Managing Financial Resources - Assignment Example

ACCOUNTING RATIOS Company A Return on Sales = (Net profit Sales) *100 = (38,000 747,000) *100 = 5.08% Return on Assets = (Net Profit Assets) *100 = (38,000 / 815,000) *100 = 4.66% Current Ratio = Current Assets / Current Liabilities = 252,000 / 160,000 = 1.57 Quick Ratio = (Current Assets – Inventory) / Current Liabilities = (252,000 – 122,000)/ 160,000 = 0.8125 Inventory Turnover = COGS / Inventory = 568,000 / 122,000 = 4.65 times Company B Return on Sales = (Net profit / Sales) *100 = (45,000 / 570,000) *100 = 7.89% Return on Assets = (Net Profit / Assets) *100 = (45,000 / 1,056,000) *100 = 4.26% Current Ratio = Current Assets / Current Liabilities = 271,000 / 200,000 = 1.35 Quick Ratio = (Current Assets – Inventory) / Current Liabilities = (271,000 – 97,000)/ 200,000 = 0.87 Inventory Turnover = COGS / Inventory = 377,000 / 97,000 = 3.88 times Company C Return on Sales = (Net profit / Sales) *100 = (30,000 / 525,000) *100 = 5.71% Return on Assets = (Net Profit / Assets) *100 = (30,000 / 455,000) *100 = 6.59% Current Ratio = Current Assets / Current Liabilities = 200,000 / 80,000 = 2.5 Quick Ratio = (Current Assets – Inventory) / Current Liabilities = (200,000 – 120,000)/ 80,000 = 1 Inventory Turnover = COGS / Inventory = 471,000 / 120,000 = 3.92 times COMPARISON AMONG COMPANIES AND WITH INDUSTRY Company A Industry Company B Industry Company C Industry Return on sales % 5.08 4.29 7.89 8.63 5.71 5.66 Return on assets % 4.66 10.21 4.26 7.91 6.59 10.47 Current Ratio 1.57 1.36 1.35 1.49 2.5 1.88 Quick Ratio 0.8125 0.48 0.87 0.95 1 1.15 Inventory Turnover (times) 4.65 8.73 3.88 9.15 3.92 19.3 [Source for industry ratio (2005): Free Business Statistics and Financial Ratios, 2007] Comparison between Company A, B and C Return on sales measures the company’s ability to earn profit given its sales. Among the above companies, Company B is seen to have earn more net profit from its sales therefore its return to sales is 7.89%, whereas company C and A have 5.71% and 5.08% respectively. Return on assets measures the company’s ability to earn profit by utilizing its assets (fixed and current assets). Company C has earned the highest rate of return which is 6.59% as compared to 4.66% of Company A and 4.26% of Company B. This shows that company C has utilized its assets more efficiently than the rest of the companies. The current ratio measures the efficiency of the company’s capacity of how quickly it can convert its product into cash. The higher the ratio, the better is the company’s liquidity position. From the above table it can be seen that the Company C has the highest current ratio of 2.5 as compared to 1.57 and 1.35 of Company A and Company B respectively. The quick ratio also measures the company’s ability to convert its product into cash but it does not take into account the inventories as it is not a very liquid asset. Therefore the higher quick ratio (acid-test ratio), the better is the company’s liquidity position. According to the table above, Company C has the best ratio which is 1 as compared to ratios of company A and B which are 0.8125 and 0.87 respectively. This shows that company C is in a better liquid position than the other companies. The inventory turnover shows how many times a company’s inventory is replaced in a certain period. The higher ratio implies strong sales while lower ratio implies low sales and excess inventory. The table shows, company A has the highest inventory turnover of 4.65 times which shows that the company has strong sales. On the other hand, company B and C have turnover rates of 3.88 and 3.92 respectively. Comparison between Company A and Industry The return to sales of company A which is 5.08% is higher than that of the industry showing that the company is doing much better than the industry itself and is able to generate more profits from its sales. The return to assets of industry which is 10.22% is double the percentage of company A which is at 4.66%. This shows that the industry can utilize its assets more efficiently in order to generate profits. Company A is in a better liquid position than the industry with current and quick ratios of the company A at 1.57 and 0.8125 respectively while that of the industry is at 1.36 and 0.48 respectively. The inventory turnover of the industry is higher and almost double to that of the company A. The inventory turnover of the industry is 8.73 times while that of company A is 4.65 times showing that the industry has strong sales than the company. Overall company A is in a better position than the industry given the analysis of its ratio. Comparison between Company B and Industry The return to sales of company B which is 7.89% is lower than that of the industry which is 8.63% showing that the industry is doing much better than the company itself and is able to generate more profits from its sales. The return to assets of industry which is 7.91% is almost double the percentage of company B which is at 4.26%. This shows that the industry can utilize its assets more efficiently in order to generate profits. Industry is in a better liquid position than the company B with current and quick ratios of the industry at 1.49 and 0.95 respectively while that of the company B is at 1.35 and 0.87 respectively. The inventory turnover of the industry is higher and almost double to that of the company B. The inventory turnover of the industry is 9.15 times while that of company B is 3.88 times showing that the industry has strong sales than the company. Overall industry is in a better position than the company B given the analysis of its ratio. Comparison between Company C and Industry The return to sales of company C which is 5.71% is higher than that of the industry showing that the company is doing much better than the industry itself and is able to generate more profits from its sales. The return to assets of industry which is 10.47% is higher than that of company C which is at 6.59%. This shows that the industry can utilize its assets more efficiently in order to generate profits. Company C is in a high liquid position than the industry with current and quick ratios of the company C at 2.5 and 1 respectively while that of the industry is at 1.88 and 1.15 respectively. The inventory turnover of the industry is higher and more than double to that of the company C. The inventory turnover of the industry is 10.3 times while that of company C is 3.92 times showing that the industry has strong sales than the company. Overall company C is in a better position than the industry given the analysis of its ratio. FOH COST BUDGET (ITEM A) 100% 90% 110% 120% Fixed FOH Depreciation 22,000 22,000 22,000 22,000 Staff Salaries 43,000 43,000 43,000 43,000 Insurance 9,000 9,000 9,000 9,000 Rent 12,000 12,000 12,000 12,000 Direct Labor Hours 120,000 108,000 132,000 144,000 Variable FOH Power ($ 0.3/ DLH) 36,000 32,400 39,600 43,200 Consumables ($ 0.05/DLH) 6000 5,400 6,600 7,200 Direct Labor ($3.5/DLH) 420,000 378,000 462,000 504,000 Total FOH 548,000 501,800 594,200 640,400 Stages in Budgetary Process The operational or operating budget is prepared along the following steps: Forecast the sales The sales forecast is based on the past data and estimates of economic conditions and level of competition. Make a production schedule After sales are forecasted production is scheduled. Manufacturing Cost Budget (Material, Labor and FOH budget) The production schedule is then used to make the manufacturing budget which is followed by the last two budgets. Cost of Goods Sold Budget Operating Expense Budget BREAKEVEN (ITEM B) Breakeven (Number of units sold) Breakeven (number of units sold) = Fixed Expense / Contribution Margin per unit Fixed Expense = Fixed overhead + Fixed Selling + Fixed Admin Fixed Expense = 29,700 + 7,200 + 5,600 Fixed Expense = 42,500 Variable Cost = Material + Labor +Variable overhead + Variable Selling Variable Cost = 38,140 + 23,620 + 4,620 + 10,900 Variable Cost = 77,280 Contribution Margin per unit = Contribution Margin/ units sold Contribution Margin per unit = (Sales – V.Cost)/ units sold Contribution Margin per unit = 34 Breakeven (Units sold) = 42,500/ 34 Breakeven (units sold) = 1,250 units Sales Forecast (Number of units sold) Sales forecast = (Fixed Cost + Target Profit)/ Contribution margin per unit Sales forecast = (42,500 + 27,200)/34 Sales forecast = 2,050 units Profit/Loss Sales (1100 units * $ 80 per unit) 88,000 Production cost of goods sold: Direct material 38,140 Direct labour 23,620 Overhead: Variable 4,620 Fixed 29,700 96,080 Other costs: Selling & distribution: Variable 10,900 Fixed 7,200 Administration, Fixed 5,600 23,700 Total Costs 119.780 Profit/ (Loss) (31,780) NPV & PAYBACK (ITEM C) Project A(NPV) Year Cashflows Discount Rate Discounted Cashflows 0 (200, 000) 1 (200,000) 1 80,000 0.8475 67,800 2 70,000 0.7182 50,274 3 65,000 0.6086 39,559 4 60,000 0.5158 30,948 5 55,000 0.4371 24,041 5 10,000 0.4371 4,371     NPV 16,993 Project A (Payback Period) Year Balance Outstanding Cash Flows Balance Pay Back Years 1 (190, 000) 80,000 ( 80, 000) 1 2 ( 80, 000) 70,000 (10, 000) 1 3 (10, 000) 65,000 10,000/65,000 0.15         2.15 Project B(NPV) Year Cashflows Discount Rate Discounted Cashflows 0 (230, 000) 1 (230,000) 1 100,000 0.8475 84,750 2 70,000 0.7182 50,274 3 50,000 0.6086 30,430 4 50,000 0.5158 25,790 5 50,000 0.4371 21,855 5 15,000 0.4371 6,557     NPV -10,345 Project B (Payback Period) Year Balance Outstanding Cash Flows Balance Pay Back Years 1 (215, 000) 100,000 (115, 000) 1 2 (115, 000) 70,000 (45, 000) 1 3 (45, 000) 50,000 45,000/50,000 0.9         2.9 Project C(NPV) Year Cashflows Discount Rate Discounted Cashflows 0 (180, 000) 1 (180,000) 1 55,000 0.8475 46,613 2 65,000 0.7182 46,683 3 95,000 0.6086 57,817 4 100,000 0.5158 51,580 4 8,000 0.5158 4,126     NPV 26,819 Project C (Payback Period) Year Balance Outstanding Cash Flows Balance Pay Back Years 1 (172, 000) 55,000 (117, 000) 1 2 (117, 000) 65,000 (52, 000) 1 3 (52, 000) 95,000 52,000/95,000 0.54         2.54 Decision On the basis of the Net Present Value (NPV) Project C should accepted. The reason for this are: Positive NPV as compared to Project C. Highest positive NPV compared to other project A. On the basis of Payback Period Project A should be expected. The reason for this are: Lowest payback in years as compared to project B and project C. The company can get the investment returns in less than two and a half years. The overall decision is that the Project A should be expected. The reason is that: The payback period is less than that of Project C although the life of Project C is just 4 years as compared to 5 years of Project A. The NPV of project A is positive. FACTORS MANAGEMENT WOULD NEED TO CONSIDER – IN ADDITION TO THE FINANCIAL FACTORS BEFORE MAKING A FINAL DECISION ON A PROJECT Financial Factors that Management would Need to Consider Cost of the project Expected cash flows from the project Project cashflow risks Project’s cost of capital Cashflow’s present value Comparison of cost of project and present value Economical Factors that Management would Need to Consider Economic Efficiency of the project Cost and benefit analysis in terms of the economic resources used for the project Other Factors that Management would Need to Consider Positive contribution to the overall social goals (increasing production, improving health and so on) Sonti, R. “Capital Budgeting Decision Criterion.” Intermediate Financial Management. Penman, A. “Financial, Economic and Distribution Analysis.” Economic and Financial Issues. 1999. “Free Business Statistics and Financial Ratios.” Biz Stats. 2007. Meigs, William, Haka, Bettner. “Accounting.” 11th Edition. 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