Company's Profitability Analysis, Efficiency, Total Fixed Cost, Contribution Margin Ratio - Assignment Example

Question 3 a) Profitability Analysis The company’s net profit margin increases slightly within the two-year financial period from 2.1% to 2.6%. The gross profit margin however decreases to 40% up from 43% while the return on assets ration increases within the period from 2.5% to 2.8%, which is way below the industry average of 3.9%. From this analysis, it can be noted that In Style Pty Ltd overall profitability is not healthy at all. It can be assumed that this unhealthy profitability position is attributed to its weak marketing and product-pricing strategies. For instance, it can be assumed that the price for its products or services is not fairly positioned to ensure that sales revenues are translated to profits. It can further be assumed that the management has not made stringent efforts to come up with efficient wear and tear policies that are needed for ensuring optimum use of existing asset-base to post enough sales revenues. Certainly, its overall marketing strategies like product and service campaigns can also be assumed to be weak hence does not attract enough potential customers eligible for purchases. b) Efficiency In Style’s inventory turnover and average debtors periods increases significantly within the two-year financial period. In fact, the inventory turnover increases from 58 to 71 days in comparison to55 days industry averages; as averages debtors period also increases from 76 to 81 days in comparison to the 48 days industry average. These efficiency ratio positions indicate an unhealthy operational model of the company, which means that less stock is being converted to sales revenues while weaker policies have been implemented to ensure a timely collection of cash from goods sold on credit. Given this extensive periods of time, there is a possibility that In Style Ltd could suffer from insufficient cash resource that is needed for conducting day-to-day business operations. Question 3(Part b) a) First, the company can ensure to renegotiate its underlying credit terms with both its suppliers and customers so that the coming operational quarters cannot be marred with intensive challenges in regards to short cash flows. In the event that this is not possible, the company can go ahead and adopt a factoring model; whereby it will have to approach a financial institution for possible short-term lending, which would be secured against the value of the underlying invoices that have issued already. Secondly, the firm can opt to introduce an early settlement discounts for its underlying credit customer base whereby it will be providing early settlement discounts on invoices that will result to enticing customers pay early with a 2-3 per cent invoice value reduction. b) First, the usefulness of financial reports is curtailed by the underlying difference in accounting policies and frameworks used in preparation. It is crucial to note that while IFRS allows for flexibility of accounting policies that reflect different operational uncertainties; this flexibility can result to the use of a diverse set of policies within different companies thereby posing a comparability of their financial statements. Another setback rests with the limited ability of preparers to adopt professional judgment. Preparers of financial statements are called upon to ensure they adopt accounting policies in a more consistent manner that also reflects on the overall economic reality of its transactions. However, in the event there are perceivable differences in their interpretations then it means that there was less use of judgement hence a restriction on its overall subjectivity as a whole. Question 4 Part a) Total Fixed Cost= Annual Fixed Marketing Costs+ Annual Fixed Administration Costs = $2000+$ 9,500 = $11,500 Unit Contribution Margin per crystal= revenues per unit- variable expenses per unit Revenue per unit= selling price per crystal- purchase price per crystal = $30-$8= $22 Variable marketing costs per crystal = $3 Therefore; Unit Contribution Margin per crystal = $22-$3 = $19 Part b) Breakeven point in units= Total amount of fixed costs/ contribution margin per car = 11,500/19 = 605 crystals Part c) To find the number of crystals; the $20,000 is treated as another fixed cost hence; Breakeven point in cars= fixed expenses/ contribution margin per car = $20,000+11,500/19 = 1,657 crystals per year Part d) Contribution Margin Ratio= P-V/P = 30-3/30 = 27/30 = $ 0.9 Revenues= FC+ Profits/ CMR = 11,500+ (22*2500)/0.9 = 73,889 60/100*2,500= 1500 1500*22= 33,000 No, there is a big differences in the level of annuals sales when Joanne decides to use a fixed rental in comparison to the adopting a market contribution margin. Part e) let’s assume that the purchase price decreases to $5 Then; Unit Contribution Margin per crystal= revenues per unit- variable expenses per unit Revenue per unit= selling price per crystal- purchase price per crystal = $30-$5= $ 25 Variable marketing costs per crystal = $3 Therefore; Unit Contribution Margin per crystal = $25-$3 = $22 Breakeven point in units= Total amount of fixed costs/ contribution margin per car = 11,500/22 = 522 crystals Reason; In the event that the purchase price decreases, the break-even point in units also decreases since the overall unit contribution margin per crystal is increased as shown in the scenario above. Part f) The three notable assumptions are as follows; i) Costs involved in the CVP are classified as either being fixed or variable in nature. ii) It is assumed that there is always a constant sales price iii) It is also assumed that all units that are produced within any given time are always equal to the ones that are sold. This means that there is no possible ending finished goods on overall inventories. Question 2 Part a) Solution; ARR =  Average Accounting Profit Average Investment Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years Step 1: Annual Depreciation = (110,000-10,000)/4 = 25,000 Step 2: Year 2013 2014 2015 2016 Cash inflow 35,000 50,000 60,000 35,000 Salvage Value 10,000 Depreciation -25,000 -25,000 -25,000 -25,000 Accounting Income 10,000 25,000 35,000 20,000 Step 3: Average Accounting Income = (10,000+25,000+35,000+20,000)/4 = 22,500 Step 4: Accounting Rate of Return = 22,500/110,000 = 20.45% Part b) Net Present Value; NPV= R1/ (1+r) 1+ R2/ (1+r) 2+R3/ (1+r) 3+R4/ (1+r) 4 = 35,000/0.877+50,000/1.647+60,000/2.322+35,000/2.914 = $108,117.78 Part c) Net present value is the best of the two appraisal techniques to evaluate the project since it takes into account the time value for money hence making it better than accounting rate of return, which fails to discount future cash flows expected by the investment at hand. Accounting rate of return is weaker of the two techniques because it can be calculated in different ways hence resulting to a challenge associated with consistency. It also uses accounting income as opposed to cash inflows hence not a viable option in the event that project at hand would incur maintenance costs given the fact that viability is dependent on a timely cash inflows. Part d) Internal rate of return is an appraisal technique just like ARR and NPV. In fact, it is a distinctive metric that is employed in capital budgeting process for the purpose of measuring the profitability of certain potential ventures. It is deemed to be useful in the event that there is uniformity in investments of varying types and thus, it can be used for ranking a set of multiple potential projects in a firm that are considered to be an on even-basis. In case of an equal cost of investment amongst numerous projects; it is established that the one with the highest IRR would be the one to be considered and undertaken on a first priority. Internal rate of return is a discount rate that results to the net present value for all of the underlying cash flows from a given project undertaking equal to a zero figure. Most notably, IRR also adopts a similar formula used in calculating NPV. Read More