1 point)
• Why is NutraSweet able to obtain these margins? Be specific. [Hint: Remember that Porter's Five-Forces help to explain value capture.] (Space constraint: three sentences.) (2 points)
3) Which of the operating margin figures calculated in response to Question #1 – unadjusted operating margin or adjusted operating margin – is more relevant to a potential entrant (like Holland Sweetener Company or Angus Fine Chemicals) in deciding whether or not to enter the market? Explain why. (Space constraint: two sentences.) (3 points)
4) If you were a potential entrant to the aspartame market (like HSC or Angus), would NutraSweet’s operating margins encourage you to enter? Why or why not? (Space constraint: three sentences.) (3 points)
5) For this question, assume that NutraSweet and HSC face the same Average Total Cost and Average Variable Cost Curves. In other words, assume that the efficiency of their processes given a certain quantity is the same. Assume further that fixed costs are sunk and that HSC has yet to spend these fixed costs. Explain how the difference between average total cost per pound and average variable cost per pound could potentially impact HSC's entry decision and NutraSweet's response to HSC's entry threat. (Space constraint: three sentences.) (3 points)
6) “HSC claimed that its method of producing aspartame would be less costly and more flexible than NutraSweet’s, although this was disputed” (case page 5). What reasons might there be to doubt this claim? (Space constraint: three sentences.) (3 points)
Extra Credit (not required):
Part 1 - Based on information from the case AND the assumptions noted below, please estimate the following figures for the NutraSweet division in 1986:
a) Gross margin as a percent of sales (Note that gross margin = Sales – COGS). (2 points)
b) Average total cost per pound of aspartame produced (with and without the patent amortization charge). (2 points)
c) Average variable cost per pound of aspartame produced. (2 points)
PLEASE use the following simplifying assumptions and hints for this extra credit portion:
• Assume that total variable costs = COGS (Cost of Goods Sold).
• In order to calculate marketing and administrative expense (i.e. “SG&A”) for NutraSweet assume that SG&A for NutraSweet as a % of sales is the same percentage as SG&A as a % of sales for the entire Monsanto company.
• Assume that NutraSweet only books sales made in the US and Canada during this period.
Please state any additional assumptions that you make in constructing these estimates.
Part 2 - Assume that HSC's Fixed Costs for a 500 tonne facility is $18.6 million. For this portion of the homework, assume that these fixed costs are NOT sunk. Assume also that HSC could match, but not exceed NS's average variable cost.
• What would HSC's Average Total Costs be at full capacity? (2 points)
(No discussion is necessary. Just show your calculations.)
• What implications do you foresee if HSC cannot run at full capacity? (2 points)
(Space constraint: three sentences.)