Assignment 2: Step 7 to 10

New Zealand Stock Exchange

ACCT11059 – Term 3 2019

Accounting, Learning and Online Communication

Central QLD University

Sally Howard – C0005031

Step 7 – Contribution Margin

When I read the requirements for question seven, I was even more terrified than usual about this subject because my company is the New Zealand Stock Exchange and they don’t actually sell anything? Except shares? So I am now becoming nervous about doing this assignment and because I am assuming that everybody else has a company that actually sells a product or a service? But I get an organisation that sells shares? So what am I to do? I just need to choose three of the shares currently available for sale on the New Zealand Stock Exchange. And then I need to have to guess the selling price? And variable cost and then calculate the contribution margin? Ok, officially freaking out now. In the end after a lot of freaking out I have decided to go with the A2 Milk Company because I like their advertising, Air New Zealand because I have flown with them and they were great and Burger Fuel because I like burgers.

Three Products from the New Zealand Stock Exchange

The a2 milk company is special and different to other milk companies because the milk it sells comes from cows that have been selected naturally to only produce the A2 protein and no A1 milk. Therefore assisting people (and especially small children) who have digestion issues and challenges drinking regular milk can enjoy a2 milk without any of the unpleasantness.

Today (05.02.2019) shares in the a2milk company are selling on the New Zealand Stock Exchange for $14.51 each. But as we know the price of shares can very day to day (or even minute to minute). As illustrated in below over 52 weeks there has been an overall $1.702 or 13.32% increase on shares. So in the case that we were selling an actual ‘product or service’ a variable cost would take into consideration the cost of making the product, the facilities, advertising etc. In this case there is none of that however there is a variation as either in increase or decrease in the prices of the shares…….so!

CM = sales price – variable cost

CM = $14.51 – 13.32% of $14.50 (= $1.93)

CM = $12.58

As ‘Dave the Duck’ says in all of their catchy advertising – Air New Zealand is a better way to fly! And so they are having one of the safest ratings of any airline globally and partnering with other well-known and also very safe airlines such as United Airlines, Singapore Airlines and Air China. Air New Zealand was first listed on the NZX on the 24th of October 1989.

Today (05.02.2019) at 12.27pm Air New Zealand’s shares are selling on the New Zealand Stock Exchange for $2.75 which is nearly the lowest that they have been in a year (reasons could be their partnership with Air China and the risk of the Corona virus because as you can see below the share price had a dramatic downward spike towards the end of January and beginning of February.

In the last twelve month (or 52 week) period the variance has been the difference between $3.05 and what it is currently at $2.75 (0.30).

CM = sales price – variable cost (0.30).

CM = $2.75 – 0.30

CM = $2.45

What differeintiates Burger Fuel from their competitors is it’s very funky marketing, edgy people, creative promotions and the fact that it’s burgers are more gourmet than average and that they are made with fresher more natural ingredients in comparison to it’s competitors.

They also pride themselves on their customer service and their custome engineered Kitchens. However the last twelve months do not appear to have been fantastic for Burger Fuel as their shares are currently only worth $0.455 and they have dropped 21.55% or $0.125. However they do seem to have been fairly study since the beginning of February 2020

CM = sales price – variable cost (0.52-0.42 = 0.10)

CM = $0.42-$0.10

CM = $0.32

Why might the contribution margins for three products or services be similar/or differ?

They are very different and this comes down to many things including the types of industries that they are, the size of the industries, the economy and other factors such as worldwide events including recession, war and illness.

Why might your firm produce a range of products/services with different contribution margins?

My firm is a stock exchange so the variety of organisations that they represent is endless.

Why not only produce the product/service with the highest contribution margin?

As above – it’s the New Zealand stock exchange. They can’t just choose to represent organisations with the highest contribution margin because if they did that they would not have anybody to represent.

Constraints

In the circumstance of New Zealand Stock Exchange the constraints relate directly to the economy and also to the success of the organisations floated on the stock exchange. For instance during an economic downturn companies can go bankrupt which can greatly affect the stock exchange. Economic recession, house prices falling, too many interest only loans given out, a decline in the gross domestic product growth and retail sales becoming slow (which scares me considering all of the retail chains such as Collette and Harris Scarfe going into receivership recently).

However as far as individual constraints go for Air New Zealand it would be such things as competition in the marketplace (there are a LOT of cheap carriers available that offer next to nothing prices on airlines these days), the New Zealand Tourism industry and the New Zealand Economy in general. A current constraint for Air New Zealand could also be the threat of the Corona Virus especially considering that one of their major partners is Air China. To overcome these constraints Air New Zealand needs to have a point of difference (price, destinations reached, service or safety) and also have some kind of public relations strategy in relation to overcoming of possible damage to their business because of the threat of the corona virus.

As far as constraints are concerned there would be many for a2milk Company, there would be many to consider. There is the cost of labour, farming, cows, machinery, staffing and there is also disease and weather (drought, flood) to consider. And on top of all of that they have to consider they are in constant competition with other gut easy milk products such as Paul’s Zimil. To overcome these constraints the a2milk Company needs to do a number of things including forecasting to predict the future costs of the business and have a point of difference in comparison to their competitors. In this case that point of difference could be that they are literally the only milk company in the southern hemisphere that sells milk with no a1 proteins in it.

And finally Burger Fuel’s constraints are going to be similar to a2milk as they are both a food producer. So they have to consider the cost of labour, farming, produce, staffing and disease and weather. And again they are going to need to overcome their competition and in New Zealand that is Wendy’s, Burger King, McDonalds, Aporto and Nando’s which all have some kind of ‘unique’ burger experience on the market. To do this, as for a2milk and Air New Zealand they would need to have a point of difference. For Burger Fuel I believe this to be their edgy, cool, hip presence which attracts a certain crowd and culture.

Step 8

To be truthful the thought of calculating ratio’s had me in an anxious sweat - or is that just Mackay summer? Maria’s video’s helped and I understood quite well (surprisingly) the definitions of all the different ratios and what they are used for however I really, really struggled with the calculations. Not actually doing the calculations (that was easy) but being able to match up what I needed to divided etc. compared to what I had on my financial statements. Because again – my company is not ‘typical’ being the NZX. Here it is the completed ratio spreadsheet (and added as a document on its own of course).

What do the ratios say about this firm?

Profitability Ratio

Net profit margin ratio is how we can see the percentage of each dollar of sales turns into profit for the firm. And (if my calculations are correct) the New Zealand Stock Exchange is doing very well with its worst year in four years being in 2015 with a % of 10.5% and its best year being in 2017 with a percentage of 40.3%

Efficiency (or Asset Management) Ratios

This was a little bit confusing for me because unlike other organisations I don’t really have any ‘inventory’ as such as my company is a stock exchange and days of inventory is the way that we calculate how long it takes for inventory to be sold. But as I scanned through the financial statements I could see that there was sales and total assets so I did the division and

it’s not very good. The best year in four years was 2015 with a percentage of 0.96 and the worst year being 2017 with a percentage of 0.09 %.

Liquidity Ratio

When accountants talk about current ratio they are trying to shed some light on the ratio between current liabilities and current assets. NZX had two fairly poor years in 2015 and 2016 and climbed a little to 1.20 in 2017 and then a significant jump to 1.49 in 2018.

Financial Structure Ratio

Debt equity ratio shows for every dollar that an equity investor is putting in to the organisation how much the bank is. And the equity ratio is used to show how much dollars of assets is funded by equity investors. For the New Zealand stock exchange the figure for the debt equity ratio has been fairly steady the past four years. However, as far as the equity ratio goes I couldn’t calculate it because there was no equity listing for any of the years 2015, 2016, 2017, 2018.

Market Ratio

Earnings per share ratio show how much each share would be paid out if all the profit was divided. Dividends per share show how the amount that was paid out per share and price earnings ratio identifies the time it will take for the initial investment to be earned back. I really struggled here – especially with price earnings ratio because you have to divide the market price per share by the earnings per share and there is no actual ‘sale’ of NZX shares (I googled and tried to find info everywhere) only shares that they sell so it stumped me. For earnings and dividends per share however I could find relative material to calculate and NZX had a great year in 2016 – but the other years were not good at all.

Ratio’s based on Reformulated Financial Statements.

ROE is how much a firm has been invested into and how much of that turned into net profit. RNOA means the return on assets ratio, NBC is how much it is costing the NZX to have loans, PM shows how much profit has been created from each dollar of sales and ATO is not the Australian tax office but instead its how many sales are coming from operating assets. All of these areas are low, for every year.

Economic Profit

To calculate the economic profit for the New Zealand Stock Exchange I have decided to use 10% of net operating assets (NOA). What I believe economic profit means when it comes to accounting its excess revenue or what is left over and after researching and calculating endlessly, I came up with this. The results look good for the NZX and are:

2015: $63,482 x 10% = $6,348.20

2016: $68, 723 x 10% = $6,872.30

2017: $69,675 x 10% = $6,967.50

2018: $76,168 x 10% = $7,616.80

Reasons for the positive growth?

Maybe the below? It’s the worlds most expensive stock exchange?

It has floated successful companies like a2milk!

It’s been a very positive few years of growth for the NZX.

$9.5 billion capital as raised in 2018 + 10% on 2017 (Issuer relationships) On market trading reached a record high of 57.2% in December 2018 (Secondary

Markets) 45% growth in non-display application data licensing billing in 2018.

Step 9 – Capital Investment Decision

I don’t know how long I have spent searching the NZX website for any information to help me decide how to develop a capital investment decision for them and completing a simple payback period, NPV and IRR! So, I am going to make something up and say that they are planning on offering the sale of two new products which are going to be private health insurance and or redundancy insurance and they will need new office spaces to accommodate for either of these new businesses. The reason behind this decision to start these new businesses is a current gap in the New Zealand market and because of expression of interest from its current customers. To commence the start up on both businesses we have to consider the costs of the office, the office furnishings, insurance, rates for the building (if they own not if they rent) and they will also need to consider staffing costs, marketing etc. The cost of both offices would be nearly exactly the same and it is expected that the success of these organisations would be ongoing however the successful useful life of the office spaces would be ten years until it was necessary to move due to growth.

It would be presumed the cashflows for both of these organisations would be negative due to the very large set up costs for both organisations along with the time that it would take for the products to be successfully marketed to the public. However, it is estimated that after ten years that the assets invested would be at over 1.5 billion.