The Joka Shoe Company

Joka Shoe Company (JSC) makes womens running shoes. Introduced 20 years ago, JSC has been manufacturing and
selling three styles of shoes. Management is considering whether the product line can be trimmed to reduce
administrative costs. They need to plan for this at year-end 2016. Production and marketing would be revised starting
in 2017. Management thinks that only two shoe styles should be produced and marketed, and needs to take a decision
regarding which one of the three shoe styles to drop.
Marketing Considerations
Currently, Joka produces the following three styles:
Premium, their current top-of-the-line premium shoe;
Inexpensive, another high-quality but somewhat lower-priced shoe
Durable, a durable, reasonably priced low-end shoe.
Management has learned that consumers get confused if there are too many shoe choices. Each shoe, in effect,
competes with other shoes in the companys own product line. Obviously, that is not a good thing, and it is one reason
to streamline the product line. The Management conducted a survey to find the customer preferences in different
scenarios where any two of the current three product lines are continued with. The customer responses have been
recorded in the Customer_Reponses.xlsx excel file. Using the data contained in this file, you need to estimate the
percentage market share of different product lines in each of the three possible scenarios (i.e. Premium-Inexpensive,
Premium-Durable and Durable-Inexpensive).

Production and Marketing Cost Data

Several cost factors must be considered when creating a running shoe.
For instance, a running shoe must have a shock-absorbing sole and also a tough-but-flexible top part, called the
upper. The Premium and the Inexpensive have supporting ribs around the bottom of the sole that control how much
the shoe twists on impact with the road. This is called a stabilizer. The Premium comes with material that snugly
cups the foots heel and Achilles tendon, thus giving added support. This material is called the hugger. A running
shoe also has all sorts of miscellaneous materials, such as the laces, eye-holes for the laces, trim, and so on. Table 1
below shows use of these different components in the three models where a Y implies use.

Table 1: Inputs for Different Shoe Models

Component Premium Inexpensive Durable
Soles Y Y Y
Uppers Y Y Y
Miscellaneous materials Y Y Y
Stabilizer Y Y
Hugger Y

The cost of all the items other than the ones grouped under miscellaneous has demonstrated different patterns of
variations in the past and the same is given in Table 2. The costs of these inputs (except miscellaneous materials) are
not affected by inflation cost, but are expected to follow the trend experienced in the past.

Table 2: Variation In Cost of Components (in Rupees per Pair)

Year Soles Uppers Stabilizers Huggers
2009 35.0 25.0 150 8
2010 42.5 30.0 180 12
2011 52.5 37.5 255 14
2012 62.5 42.5 300 19
2013 77.5 47.5 285 28
2014 95.0 52.5 255 34
2015 117.5 60.0 225 38
2016 145.0 65.0 270 40

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In 2016, the cost of a pair of shoes miscellaneous materials, other than the ones in Table 2, was Rs. 35 (same for all
varieties) and the cost of labour per pair of shoes was Rs.120 for Premium, Rs. 100 for Inexpensive, and Rs. 135 for
Durable, respectively.

The plants machines must be set up beforehand to cut, mould, and bind the materials. Then many pairs of the same
shoe will be made in long production runs. Set-up costs differ for each kind of shoe. In 2016, set-up costs per pair of
shoes are expected to be as follows: Premium Rs. 25; Inexpensive Rs. 20 and Durable Rs. 30
Administrative costs are expected to be Rs. 18 Crore, Rs. 18.5 Crore, and Rs. 19 Crore, for 2017, 2018, and 2019,
respectively. Advertising expenses are very high and stands at Rs. 3 Crore in 2016. Management expects that with a
trimmed product line, the same can be maintained at this level for some time.
The selling price of a pair of shoes will be the same. In 2016, the Premiums selling price was Rs. 1200, that of
Inexpensive Rs. 900, and Durables Rs. 1500.
Joka management wants to drop one line of shoes, but they are not sure which one. You have to build a spreadsheet
model of the situation so you can play what if with the variables. Managements chosen strategy is to obtain the
combination of product lines that give the highest net income after taxes and repayment of loan at the end of 2019.
You may work with the following assumptions:
Annual demand is around 2 million pair of shoes, equally distributed across 12 months.
JSC needs 3 months sales worth of cash to start each year. A banker will lend the company enough to stay
at that level if there are cash-flow problems. Assume you would begin with ZERO cash balance at the
beginning of 2017.
The Tax Rate (25%) and Interest Rate (12% per annum) are not expected to change in the three years.
Loans are expected to be repaid at the end of every year if enough cash balances are available.
The quality control process of Joka is quite stringent. Historically about 10% of the shoes produced under
strict control of Joka are rejected when they arrive at the Joka warehouse.
It is expected that the inflation rates is going to be around 5% in the years 2017, 2018, and 2019. This would
affect all costs (except those in Table 2), but the management expects they will be able to keep the unaffected
by inflation with a different internal cost-cutting measures.
For each year, your spreadsheet should show net income after taxes, cash on hand at the end of the year, and debt
owed to the bank at the end of the year. These values are computed in the spreadsheet body and echoed to this section.

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 Joka Shoe Company Worksheet
T ask 1. Use customer survey day to fill-in cells in Table 3 given below:

Table 3: Fraction of Respondents Choosing a Brand

Product Pair Produced and Sold Premium Durable Inexpensive None

Premium-Inexpensive

Premium-Durable

Inexpensive-Durable

T ask 2. Fit curves for analyzing trends in cost of various components given in Table 2. Fit appropriate best-
fitting trend-line (based on R2 values: ensure you do not over fit the data for polynomial curves) in
each case to verify your choice. Write a line in the form of interpretation of trend line.

Cost Item Interpretation of the Trend

a. Soles

b. Uppers

c. Stabilizers

d. Huggers

T ask 3. Create a set of three check boxes along with appropriate Cell-links. It should be possible to use them
to select the model-pairs to produce and sale and see the effect of this on the Net Income in 2019.
T ask 4. Create an Excel model to obtain Net Income for the company in 2019 under the three possible product
line combinations. Parameterize the Inputs appropriately. Use Range Names liberally.
T ask 5. Will JSC be able to brake even in 2017 itself?

T ask 6. What is the Net Income for the company in 2019 if the company produces Premium and Durable?
__________________________

T ask 7. What is the highest Net Income in 2019 and for which two-product combination?
_______________________and __________

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