ASSESSMENT 2 – STEP 7

My blog’s link: https://mariaaccounting.wordpress.com

I have chosen some products related to my company, my company is Carpetright which sells covering for floors and for beds, also produces some furniture. I have chosen:

The price for this bed is £1,399.00, I have chosen to take an 80% for each product to know the variable cost of the product. So, the variable cost for the bed is: £1119.2.

Its contribution margin is calculated by resting sales with the variable cost, in this case would be:

Contribution Margin= 1,399.0 - 1119.2 = 279.8

The price of this floor covering is £17.99 m2, I have chosen to take an 80% for each product to know the variable cost of the product. So, the variable cost is: £14.4.

Contribution Margin= 17.99 - 14.4 = 3.59

The price of this floor covering is £95.99 m2, I have chosen to take an 80% for each product to know the variable cost of the product. So, the variable cost is: £ 76.792.

Contribution Margin= 95.99 - 76.79 = 19.2

When a company decides, which products is going to produce, they must think about if people is going to buy and if it worth to produce it, as probably producing a good can be expensive for the company and they would have to sell it to low price until people buy it. The way that I calculated the variable costs was by a guessing as these companies that sell house products might not be as a supermarket that sells a large quantity of products every day for me the I would choose an 80% as the company should have a bit higher contribution margin. I have seen some other products than the ones I chose and the prices may vary quite largely as you might have noticed in the type of floor covering, in my opinion the prices might vary a lot because of course the type of material that they choose and then because the type of the first floor is cheaper a larger amount of people buy it while the other one for being more expensive just some choose it, it is like if you see a bread of 5 dollars and a bread of 1 dollars, the components can be different but people usually choose what is cheaper and reachable.

My contributions margins had a great difference as I chose very different prices but as you can see the second floor covering is the one that generate the least contribution margin, it is because has of course the lowest price, buy why they continue having that product if they can just leave the third product to sell and have more earnings, well in my opinion it is because people buy more cheap things as I explain before, so this product that produces low contribution margin is my company sells a lot of that product, they can even get more earnings by that product that by the other two as the second is being sold more often. That’s why company has so many different products for similar items, because it depends on how many people buy it.

Some of the constraints of the contribution margins can be when they start selling less and less because maybe the product is not of the right quality or because is too expensive, so there comes the sales part, where the company reduces the product’s prices to sell it first making it seems that they put it just for us to enjoy of cheaper products, when a company do this might be because they need to sell the products as soon as possible as the inventory is taking too much time to reduce its items so they need to get rid of those products so at least the company will receive some contribution margin even when it is not the same as it was expected the idea is not to lose any cent, when this happen the company looks for at least cover the fixed costs. Sometimes the company do not sell some products but they need to sell it, they even end up having negative contribution

margins because they reduce so much the price that the variable costs where higher. The idea for companies is to maximise the idea of having positive contribution margins.

ASSESSMENT 2 – STEP 8

Ratios have been the most easy calculation I have done so far in accounting hahahaha, the issue now is knowing what they mean, I have some chats with my classmates about my ratios because when I was doing them I saw my numbers where really different to Maria Tyler, so I had to check with my friend and yes… same issue, my numbers where too small or too big so it was weird for me to compare with my classmates as I got more confused. When I asked my lecturer about this issue she asked me, which issue, and I said well it is different from everybody else, could you please check if it is correct? When she did she said that every company is different, and we must compare what we have it doesn’t matter if it is too different from others, and that’s right then I understood it is my issue of worrying too much about something simple.

The first ratio I looked at profitability ratios, the first one was net profit margin which calculates the relationship for every dollar of sale how much profit my firm gets, and it has varied a lot, as for 2014 was negative to -0,8% and reached a 2.2% to 2016 but unfortunately for 2017 reduced to 0.8% that means that for 2017 they were earning 80 cents for each sale. Then was the return on assets, which highlights how much profit my company has made for every dollar of assets, it didn’t differ much from the net profit margin as has similar relationship and as I said 2016 was negative and then increased and then decreased, I guess the best year for profitability for my company was 2016. Following I have earnings per share that is when a company distribute all the shares in all the shareholders so it means that for all the sum of the shares how much of the profit the shareholders would get, and it is very very low for my company, the maximum was 15 cent for each share and the least was not earning, which was -0.05, a company wants to get this number low but not that low as a minus, as they don’t want to pay a lot to the shareholders.

Continuing with the profitability I have dividends per share, unfortunately my company doesn’t have dividends, but it means that after calculating the earnings per share the dividends is the real money they would pay per share, probably as my company has so low earnings per share they are not able to pay those dividends. Price earnings ratio highlights that for the total amount invested how much a person is going to have, my company has very small numbers and it is even lower in 2016 which was 0.00074273, I am not very sure about this ratio as I am confused but according to Maria’s video I can relate that for every dollar invested we will take 0.00074273 to get it back, but I am not I cannot really understand this relationship.

For the efficiency and liquidity, we have current ratio which means that for every dollar of liabilities how many dollars we must pay in assets and my company has negative values, that means that they are not being able to pay its debts which is very bad for the company, the worst things are that is getting higher the negative value every year and for 2017 is -0.75. The days of inventory is demonstrating how many days is taking for the company to finish its inventory from the time it was purchased to the time it was sold, my company has been changing a lot and for 2016 had the highest which means that they took approximately 83 days to finish its inventory. And now for 2017 has decreased by only 4 days, the ideal is to have lower days. And for last the assets turnover which highlights how often the company is turning each dollar of assets into sales, my company has small numbers which increased in 2015 and it is good that increased but for 2017 it decreased to 1.79 being like the value of 2014, anyway it is not bad now, but I imagine that the company would be happier with the value of 2015 which was 1.97.

Turning to the financial stability, first I looked at the equity ratio which highlights the relationship for each dollar of assets how much is going to contribute to the equity, my company has a low percentage, but it has been increasing among the years which is pretty good and now for 2017 it reached 31%, while it started in 2014 with 24%. Comparing to the relationship of debt ratio which for each dollars of assets can contribute to the debt and it is high, and that means that most of my company is being found my debt, which is not good it is for 2017 70% and we have to look that the company can found by the equity no by the debt, however slowly has been increasing so it is a good sing for the company. And we have the Debt/Equity Ratio which compare the debt ratio and the equity ratio, for my company it is high 229%, that means that for every dollar of equity 229 dollars are being found by the debt, in my opinion is not good because the debt is high, however it is noticeable that the company has been reducing this issue.

Now for the restated ratios, we have the return on equity which was negative the first two years and after got to 18% in 2016 which increased a lot but again decreased by 2017, which is like the profitability part where 2016 was the best year but the decreased again for 2017 but again, it is better than 2014. Then I have the return on NOA which means that for each dollar of NOA the company is generating for the operating income, which mentioned before 2016 was the best and 2014 was the lowest, they must have had low net operating assets and high operating income for 2016. After we get the profit margin that is for each dollar of sales how much the company is turning into operating income, comparing to the first part has very similar values, varying mainly in 0.3% for each year, in 206 was the best and in 2014 was the worst. For the net borrowing cost, we highlight how much interest they are paying for the borrowings which are very high all of them in my opinion, in 2015 the interest rate is 187.71% so the company was paying lots of money for the borrowings which is really high, but it then had a dramatic decreased until 2017 which now is 6.82% which is pretty good are the moment as they reduced a lot what they have to pay. And then we got the asset turnover which calculate how efficient the company use their net operating assets to generate sales, which is a bit better than the first asset turnover I calculated for the company, however in my opinion f0r 2015 it was too high with 7.38, however it after decreased in 2017 to 4.95 which in my opinion is pretty good, so the net operating assets are actually creating more sales that the total assets.

In general, what I can get from the ratios is that some of the items really differ depending on the years but generally 2016 was one of the best in terms of profitability as well in average for efficiency, comparing to the restated it is the same, 2016 was the best and for 2017 all the values have been decreasing except for the debt/equity ratio which is good to be lower each year.

Turning to economic profit as I expected it is negative, all years are negative but 2016, as I mentioned before 2016 was a good year for the company passing to 2014 being the worst, in 2016 we can see many positive aspects for the company, such as the RNOA, it was the only one that ratio that had more than 10% of WACC, it was 14,69% compare to the rest that were much lower, even when I said that 2016 was the best year for the company, I found that the NOA was higher in 2017 but again 2016 remain higher than the other years. The comprehensive income after tax in my company which was very high because my company had less expenses compared to the other years, caused having more percentage in 2016 in the RNOA. In terms of the value size I would say that there is a difference of 9 among all the values of economic profit and RNOA which demonstrates that the value that really made the difference was the expenses of the company. The choice for my company was having less expenses, well in my opinion it is good for my company having a better OI which in the end demonstrate the difference to the other years.

When I compared to my classmate, we always compare everything, we had very different numbers, but both were negative as well, the difference is that she has all of them negative, so it is because her RNOA ratio was less than 10%, we compared about what could change and she had bigger numbers for NOA but the same as me, expenses made the difference for her, she has better numbers in 2017 which is good as her company is getting better, but still got the negatives.

Assessment 2 – Step 9

It was for me one of the most challenges tasks from accounting, have a decision for my company is very hard as I have to understand well the monetary aspect and have a good knowledge of what they offer to understand what kind of investment I could do. I would choose to have an investment for changing the old machinery in the head company and the second biggest, as they are the ones that produces the most.

After doing the process of the NPV, IRR and payback period, I had some issues following the formulas, but I think I the end was quite well, and I ended up understanding much more than I thought I could, as for me this topic is quite hard. The quantities of money are highlighted next and are expressed in millions. The discounted rate used was 10%.

CARPETRIGHT Head Company Second BiggestOriginal Cost 27 22Estimate Life 10 Years 10 YearsResidual Value 7 4Estimate Future Cash FlowsApril 2019. 5 2April 2020. 7 3April 2021. 6 2April 2022. 5 5April 2023. 4 3April 2024. 6 6April 2025. 8 5April 2026. 4 2April 2027. 5 3April 2028. 6 4

After having consideration of the numbers, it is better to invest in the head company as the company will receive the money invested in less years and it will have more earnings that if it is done with the second biggest, the NPV was 9.84 millions compared to the second company which was 0.32, as seen it is obvious for that part that the investment id better to be done with the head company, and if we look at the IRR it is the same, sometimes it can vary but actually for the second biggest it is just above the discounted rate and in the head company is much greater. The time frame for both are still ok as both are in less than 10 years, however the best decision would be for the head company. Also, it is seen that for the head company it was invested more money and even in that case the money is returned faster than the second biggest as it was lower.

Assessment2 – Step 10

Feedback From: Maria Alejandra Cifuentes Moreno, https://mariaaccounting.wordpress.com

Feedback To:

My Comments Step 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog) Step 9 Develop capital investment decision for your firm Calculation of payback period, NPV & IRR Recommendation & discussionStep 10 Individual feedback with other students

Feedback From: Maria Alejandra Cifuentes Moreno, https://mariaaccounting.wordpress.com

Feedback To:

My Comments Step 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog) Step 9 Develop capital investment decision for your firm Calculation of payback period, NPV & IRR Recommendation & discussionStep 10 Individual feedback with other students

Feedback From: Maria Alejandra Cifuentes Moreno, https://mariaaccounting.wordpress.com

Feedback To:

My Comments Step 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins

Constraints – identify & commentary Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog) Step 9 Develop capital investment decision for your firm Calculation of payback period, NPV & IRR Recommendation & discussionStep 10 Individual feedback with other students