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ASSESSMENT 2STEPS 7 - 10Accounting, Learning and Online CommunicationZoe AndersenCQ UniversityStep 7 – Contribution Margin & Constraints:Atlas Pearls has many products and services from which I could choose from. I decided to go with their jewellery products as it would make things slightly easier in that I would not have to guess the price. Atlas Pearls evidently sell pearl jewellery and I was able to pick three different products from their website with the price displayed. I picked the following products as they are some of the most popular products sold in their category.Sales Price:Edged Pendant WG DD03 - $1,200Bubbled YG Ring 01 - $1,890Embraced WG Earrings 02 - $1,700Variable Costs:Estimated variable cost percentage of each product - 70%Edged Pendant:0.7 x 1200 = $840Bubbled Ring:0.7 x 1890 = $1,323Embraced Earrings:0.7 x 1700 = $1,190Variable costs evidently can change compared with fixed costs, and they change depending on the activity levels of the firm. However, when it came time for myself to choose what I believe the variable costs to be of each of these products, I had a ‘mind blank’. Martin says to not spend too long on step 7, and I feel I may have spent too long stressing about what variable cost percentage to pick for my products. In the end, I decided with 70% for each of my products. Each piece of jewellery is clearly not the most affordable piece of jewellery you would normally buy. To me, these prices reflect what Atlas Pearls stands for. They take pride in how they develop their pearls and that each pearl is individual to itself. I also believe from researching my company, that the production of producing pearls is a relatively expensive and time-consuming process (it takes 4 to 5 years from breeding to selling the pearls). When going over my firm’s restated financials, I noticed that their Operating Expenses are also higher than Operating Income. This figure can be an indication for the activity level in te production of pearls and may indicate higher variable costs. Contribution Margin:ProductSales priceVariable cost (estimated)Contribution marginEdged Pendant$1200$840$360Bubbled Ring$1890$1,323$567Embraced Earrings$1700$1,190$510Contribution Margins = Sales price – Variable costsThe contribution margin equation is displayed above. My understanding of CM is that it is the amount that will contribute to, and cover first of all, a firm’s fixed costs, and then hopefully produce a profit. If there is a positive CM, firms firstly need to utilise this money to cover their fixed costs, and then see whether there is any money left over which is evidently a profit. Products or service with a negative CM is not what firms want, as it is essentially not making the firm any money nor covering costs. However, a firm also does not want to only keep a product or service with the highest CM as this is not a smart decision if they want their business to be successful. Out of the three products I have chosen, it is clear that the Bubbled Ring has a higher CM than the other products. It is also the only piece of jewellery of the three that is yellow gold compared to the Edged Pendant and Embraced Earrings being white gold. If Atlas Pearls were only to produce this product, it would mean they would only be offering a yellow gold product which is a ring. Customers want a selection of jewellery to choose from, to pick a piece that best suits their interests. If the products on offer were reduced to a small number, people may look to another pearl company for a better selection. The other two white gold products produce a positive CM and therefore can contribute to covering fixed costs and hopefully producing a profit. Therefore, it is important to realise that firms should not only produce one single product that produces the highest contribution margin. When assessing the contribution margin, it is essential to consider constraints that certain products and services may encounter. Considering constraints will assist mangers in making decisions about certain services and products within their firm. A major constraint that first came to mind for Atlas Pearls, is environmental conditions affecting the production of pearls. From my research and reading Atlas’ financial statements, environmental conditions was something that can greatly affect the production of pearls. South Sea pearls are clearly apart of each Atlas Pearls product and without them, business will not be successful. If less pearls are produced, then Atlas will have less stock available for customers to buy and this would negatively affect the firm. As global warming and climate change continue to be a focus in headlines around the world, I believe this is a constraint that Atlas Pearls would need to consider each year when assessing their production processes. Another constraint facing Atlas Pearls is competition. When Googling “pearl companies in Australia”, numerous websites came up from different companies across Australia producing and selling South Sea pearls, as well as other types of pearls. Atlas Pearls would need to compare many factors between their company and their competitors. These factors may include, but is not limited to, how the pearls are produced, selling prices, grading of the pearls and what types of pearls are being sold. Atlas Pearls need to stand out from their competitors in some way so that they can be successful. Atlas Pearls maintain that they produce their pearls in a sustainable and environmentally friendly way, perhaps this is an advantage in terms of people’s interest and morals about products they purchase. However, this could also mean that production is more expensive when performed in a sustainable way, which may increase variable costs. The above demonstrates some of the constraints that Atlas Pearls will encounter. Contribution margin and constraints enable managers to make decisions about the products and services that they produce. Specifically, how many products should be produced, and whether the product should be produced at all. Atlas Pearls is a company that has been around for 20 years and this could be an indication to the successfulness of the company. I identified competitors in the market as one constraint for Atlas Pearls, however, due to the years they have been operating, this could be an indication to the individuality of Atlas Pearls compared with other companies. Although environmental conditions can also affect their production of pearls, Atlas have continued to expand the successfulness of their operations to be able to continue to produce and sell South Sea pearls. I think that although these constraints are present, Atlas Pearls have managed to learn and grow over the years to continue to sell amazing pearl jewellery to their customers. Although these three products have positive contribution margins, there is a large range of jewellery sold on the Atlas Pearls website. Therefore, I think it would be essential to see if all the individual products are producing positive contribution margins for the company. It will be interesting to complete the ratios and see if Atlas Pearls have been learning over the years in an attempt to grow their business successfully. Step 8 – Ratios:Beginning this step was making me feel all kind of nervousness and anxiety. I was already seeing people posting for help in the Facebook group, and also expressing their frustrations about the ratios step in the assignment. I was not looking forward to this step. I struggle with percentages and ratios a little, so that additionally made me more worried about how I was going to explain what each ratio was telling me about my company. I managed to complete the steps for the working area that Maria takes us through. I only came to a bit of confusion when finding the market price per share. I managed to find what I believe to be the correct figures, however, under 2018 it had $’000 and the market price per share was 2.4. I thought, “does that mean I am to input 2400?” I posted in the Facebook group for assistance, and within a short time Robert Marsden had commented his thoughts, followed by Claudia Turiano. They both advised me to keep the figure at 2.4 cents as $2400 for a share would not commonly be correct. As soon as they pointed this out, I felt a little stupid to be quite honest! However, obviously I just needed that pointed out to me and it immediately clicked in my brain which figure I should keep the share price at. -13032261180023958552667000Once I finished the working area with Maria’s guidance and the help of fellow students, I was ready to move onto my ratio analysis. Profitability Ratios:Firstly, the profit margin ratio is a chance for outsiders and investors to see how well a company manages their expenses. A higher profit margin means more profit left over after expenses are paid, to be spent to pay back loans, pay out dividends and so on. A lower profit margin evidently means that expenses are too high, and the company needs to assess where to cut costs. On the other hand, the return on assets ratio examines how efficiently can a company manage its assets to produce a profit in a particular period. Therefore, we would prefer a higher figure as it means the company can manage its assets appropriately to produce a profit. I could firstly see a similar trend between net profit margin and return on assets from 2015 to 2018. Both in 2016 and 2017, Atlas Pearls were making a small net profit for each dollar of sales and assets. They were obviously managing their expenses and assets correctly for those two years. However, in 2015 and 2018, Atlas Pearls were making a loss for each dollar in sale and assets, meaning that they were not managing appropriately. These ratios seemed reasonable for several reasons. Firstly, the low (or negative) ROA ratio would suggest expenses were high, which can be seen in the balance sheet in the original financials for 2015 and 2018. Secondly, the total CI for these years was also a loss compared to the other years having a profit. These could be an indication for why PM and ROA ratios are displaying a loss. left1907700*include comparison to other people’s work*Efficiency Ratios:Days of inventory ratio can tell us how long an item will normally stay in inventory before it is sold. More specifically, the time between purchasing inventory, to the time the company sells it. From the footnotes in Atlas Pearl’s financials, I can see their inventory is made up of pearls and jewellery (current), and nuclei (non-current). In 2015 inventory took almost 200 days to be sold, and in 2016 it decreased, but still took over 100 days. To me, this appears to be a long time for jewellery to move out of their inventory and to be sold to customers. In more recent years, the days have decreased significantly to between 66 to 80 days for inventory to be sold. I believe 2-3 months is a reasonable amount of time as some of the inventory is nuclei, which is utilised specifically for the seeding process in the journey of creating South Sea pearls. It would be important that this inventory does not have low liquidity. I believe the days of inventory ratio is reasonable for Atlas Pearls, considering the pearling process takes 4 to 5 years.left163029400For total asset turnover ratio, it is concerned with a company’s ability to generate sales from its assets. A higher ratio means a higher turnover, and that the company is utilising its assets efficiently. A lower ratio obviously means the company is not very efficient when utilising its assets to generate sales. Atlas Pearls have a relatively constant total ATO ratio across the four years. For example, in 2018, for every dollar in assets, 45cents is generated in sales. This figure is not great and may indicate that Atlas Pearls is not operating efficiently. However, to know this for sure, I would need to compare my company’s total ATO to another company in the same industry to compare and then draw conclusions. (Discuss other students ATO)Liquidity Ratios:right179636000Current ratio is a measurement of a company’s ability to pay its current liabilities with its current assets. A ratio of 1:1 or higher is preferable, however, it is important to place the ratio in the context of the history of the company. A lower ratio may suggest that a company will be unable to pay its short-term liabilities with the current assets available. For Atlas Pearls, they have a high current ratio in most years, which means they have almost double or, more than double the amount of assets to liabilities. However, a higher current ratio can sometimes suggest that a company is not managing their assets efficiently. In the financial statements, the total assets across all four years, are clearly higher compared to the total liabilities, which is reflected in the current ratio I have calculated.Financial Ratios:The equity ratio demonstrates how much a company’s assets is funded by equity investors. For Atlas Pearls, in 2018, 75.4% of their assets were funded by equity investors, and this ratio has remained fairly consistent in the past four financial years. A higher equity ratio can be more favourable as it can indicate higher investment levels from investors, and potential shareholders are able to see this. The debt/equity ratio compares the total equity and debt of a company. It displays that percentage of the company that is being funded by investors compared to creditors. A lower debt/equity ratio usually indicates that the business is being financed by investors such shareholders. Whereas, a higher debt/equity ratio means that the business is being financed by creditors such banks. When looking at Atlas Pearl’s debt/equity ratio, it would appear that is has remained consistent with shareholders financing the firm, rather than banks.left1949100Market Ratios:Atlas Pearls did not earn very much or nothing at all on their shares. I doubled checked that I had done my formula correctly, as Maria points out that you should always check the ratios that are quite different to what you would expect. Everything appeared correct, so it seemed that Atlas Pearls was doing something incorrectly. EPS evaluates how much is earnt for each share. In the financial statements, the total CI indicates that Atlas made a loss in 2015 and 2018, and only a small profit in 2016 and 2017. The number of shares on issue for each year is over 400 million. Therefore, the EPS ratio calculated would be reasonable when looking at these two aspects. I then came to the dividends per share, which focuses on how much the company actually pays out in dividends to shareholders, from the earnings per share. When looking at my statement of changes in equity, I could not find anything referring to dividends paid. I figured it would not be there as Atlas had made no earnings per share. I decided to search the financial statement PDF for the word “dividends”. I found a section in the director’s report, called shareholder returns. Listed, it had “Dividends paid”, then “Nil” across all years, which confirmed that my ratio of 0.0 for dividends paid out was correct. left163805200Lastly, came the price earning ratio (P/E ratio) which is essentially the relationship between a company’s stock price and its earnings per share. It helps people look at the company’s stock value. This ratio was a difficult one to understand as Atlas Pearl’s ratio was quite different across all years. To me, comparing the EPS, DPS and P/E ratios, the value of Atlas Pearl’s shares is poor. From reading information on Google, a higher P/E ratio is not necessarily better than a low one. You must look at everything together and make your decision then. In my opinion, from what I am seeing, buying shares in Atlas Pearls would not appear to be worthwhile investment at this point in time. left60910300** Should this be in a separate Ratios Discussion section? ** Discuss your ratios with other students. How do your firm’s ratios differ to the ratios of firms of other students? What do your firm’s ratios tell you about how well your firm is performing? In your blog, include your reflections on your firm’s ratios: what they tell you (or do not tell you) about the performance of your firm, how they compare to the ratios of other firms and what new questions the ratios might raise in your mind about your firm.left34902900Ratios based on reformulated financial statements:Return on Equity (ROE):The ROE ratio demonstrates a firm’s ability to generate a profit from its shareholders investments. For each dollar, how much is the company turning into profits to grow the company. For Atlas Pearls, I can see a trend between general ratios and the reformulated ratios. In 2015 and 2018, they are not making a return/profit and are in fact making a loss. In 2016 and 2017, they managed to generate a small profit for each dollar of equity investment. They initially improved from 2015, however, have then gone back down into making a loss once again in 2018. Return on net operating assets (RNOA):The RNOA is similar to ROA, this ratio examines how the company is managing its assets, or operating assets, to generate a profit. I can see a similar trend between 2015 and 2018 once again. Atlas Pearls were not managing their assets and operating assets efficiently in these years compared to 2016 and 2017. A positive for 2016 and 2017, is that it appears their operating assets generated a slightly higher profit compared with total assets. Hopefully in the next financial year Atlas Pearls will improve by better utilising their assets. Net borrowing cost:left156615800Net borrowing cost ratio refers to the percentage of expenses incurred when a company borrows money. I can see in 2016 that Atlas Pearls has an insane figure compared with the other years. To attempt to explain this, I looked through my restated financials. I found that in 2016, the NFO is significantly lower compared with other years, which could explain the extremely high NBC. Atlas Pearls also had a large amount of financial cash and cash equivalents in 2016 compared to the other years. * Compare with others to attempt to explain NBC *Profit margin:The profit margin ratio is examining for every dollar of profit, how much is the company turning into sales. I compared net PM and operating PM, and I noticed that Atlas Pearls had improved in each year. In 2016 and 2017, Atlas have been able to increase their profit to sales ratio, and although 2018 has improved, they still have some work to do. Asset turnover (ATO):The asset turnover ratio examines how a company is utilising its assets, and more specifically for this part, their operating assets. I can see that Atlas Pearls is utilising their operating assets slightly better than their total assets as there is an increase. Therefore, for every dollar of assets, Atlas were generating 55 cents in sales. Economic profit:Understanding the term economic profit was quite challenging. I read many websites, listened to Maria’s explanation and read chapter four of Martin’s study guide to attempt to understand the concept. I feel that I mostly understand what is involved, however, the concept has confused me a little as what I read online is slightly different to the chapter reading. This has made it difficult to apply the concept to my own company. Economic profit or loss is the difference between revenue received from sales and the opportunity cost of the inputs utilised. Another way of viewing economic profit is, the money that a company earns or loses from one course of action compared with another, if they had chosen that path. EP involves RNOA, cost of capital and NOA, however, I found it interesting that these terms were not commonly mentioned on most websites and YouTube videos. It is also said that economic profit is a theoretical calculation which can help managers to decide which option is better for the company. left240063200left212852000When looking at the EP I calculated for my company, immediately I noticed each year was a negative. I expected 2015 to have a large loss as almost every ratio for that year indicated a loss. It is clear that RNOA and PM are some of the drivers for why Atlas had an economic loss in 2015, as well as other ratios calculated. In 2016, the loss is not as large, which I believe is because the ROE, RNOA, ATO and PM are all more successful figures compared to other years. In 2017, the economic loss continues, even though Atlas made a small return on RNOA and PM. The RNOA is significantly lower than the WACC, which may be the driver for the economic loss. Lastly, in 2018, the key drivers that I could identify for why Atlas had produced an economic loss, were the losses in RNOA and PM. Additionally, Atlas produced a loss for ROE and therefore, I believe this economic loss ratio is reasonable. Comment on what is driving or causing your firm’s economic profit over the past four years to be at the levels it is. If your firm’s economic profit is negative (or positive), what is causing it to be negative (or positive)? If it is a large number, what is causing it to be so large? If it is a small number, what is causing it to be so small? If it changed a lot over the past three or four years, why did it? If it stayed much the same over the past three or four years, why was this? Discuss your thoughts on what is driving your firm’s economic profit with other students. What similarities or differences are there between the economic profit of your different firms? Why is this? What is causing these similarities or differences? What insights have you gained by ‘breaking into bits’ your firm’s financial statements? What insights have you not gained? In your blog, include your reflections about your firm’s economic profit.Step 9 – Capital investment, Payback period, NPV and IRR:Atlas Pearls is considering two capital investment opportunities for the 2019-2020 financial year.Open a store in Sydney ................
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