Performance in Quioske Limited Net Profit and Sales - Case Study Example

QUАNTITАTIVЕ МЕTHОDS FОR BUSINЕSS Table of Contents QUАNTITАTIVЕ МЕTHОDS FОR BUSINЕSS 1 Introduction 3 Appendix 1; Analysis of sales and net profit for the period 2013-2016 3 Appendix 2; Investment verdicts 4 Option one; Saving the cash in the bank for two years to earn interest at 4.5% 4 Option 2; Investing in a new project 5 Appendix 3; Break Even Analysis 6 A) Workings 6 The break-even number of subscribers per month for QFlix 6 The monthly revenue at break-even 6 Subscribers required to obtain a profit of $100,000 per month 7 Sensitivity Analysis 7 The new break-even number of subscribers 7 The new revenue 7 The new profit for these changes 8 Examination of sensitivity Analysis 8 Sensitivity analysis on expected break-even number 8 Conclusion & Recommendations 8 Bibliography 9 Introduction The aim of the study is to evaluate the company’s performance as appraised by the trend performance in company’s net profit and sales and providing conclusion on the implication of this trend to Quioske limited with regards to suitability of the promotion undertake and if it must be rolled out across the company’s shopping centre. From our analysis, it is evident that the company’s investment decision is in dilemma of whether to investment the $350000 in an investment project a 10% discounting rate compounded monthly or just save the cash in the bank for two years to earn fixed interest of 4.5% per annum compounded monthly. The study will further examine the impact of break-even analysis on the service order in to evaluate the number o subscribers required for the company to reach a point of equilibrium with regards to cost and profits. The sensitivity analysis will as well undertaken to appraise the effect of the 10% reduction in the selling price and the 35% increase in the number of subscribers on the breakeven point required the new contribution and the new net profit for the company. Appendix 1; Analysis of sales and net profit for the period 2013-2016 It is evident from the table below that that the company’s net profit and net asset will depict a reduction from the financial period 2013 ending 2016. This would imply that the ability of the company to use net asset to generate more income would be declining and therefore a decline in the net profit. In this regards, Quioske is not recommended as a triumphant marketing promotion and must not be rolled out across shopping centers   2013-2014   2014-2015   2015-2016 Net Profit 57.9% -117.9% 33.9% Sales 20.9%   18.9% 22.9%   2014   2015   2016 Asset Turnover 0.77 0.67 0.66 The required sales target level for HR where Quioske must undertake is $186,734,000 .The sales level deem sufficient for the company if the business just reach the level of the market to charge the service and at the same realize the target net profit. Appendix 2; Investment verdicts The objectives of the assessment is to appraise if the business must undertake alternative two of investing the amount ($350000) in an investment project for two years discounted at 10% per annum compounded monthly for two years or undertake alternative one of saving the cash in the bank to earn 4.5% per annum compounded monthly for two years (Ehrhardt, 2016). Option one; Saving the cash in the bank for two years to earn interest at 4.5% The company has an option of saving the $350000 for two years to earn interest at 4.5 per annum compounded monthly. From the analysis, if the company undertakes these options, the closing balance at the end of year two will be $ 381,466.05 the net difference will be a profits of $31,466.04. Option 2; Investing in a new project The company a second option of ivnest9ng the $350000 in an investment project that is anticipated to take two years and discounted at 10% per annum compounded monthly. Form our analysis in the figure below; it is evident that the company will realize a positive NPV of $11,578,856 (Madura, 2007). This amount is ideal for the company for the company since the project will realize positive returns within the shortest period. In this regards, the company should not sale its product to Microsoft at $15 million since it is a once of profit unlike the NPV analysis which depict that the company will return its capital invested within two years and the remaining years will be profit for the company to the infinity years. Years Subscriptions Sales Variable cost total Variables Fixed cost Cash flows DTS P.V.I.F 10% Cash flows 1 $ 200.00 150000 $ 30,000,000 40 $ 6,000,000 25000000 $ (1,000,000) $ 400,000 0.90909 $ 363,636 2 $ 250.00 200000 $ 50,000,000 40 $ 8,000,000 25000000 $ 17,000,000 $ 18,400,000 0.82645 $ 15,206,612 3 $ 250.00 220000 $ 55,000,000 40 $ 8,800,000 25000000 $ 21,200,000 $ 22,600,000 0.82645 $ 18,677,686 4 $ 250.00 200000 $ 50,000,000 40 $ 8,000,000 25000000 $ 17,000,000 $ 18,400,000 0.68301 $ 12,567,448 5 $ 250.00 120000 $ 30,000,000 40 $ 4,800,000 25000000 $ 200,000 $ 1,600,000 0.62092 $ 993,474 $ 215,000,000 $ 35,600,000 $ 125,000,000 $ 54,400,000 $ 47,808,856 Initial cost $ 36,230,000 NPV $ 11,578,856 Appendix 3; Break Even Analysis The objective of undertaking this process is to ascertain the number of subscribers that the company will anticipate before Making profit or loss. A) Workings The break-even number of subscribers per month for QFlix Breakeven point= {Fixed cost/contribution margin per unit} Variable cost Server cost (116£*1.62/1 £)=$187.920 Bandwidth cost ($0.02 per GB*65)=$1.30 content paid ($0.15*30)=$4.60 membership fee $2.140 Contribution= (selling price-variable cost) Contribution= {$12.49-8.04) =$4.440 Total Variable cost {1.3+4.6+2.14) =$8.040 Fixed cost= ($56,000+$20,000+45000) =$121,000 Breakeven point= (121000/4.44) =27252 subscribers The monthly revenue at break-even Breakeven point in sales= {fixed cost/contribution margin ratio] But Contribution margin ratio = {contribution margin /sales} Contribution margin ratio therefore will be = ({$4.4*27252}{/$12.49*27252})= 0.35 Breakeven point= {121000/0.35) = $ 343,475 Subscribers required to obtain a profit of $100,000 per month Profits = ({Selling Price per Unit x Unit Sales} – {Variable Costs per Unit x Unit Sales} - Fixed Costs) However, profit target is $100,000 Hence, the subscribers required will be $100,000= {$12.49*subscribers)-($4.44*subscribers)-121000) Let subscribers be Y $100,000= {12.49Y)-(4.44Y)-121000} (121000-100000}=8.05Y Therefore, the new Subscribers will be {121000/8.05} =15,031 Sensitivity Analysis The new break-even number of subscribers Reduce selling price by 10% New selling price= {$12.49*90%) =$11.24 Effect, 35% increment in subscribers New contribution margin = (35%*4.44) = 5.994 New Breakeven point = (121000/5.994) =20187 subscribers The new revenue New Unit selling price $11.24 Contribution margin = {$11.24*20,187) = $226,920.4 The new profit for these changes Profit= {Contribution margin-fixed cost} Hence, New Profit = {$226,920.42-$121000) =$105,920.4 Examination of sensitivity Analysis Sensitivity analysis on the change in contribution margin The change in contribution margin increased from$4.44 per subscriber to $6 per subscriber Sensitivity analysis on expected break-even number The change in selling price will lead to decline in the break-even point. This is observed in the calculation above whereby the new subscribers will be (27252-20187) =7,065 depicting a decline in the number of subscribers that the company will have in order for the business to make no profit or loss (Sarnat, 2007). Conclusion & Recommendations From the analysis of business performance with regards to appraisal of trend analysis (Sales and Net profit), it was evident that the company is not performing well and thus the quioske is not a successful marketing promotion and should not be rolled out across shopping centers. The company company investment alternaive with regards to $350,000, it was evident that the company must invest the cash in a project sicne, the proejct is vaible and the invested captial will be returned within the next two years of investment (Vance, 2002). This was evient when the NPV analysis depcited that the project will realsie a psoitve NPV of $11,578,856. With regards to sensitivty analysis the workign s concludes that the best option that the company msut udnrtake is otpion one since the company will realise 27,252 subcribers before making proift or loss. Bibliography Ehrhardt, M. (2016) Corporate Finance: A Focused Approach - Page 575, New York: Springer. Madura, J. (2007) International Financial Management - Page 483, London: Cingage Learning. Sarnat, M. (2007) Financial Decision Making Under Uncertainty, New york: Springer. Vance, D. (2002) Financial Analysis and Decision Making, london: John wiley. Vikram, N. (2004) Finance for Strategic Decision-Making: What Non-Financial Managers, New York: Cengage Learning. Read More