A1. Key Points
Banks are concerned with Custom Snowboards liabilities and assets. They are interested in assets as this is what Customer Snowboards will use to generate funds to repay the loan. Banks are interested in liabilities as this is what Custom Snowboards currently owes other creditors. Custom Snowboard, Inc. showed a small decrease of 3.40% in net sales from Year 13 to Year 14. This slight reduction can be attributed to the decline in the current economic situation. Even though sales have dropped, anticipated sales for years 15, 16, and 17 are expected to recover at a slight incline of 2 – 3.7% per year. Operating Expenses were reduced from $782,800 for Year 13 to $756, 200 for Year 14. This was in an attempt to offset the decline in net sales. On the comparative balance sheet, cash is showing a nice increase of 7.2%. This increase can be attributed to sales carried over from the previous year. Operating Income declined due to Operating Expenses increasing.
Accounts and Notes Payable is showing a decrease of 3.4%, with Total Current Liabilities at 2% Year 13 and 14. Custom Snowboards had paid off some of their debt. The Total Stockholder’s Equity is at 2%. This discloses what the stockholder’s would accumulate if all assets were sold. Even though a larger percentage would be more appealing, the stockholders would not owe money is Custom Snowboards, Inc.’s assets were sold. Net Earnings were the highest of the three year period during Year 12 with $140,250. Net Earnings decreased in Year13 with $96,900. This increase was due to an increase of expenses and reduction in sales, Year 14 shows Net Sales declined to $6,407,800. Current assets declined from Year 13 $880,950 to $740,155 due to paying off long-term debt, including the purchase of a more efficient production machine. Current ratio (current assets divided by current liabilities) is 5.84% for Year 14 and 6.82% for Year 13.
This shows that Custom Snowboards was able to pay off 5 – 6 times their current debt. The current ratio for a competitor, Winter Sports, is 4.2%. Total Stock Equity continues to increase over the three year period, Year 12 43.1%, Year, 47.5% to 49.6% in Year 14. This number is appealing due to the increase in the percentage the stockholders would receive if all assets were sold. Cash and Cash Equivalents increased from 12.5% of Total Assets for Year 13.7% of Total Assets for Year 14. Custom Snowboards has improved their ability to increase the cash on hand. Long Term Liabilities decreased to from 52.5% in Year 13 to 50.4% of Total Liabilities for Year 14 by $57,250. In reviewing the forecasted trend analysis, using Year 14 as the base year, Customer Snowboards will continue to expand next sales. Year 15 ($6,600,034) vs. Year 14 ($6,407,800) shows a 3% increase in net sales. Year 17 ($6,647,452) over Year 16 ($6,535,956) shows a 1.7% increase.
This forecasted revenue growth is strength of Custom Snowboards’ ability to pay future debt. 1. “As a result, Operating Income declined because Operating Expenses also declined.” Please explain; and 2. “Retained Earnings for CS increased for Years Twelve, Thirteen, and Fourteen at 8.5%, 14.2%, and approximately 17%. This demonstrates a tremendous growth rate, meaning CS almost doubled the amount of their investment from 8.5% for Year Twelve to 16.9 % for Year Fourteen.” Please identify the investment for clarification.
By reviewing the income statement, the bank will notice a risk associated with the reduction of Net Earnings over a three year period. Custom Snowboards had the highest Net Earnings of the three year period during Year 12 with $140,250. This number declined in Year13 with $96,900 Net Earnings. The reduction was greater during Year 14 with $16,725. In order to improve this calculation, Custom Snowboards would need to reduce expenses and increase sales. A possible “sale” of the product or a rebate program can generate additional sales and use current inventory. A review of the Cost of Goods Sold should also take place to ensure materials orders are not currently in stock. Procurement and the Inventory Manager should be involved to assure the proper material is ordered at the proper price. Additional vendor bids may need to be received in order to obtain the best price.
A reduction in Total Assets can also concern the bank. Proper utilization of Total Assets allows a company to generate additional revenue. Total Assets has decreases 2.2% from Year 13 to Year 14. Custom Snowboards should increase efforts to increase their short-term investments for Year 15. This can occur by investing in short term bonds or stocks. Selling unused equipment can provided the additional cash (Adams, 2012).
The third risk would be the increase in Total Operating Income. . Year 12 ($400,000) to Year 13 ($415,000) showed a 3.75% increase, while Net Sales increased from $6,601,000 in Year 12 to $6,633,200 in Year 14. However in Year 14, Net Sales declined to $6,407,800 while the percentage of increase for Administrative Payroll and Executive Compensation increased by 12.05% over Year 13. These increases for Year 14 were the result of sales for Year 13 and the need to hire additional workers to manufacture the product due to the increase of sales. To eliminate this risk, Custom Snowboards should also review the Salary Wage for Administrative Payroll and Executive Compensation increases per year to determine in the percentage of increase should be lowered.
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A3. Ratio Analysis
In reviewing the current ratio, which measures a company’s ability to pay short-term obligations, Custom Snowboards has more cash to convert (5.84%) than Winter Sports (4.20%). Acid-Test Ratio shows if a company can pay all their liabilities, should they come due immediately. The Acid-Test Ratio shows that Custom Snowboards has more current assets (4.14%) to quickly convert to cash than Winter Sports (3.4%). Custom Snowboards has been higher in this ratio for the past two years with 4.66% and 3.64%. The Average Collection Period shows the number of days it takes to receive payment from creditors. The Average Collection Period for Custom Snowboards is 11.0 consistently for Year 13 and Year 14. Competitor, Winter Sports’ Average Collection Period is 32.5. Custom Snowboards is receiving payment quicker after the sale.
The Debt Ratio compares total assets and liabilities. This displays Custom Snowboard’s ability to pay long term debt. Custom Snowboards is showing a decrease in debt ratio, Year 13 52.5% to Year 14 50.4%. Winter Sports has a better Debt Ratio with 38.0%. Gross Margin measures the financial health of a company by disclosing the funds remaining after Cost of Goods Sold is subtracted from Revenue divided by Revenue. Gross Profit Margin has been consistent at 30.4% for two years. This is slightly lower than Winter Sports with 32.1%. The Operating Profit Margin is showing Custom Snowboards has 1.5% to pay for fixed costs. Winter Sports has a better Operating Profit Margin with 5.2 The Net Profit Margin is declining for Custom Snowboards as .3 cents of every dollar is profit, compared to 1.5. The Price / Earnings Share indicate investors are expecting a higher return from Custom Snowboards with $170.52 compared to Winter Sports at $29.00. Investors are willing to pay $170.52 for $ of current earnings (Financial Ratio, 2012).
B1. Historical Analysis
Net Sales for Year 14 $6,407,800 decreased by 3.4% from Year 13 $6,633,200. This slight reduction can be attributed to the decline in the current economic situation. However Year 13 improved by .49% over Year 12, $6,601,000. Even though sales have dropped from Year 13 to Year 14, anticipated sales for years 15, 16, and 17 are expected to recover at a slight incline of 2 – 3.7% per year. The Cost of Goods Sold also showed a decrease of 3.4% (Year 13 and 14). This is a weakness as the percentage between the cost of goods sold and net sales is the same and both and showing a negative Cost of Goods Sold for Year 12, 13, and 14 represented 69.6% of Net Sales, leaving only 30.4% for Gross Profit.. The economic status and decline in winter snow has attributed to a Gross Profit decline of 3.4%. This may demonstrate a weakness of the company in meeting or exceeding their revenue goals. In order to control profit loss, Operating Expenses were reduced from $782,800 for Year 13 to $756, 200 for Year 14. Advertising and Transportation Out show a decline.
Total Selling Expenses represented 11.8% of Net Sales for all three years. Sales Commissions were increased by 3.4%. This was attributed to the growth of sales in Year 13 and was paid out in Year 14. General and Administrative Expenses showed Custom Snowboards stayed relatively consistent with no change in Research and Development, Website Creation and Maintenance, and Depreciation Expense. This shows where the company is controlling costs to a steady level to diminish the negative profitability from loss of sales. Utilities increased by 1.96%. This was a reflection of the increase in cost for natural resources. Another area of increase was Other General and Admin Expenses at 7.59%. This area should be reviewed further to determine the cause for the increase. Vertical Analysis is showing Total General and Admin Expenses has increased from 14.6% for Year 12, 15.5% for Year 13 to 17.1% of Net Sales for Year 14. The Operating Income is showing a 52.91% decline.
This is alarming as Operating Income measures how effective Custom Snowboards is in running their business. Net Earnings are a negative 82.74%, showing a decline from $96,900 for Year 13 to $16,725 for Year 14. Net Earnings also declined from Year 12 $140,250 to Year 13 $96,900, a decrease of 30.91%. Current assets declined from Year 13 $880,950 to $740,155 due to paying off long-term debt, including the purchase of a more efficient production machine. This was in an attempt to offset the decline in net sales. Current Assets for Year 13 was 48.5% and Year 14 was 42.5% of Total Assets. On the comparative balance sheet, cash is showing a nice increase of 7.2%. This increase can be attributed to sales carried over from the previous year. Operating Income declined due to Operating Expenses increasing.
Accounts and Notes Payable is showing a decrease of 3.4%, with Total Current Liabilities at 2% Year 13 and 14. Total Current Liabilities stayed a consistent 7.3- 7.4% of Total Liabilities and Equity for all three years. Custom Snowboards had paid off some of their debt. The Total Stockholder’s Equity is at 2%. This discloses what the stockholder’s would accumulate if all assets were sold. Even though a larger percentage would be more appealing, the stockholders would not owe money is Custom Snowboards, Inc.’s assets were sold. Total Stockholder’s Equity has increased each year as a percentage of Total Liabilities and Equity: Year 12: 43.1%, Year 13: 47.5%, and Year 14: 49.6%. Investors are very interested in Custom Snowboards (Financial Ratio, 2010).
In reviewing the comparative balance sheet, cash is showing a slight increase of 7.2% from Year 13 to Year 14. Year 12 to Year 13 showed 83.8% increase. This increase is from the sales carried over from the previous year. Short term investments decreased from $180,000 to $30,000. $50,000 in short term investments expired over the past year. A shortage of sales has impacted Accounts Receivables. This is showing a 3.4% decrease from Year 13 to Year 14. Cash and Cash Equivalents increased from 12.5% of Total Assets for Year 13.7% of Total Assets for Year 14. Custom Snowboards has improved their ability to increase the cash on hand.
Raw Material Inventory decreased 3.4% from Year 13 to Year 14. This shows Custom Snowboards mirrored inventory to Sales, as they did not over order based on Year 13 Sales Projections. Accounts and Notes Payable is showing a decrease of 3.4%, with Total Current Liabilities at 2% Year 13 and 14. Custom Snowboards had paid off some of their debt. The Total Stockholder’s Equity is at 2%, showing what the stockholder’s would accrue if all assets were sold. A larger percentage would be more appealing, the stockholders would not owe money is Custom Snowboards, Inc.’s assets were sold. Bottom of Form
B1. Future Performance
The future consideration of performance of Custom Snowboards is important to the growth of the company. The company must be considering the next steps they will take to strategically think of the future. Futuristic goals must be set. If a company is not expanding, they are not growing in the marketplace. A company must be able to adapt to change quickly. In reviewing the forecasted trend analysis, using Year 14 as the base year, Customer Snowboards will continue to expand next sales. Year 15 ($6,600,034) vs. Year 14 ($6,407,800) shows a 3% increase in net sales. Year 17 ($6,647,452) over Year 16 ($6,535,956) shows a 1.7% increase. This forecasted revenue growth is a strength of Custom Snowboards’ ability to pay future debt. However, to improve Net Sales Revenue, the company could offer a rebate a month or two before the peak season starts.
Additional products, non-customized, can be created for consumers who are looking for a generic snowboard for learning purposes. Advertising cost and transportation costs can be negotiated. Both of these items can be placed for bid, with the best available price locked in for a specified, negotiated period of time. Contribution Margin can be improved through increasing sales, and reducing the direct labor cost, cost of production, and raw materials cost through utilizing scrap parts. Utilizing the reserve inventory can also play a part in the profitability of the company. Administrative Salaries can be improved by ensuring the company is staffed properly during down times and during peak.
By understanding historical performance over the last three years, factors can be identified which lead to future trends. The historical trend analysis shows that every other year, there is a decrease in net sales. In Year 12, Net Sales were $6,601,000. Net Sales rose .5% in Year 13, declined 3.4% in Year 14, rose 3% in Year 15, declined 1% in Year 16, and rose 1.7% in Year 17, with $6,647,452 in Net Sales. This rollercoaster effect may be impacted by the quality of snowboards. There are several things to consider such as evaluating if the increase in sales are the same consumers upgrading their snowboards or is the increase of sales due to weather patterns? To minimize this impact and continue with future growth, additional product offering may need to be developed. Top of Form
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Activity-Based Costing provides a true interpretation of product costing. This costing method evaluates each activity associated with the production of a product and then allocates a price to the activity associated with the production. This method provides a more accurate costing method. It would allow a company to only add a cost to the product based on the activity needed to produce the product. The Activity-Based Costing Method breaks down each item within manufacturing and assigns a cost based on product and use of item (Johnson, 2012).
Direct Material is showing consistent for both regular and personalized snowboards utilizing both costing methods at $1,177,376. Direct Labor is consistent with ABC and Traditional costing methods at $2,197,768, equaling $3,375,143 for Total Direct Cost of Materials and Labor. Personalized Snowboards have a Direct Labor cost of $686,784 and Total Direct Cost of Materials and Labor of $1,177,344 for both costing methods. The difference between the two costing methods can be seen in the Manufacturing Overhead. Both models show the manufacturing overhead. The traditional method has a fixed cost of $1,068,982 for Regular and $334,048 for Personalized. The Activity-Based Costing Method breaks down each item within manufacturing and assigns a cost based on product and use of item. The Activity-Based Costing of the Regular Snowboard shows a higher cost for Packaging / Shipping and Product Movement.
In order to reduce this cost, Custom Snowboards should consult with a Packaging Lab. A Packaging Lab will work with Custom Snowboards to determine the proper, effective packaging based on product dimensions. Within this testing, they also review how the product will travel throughout the transportation network. In order to control cost of product movement, carrier bids should be submitted to determine the price and transit that will fit the needs of the customers. While the Activity-Based Costing for Personalized Snowboards is higher for Factory Setups $183,758 and quality control $300,938, these cost are associated with personalizing each snowboard to customer’s specifications. In order to customize the product several tools are needed for the customization. Quality Control is important to verify the customer’s specifications are met. The Activity-Based Costing for Regular is $3,922,006 and Personalized is $2,033,511. Custom Snowboards should transfer to the Activity-Based Costing Method. Using the Traditional Method, the unit cost for Regular is $119 and Personalized $105.
Once the Activity Based Costing is utilized, the product unit cost will more reflect the actual production cost of the product with Regular snowboards per unit cost at $162 and Personalized per unit cost at $218. Using the Activity-Based Method more accurately represents cost allocations for making decision about production and pricing. This method helps the company to accurately assign price allocations to assist with long-term stability. Traditional costing is not as accurate and can result in over or under costing a product. A lean operation can be taken into consideration. Work cells should be incorporated into the environment of production. Production equipment is organized to allow products to travel seamlessly from one stage of production to the stage, resulting in a final product.
The equipment is grouped together based on the reasonable production evolution – raw materials are located at one end of the assembly line while finished goods are located at the opposing end. Due to the movement of processing locations, the product has the capacity to be manufactured just in time. Volume would justify the cells. The cells can be reconstructed as design or volumes fluctuate. The benefits are a higher level of production efficiency, eliminate waste, decrease inventory levels, shorter production cycles, improve customer response time, and effective manufacturing capacity by optimization of floor space. A production facility which has a mixture of low volume products would not value from a work cell model. In this case, the assembly process should be reviewed. Work cells keep the associates together and offer the most flexibility to maximize production levels (Cellular Manufacturing, 2012)
Continuous Quality Improvement can be acquired by utilizing Six Sigma. Six Sigma can provide a data-driven approach to eliminate defects with the manufacturing process and product planning. The Six Sigma process measure, analyzes, defines, improves, and helps control to enhance processes. From this analysis, new practices can be shaped to provide enhancements. Six Sigma advances the quality process by eliminating errors and diminishing inconsistency in the business process. Each Six Sigma project follows a arrangement of stages and offers cost reduction or profit upturns. Six Sigma provides several roles dependent on the execution need (What is Six Sigma, 2012).
B3. Internal and External Risks and B3a Recommendations:
An external risk would be economic risks. Custom Snowboards would be exposed to the financial risk the European economy. Weaknesses in the economy can provide a sudden drop in demand. A decrease in demand can cause prices to drop across all industries, placing companies at risk, lowering profit margins and deteriorating income statements. The ProForma Income Statement shows an increase of earnings for Year 15 to Year 19. To mitigate this risk, Custom Snowboards should change their business model to adapt to changing economic conditions.
An internal risk would pertain to the Sales Forecast. The European Sales Forecast does not show the information broken into quarters. Snowboarding is a seasonal sport in which will see ups and down within the financial quarters based on if the weather. Snowboarding will be more popular in the Winter Months or during Spring Break. Quarterly projections allow a company to make necessary financial adjustments based on sales patterns. Inventory levels and sales would be higher during the peak season and lesser during the off season. By following this pattern, the company can avoid an unnecessary inventory stock pile which may not be needed. A reserve inventory can be utilized to cover sales during the off-season and peaks above the quarterly projected sales. Labor would be another internal risk of have an office in an international country.
There would be language and custom barriers. It may be difficult communicating company goals and missions. It will be important there are enough trained employees to cover an international office. In order to mitigate this risk, it will be important to break the communication barrier. An executive or senior manager who is fluent in the language in which the office will reside, should assist with educating and communication to new associates. Interpreters may need to be involved to communicate the company’s goals. Handbooks and Code of Ethics will need to be revamped and translated to the proper language. Education classes should be set to minimize impact to consumers.
Natural disasters would be listed as another external risk. This risk would ruthlessly impact our company’s goal of manufacturing snowboards for our consumers. These natural disasters would be defined as earthquakes, flooding, or hurricanes. These types of business disruptions may take weeks or months to remedy. Even though, we could not control when a natural disaster would occur, the risk can be mitigated by utilized one of our other manufacturing plants to produce the snowboards. A computerized inventory of sales which can be utilized by all plants, will effectively allow all manufacturing facilities to access orders to be processed.
The plant manager can easily determine which orders are remaining to be filled. International laws and regulations would be considered an external risk. Changes in laws and regulations can financially impact a company as they must conform to these new changes by the effective date of the change. Governments can create tariffs or change existing tax laws. To mitigate the potential law and regulation change, the company should have additional funds on hand to cover any unexpected obligations in meeting the new requirements. The company should be available to adapt and correct any defaults in obeying the regulation or law to minimize fines.
B4. Potential Returns
I analyzed the Capital Budget for the direct expansion option for the European Plant Project. Based on that assumption, the analysis of the NPV and the IRR for the expansion is listed below. The investment is $1,000,000. Net Present Value (NPV) analyzes profitability through calculating the deviation among the current value of cash inflows to the current value of cash outflows. Internal Rate of Return (IRR) is the rate of generated increase. The higher the Internal Rate of Return, the more attractive it is to embark on a project (Investopedia, 2012).
The present value of cash flow for Year 15 is $85,089. This increases by 2.21% by Year 19. This takes into account the 10% Present Value factor. Custom Snowboards required return on capital is 10.8%. The NPV is -$40,827. Since this is below zero, this will not add value to the company. The company would be better investing the money than building. The IRR rate of 8.9% does not meet the expected 10.8% return. With this information, the construction of a new plant is not a wise investment.
Custom Snowboards is reviewing three options for considerations for expanding in the European market. The considerations are to either merge with European Snowfun, acquire European Snowfun, build or lease a facility under the Custom Snowboards name. In reviewing the prepared Capital Budgeting spreadsheet, the NPV is -$40,827. This value must be over 0 in order to add value to the company. This project fails to meet the determined threshold. The Internal Rate of Return is 8.9%. This also fails to meet the cost of capital or hurdle rate, of 10.8%. The option of building would take a considerable amount of capital. The build option would be the most expensive and most risky. The build option would include purchasing land, developing blue prints, building a building, and hiring contractors. This option also includes market entry in which European Snowfun will be a competitor. Leasing would include purchasing or leasing an existing building. The Present Value of Outflows of leasing is $653,355 which is higher than the Present Value of Outflows for Purchasing, $597,723.
Leasing a building has many disadvantages. The rent may increase as the market fluctuates. The ownership of the building can change hands. Most importantly, the lease contract may prevent a business from expanding or modifying the current floor plan. With the existing offer price of $2.40 per share, an acquisition of European Snowfun would require $720,000 upfront financing. The NPV of the cash flow are calculated at $732,522. The $12,000 increase over the next five years is attainable. With an acquisition, Custom Snowboards would need to seek additional financing by issuing equity, debt, or both. Acquisition would take over all assets. There would not be a need to lease or purchase a building. The majority of the shares will be maintained by the company A merger with European Snowfun will raise Custom Snowboard’s Earning per Share from .98 to 1.18.
A merger with European Snowfun would not require financing. There would be no upfront costs. European Snowfun shares will be exchanged for Custom Snowboard shares on a 3:1 basis. For every three shares of European Snowfun, Custom Snowboard will trade one share of its stock. Existing staff can assist with the European operations, allowing Custom Snowboards to continue with its operations in the United States. Both companies have unique operating regions; they would complete each other well to gain more market share. Both companies are established and have business methodologies which make them successful in their respective regions.
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Based on this information, it is recommended the Custom Snowboards merge with European Snowfun. Merging allows Custom Snowboards to use the existing European Snowfun facility. There is no upfront cost associated. With the merger option, there is a 3:1 stock exchange. For every three shares of European Snowfun stock, shareholders would receive one share of Custom Snowboard stock. Since there are 300,000 share of common stock outstanding for European SnowFun, the total # of shares of common stock outstanding for Custom Snowboards would increase from 200,000 to 300,000 shares. The EPS for both companies increases. The EPS for European Snowfun is .20. Considering .20 X 3 + .60, the overall EPS is 1.18, which makes this a good opportunity for Custom Snowboards.
Due to the licensing of European Snowfun’s technology, there is an increase of potential sales. Custom Snowboards has the availability to revamp the low quality European Snowfun product to gain additional sales. This option is the least risky. Financing should be considered as an alternate plan. If management decides to not merger, the scenario listed below is the best for financing. Based on the information in the table listed below, shareholders returns will be maximized at Long Term Debt, with a return of $0.16 during Year 19.
If all stock is issued, control will be lost. Even though Year 15, provides a loss in EPS (-$0.024), It dramatically improves over years 16 – 19, bypassing the EPS for 30% Long Term Debt and Common Stock, 80% Long Term Debt and Common Stock, and No Long Term Debt. No Long Term Debt provides the greatest return if stales stay below $60,118. The Long Term Debt option also provides the highest average at 0.309. When EPS declines, the number of common shares is increasing and the net earnings are declining.
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