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Summary On Current Mnagement Ariticle - Essay Example

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The author offers the timing ratio model as a solution for solving the timing problem of investments. He notes that in spite of existing…
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Summary On Current Mnagement Ariticle
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Article summary and critique Summary Karri Timo ed the article, ‘Timing ratio model for capital investments,’ which Lappeenranta of Technology published. The author offers the timing ratio model as a solution for solving the timing problem of investments. He notes that in spite of existing literature on evaluation of profitability of investments, little discussions exist on the timing problem, though its significance extends to replacement models. Capacity expansion models are also important determining size and location of an investment besides its timing. Optimal operations through maximum profit margins are the focus different capacity models and are applicable. The classical model of capacity expansion is an example and is applicable in cases of definite demand with constant growth rate. These models assume growth to have a geometric or stochastic trends but Karri’s timing ratio model assumes that demand has a linear but definite growth that allows for determination of optimal capacity expansion time. According to the model, early expansion of potentials leads to surplus potentials while late expansion leads to shortage of potentials. The model for capacity optimization identifies size and fixed costs of the proposed equipment, and unit fixed cost as significant factors. It shows that early project implementation is better under minimal fixed costs, relative to contribution margin. Some of the factors may again be insignificant in the model. With an assumption that an organization’s cost structure is an indicator of its expansion project, timing potentials of entities become comparable. In addition, range for investment timing widens if contribution margin is high and yet fixed costs remain minimal. Timing ratio, under the model, is inversely proportional to timing potential. Testing the model faced the challenge of contents of organizations’ income statements. While contributing margin is significant to determination of the time ratio, some organizations’ income statements do not offer items that are used in computation of the contribution ratio. The contribution margin can however be estimated and this facilitated testing of the timing ratio model. The model and its testing identify theoretical and empirical implications. Ability to compute timing ratio from contribution margin and operating income and difficulty in comparing timing ratios are the implications of the developed information (Karri n.p.).
The article relates to the managerial accounting concept of value optimization through minimizing cost and maximizing profits. In determining the right time for new product acquisition, the time ratio model ensures that the maximum possible value is derived from the acquisitions. It is also informative and reliable. Establishing its basis from literature on other models and identifying the models’ limitation, the article establishes significance of the time ratio model for application in managerial accounting. Application of empirical data in testing the model also enhances validity and reliability of the article. Recommending future studies with larger number of firms however identifies the article’s weakness in reliability due to use of a small number of firms in a quantitative analysis. This, however, only induces reliability concerns but does not necessarily means that the results from the model’s test are not reliable. The article can therefore be used to expand knowledge in academic and professional set ups (Karri n.p.).
Works cited
Karri, Timo. “Timing ratio model for capital investments.” Lappeenranta University of Technology. Read More
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