Individual Portion of Group Project - Assignment Example

Year 2011 Profit Margin = (864 / 13,198) * 100 = 6.55% Question 29 a. Days in Inventory = (Average Inventory / COGS) * 365 b. Year 2012 Average Inventory = (1,365 + 1,174) / 2 = 1,269.5 Days in Inventory = (1,269.5 / 8,763) * 365 = 52.88 days c. Year 2011 Average Inventory = (1,174 + 1,056) / 2 = 1,115 Days in Inventory = (1,115 / 8,046) * 365 = 50.58 days Profit Margin Profit margin is one of the most important financial metrics that helps to evaluate the profit making ability of the company.

It measures the capacity of the company to control its direct and indirect costs. The ratio is normally classified as a profitability ratio and calculated as: Profit Margin = (Net Income / Net Sales) * 100% Kellogg’s net profit margin improved in 2012 by 20 basis points. The company contributed 6.77c in 2012 as compared to 2.55c in 2011 to the net income for every unit dollar sales made. The improvement in the margin was due to the company ability to control its indirect expenses in 2012. The company was able to reduce its selling and administrative expenses by 100 basis points despite an increase in the sales figure.

However, the increase in the net profit margin could have been higher if the company had been able to control the growth in the direct costs. The cost of goods sold as a percentage of net sales increased by 70 basis points; which ultimately reduced the gross margin of the company. Another entity that reduced the profitability of Kellogg was the high interest expense. The company is highly leveraged and pays a massive amount as interest each other. In 2012, the company paid $261 million as interest expense as compared to $231 million in 2011.

(SEC 2013) The increase in the profitability will have a positive impact on the Kellogg operations. It will allow the company to retain more of the earnings and invest in the company operations. This will allow the company to expand into the new markets each year and increase the profits of the company in the following year. Similarly, the increase profitability impacts the investors psyche – they are more prone to invest in the company with better margins and payout ratios. The management at Kellogg needs to effectively control its growing direct costs.

The resulting decrease in the cost of goods sold will increase the profit margin. Likewise, it needs an effective and efficient inventory management system that will allow the company to reduce its inventory costs as well. Similarly, the company needs to efficiently reduce its selling and administrative expense which will again directly affect the profits. Kraft is one of the biggest competitors to Kellogg in the food products industry. Kraft contributed 9.0c in 2012 as compared to 9.5c in 2011 to the net income for every unit dollar sales made.

Although, Kraft’s net profit margin declined in 2012 by 50 basis points; it still has a better net profit margin compared to the Kellogg. (MSN Money, 2013) The main reason behind the high margin is the company’s ability to control its direct costs as well as indirect costs. With higher margins and profits, the company reinvests a massive amount to expand and test the new markets. Similarly, these margins allow the company to maintain an effective advertising plan to stay at the top of the consumer’s mind.

(MSN Money, 2013) Works Cited Bloomberg Businessweek. "KELLOGG CO (K:New York): Stock Quote & Company Profile."