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ACCT11059 Accounting, Learning and Online Communication Assignment 2 Step 7 – 10Below is my draft for step 7 – 10, there is still some work to do in broadening my definitions. I have not put anything in my step 10 heading yet as I will wait feedback to write my reflection. Step 7:Variable costs and Contribution MarginsLaura Ashley Home Furnishings and Fashion have an extremely large and diverse range, I have made my 3 choices of a day dress, coffee table and 2 seater sofa. The three products and estimated price I have decided to use are:Day Dress, price $100Coffee Table, price $5002 seater sofa, price $1500 I had thought of an estimated price for each of these products before looking them up, but it would appear women’s fashion and furniture is not my strong suit when it comes to working out prices. The real prices are as follows:Day Dress, price $185Coffee Table, price $9202 Seater Sofa, price $2750If I were to assume that all the employees at all of the factories are on the same wages and they all work the same standard week. I would imagine the differing costs between dress fabric, coffee table timber and sofa fabric along with the various machinery used to produce these items to be the main variable cost. Using this assumption, I will attribute variable percentages as follows.The day dress variable cost 30%, variable costs material and machine powerCoffee table variable cost of 40% variable costs timber and power tools used2 seater sofa variable cost of 60% variable costs of material and powerThe variable cost of each of the products are:Day dress = 30% of $100 = .30 x 100 =$30Coffee table = 40% of $500 = .40 x 500 = $2002 Seater sofa = 60% of $1500 = .60 x 1500 = $900The contribution margin would then be:Contribution Margin (CM) = Sales Price/Revenue (S) – Variable Cost (VC)S – VC = CMDay dress, $100 - $30 = $70Coffee Table, $500 - $200 = $3002 Seater sofa, $1500 - $900 = $600Day DressCoffee Table 2 Seater Fabric SofaSales Price/Revenue$100$500$1500Variable Cost $30$200$900Contribution Margin $70$300$600Contribution Percentage 70%60%40%Managers have to make decisions, these decisions will affect the different quantity of output by the firm. Laura Ashley’s managers have to make decisions based on sales records from previous years, records supplied by the accountants. I would like to assume that all of the products they have to offer have a positive contribution margin, maybe they don’t and that is perhaps part of the reason they find themselves in financial trouble closing stores and restructuring others.I believe the contribution margins that I have allocated for each product The Day dress I believe would have the biggest contribution margin as it requires fabric which requires dyes and patterns and sewing machines to manufacture the dress. The coffee table needs timber which at times maybe dearer or cheaper than it’s allocated cost also required are various power tools to complete this item. Finally, the 2 seater fabric sofa I believe would have the lowest contribution as it requires fabrics and timber so sewing machines and power tools.Some of the constraints that might occur could be there might be a shortage of certain coloured dyes that were popular in the previous season to make dresses. If this were the case then other colours may have to be used possibly affecting future sales of this item. A fire in the timber plantation may affect they quantity and quality of the timber for use in both the coffee tables and sofas. An alternate timber source could be used for the sofa as it is only internal frame work that the fabric is then put over. Limited supplies of coffee tables due to poor quality timber. Step 8 RatiosI was not sure what to expect when it came to working out the ratios for step 8. I will admit I had some reservations when I sat down and started Maria’s video on working out ratios. However, what a relief it was to it wasn’t too difficult as long as I followed the steps, I did manage a few myself once I worked out that I could use all of the acronyms. Profitability RatiosLaura Ashley’s net profit margin is trending down they have gone from a high in 2016 of 4.3 pence of profit generated from every pound of sales. 2018 has taken a turn for the worst as Laura Ashley on managed to generate 0.4 pence for every pound of sales. The company is also experiencing the same problem when trying to generate net profits from assets, in 2016 they made 12.7 pence for every pound compared to 2018 when it plunged to just 0.8 pence for every pound of return on assetsEfficiency RatiosFrom my understanding of this ratio it is how long from when a good is purchased until it is sold. Laura Ashley sell a very large range of different products from clothing to furniture but due to poor sales this relates to a very high average selling of goods at 127.78 days in 2018.Liquidity RatiosThis is one of the only positive outcomes of working out ratios for Laura Ashley, fortunately for them they have more assets than the liabilities that they owe.Financial Structure RatiosThis ratio tells us how the company is funded, a higher equity to debt ratio would be the preferred scenario. Laura Ashley are relying on outside investments averaging around 70% of debt to total assets over the last 4 years, compared to just 30% of their own equity to total assets. Market RatiosLaura Ashley did not pay any dividend to their shareholders in the last financial year, Shares were ?4.48. The previous year Shares were ?11.37 and there were ?0.02 dividends paid. In 2016 shares were ?22.00 and they only paid out ?0.02. In 2015 shares were ?30.5 and they paid ?0.02. Using the formula to work out price earnings ratio the answer is a very high ratio If I were to have purchased Shares in 2018 it would take a very long time to get the money back that was invested. Currently Laura Ashley shares have fallen to an all-time low of just ?2.1Ratios Based on Reformulated Financial Statements These ratios are taken from the restated financial statements completed in step 3 and 4 of this assignment. Thankfully I had inserted all of my acronyms in the restatement process which made it a whole lot easier when watching the ratio video to go and find the corresponding acronym. There has been a steady decline in economic profit over the last few years from ?10.7m in 2016 down to -?4.8m in 2018 this is yet another bad sign for the company. Step 9 Capital Investment DecisionLaura Ashley are looking to open a new retail store in Bond Street London. Over the past few years the company has closed a number of retail outlets due to poor turnover. They are hoping a move into the very up market area of Bond Street will be the boost they need. They are also looking to open a new furniture manufacturing plant in the Sheffield area. This factory will consolidate some of their smaller operations under one roof.Purchasing and fitting out a store in Bond Street London is very expensive, I have probably grossly under estimated the setup cost. As this is a lesson in using different formulas I thought keeping it simple would help me out. Opportunity 1, is the purchase and setup of a new store in Bond Street for a cost of ?20m with an initial life expectancy of 10 years and a payback period of 5 yearsOpportunity 2, is the construction and setup of a furniture manufacturing plant in Sheffield for a cost of ?250m with an initial life expectancy of 10 years and a payback period of 5 years.Investment opportunityBond Street Store LondonSheffield Furniture Manufacturing plantOriginal cost?20m?250mTime Period10 Years10YearsEnd of Life cost sale?10m?50mEstimated future cash flowYear 1? 3m?25mYear 2? 3m?25mYear 3?4m?25mYear 4?4.5m?30mYear 5?5m?35mYear 6 ?5m?35mYear 7?5m?40mYear 8?5.5m?50mYear 9?5.5m?50mYear 10 including sale of property ?16m?100mWhen I first entered my figures in to the spread sheet and completed working out the Net Present Value (NPV) and Internal Rate of Return (IRR), all I ended up with were Hashes. I knew from the ratio video that I had an answer there but there were to many decimal places, after fixing this issue up I realised that my figures were way off so I played around with the numbers until I came up with the table above. If this was a genuine business scenario by far the best option would be the new shop in bond street, along with an NPV of ?10.85m and a great IRR of 19%. With a payback period of 5 years 36.5 days it is very probable this investment might be considered as even though it is just outside the payback period there is on paper a very good return on the company’s investment. The other investment option of a new manufacturing plant would in all likely hood not get any further than this stage. It would take 7 years and 8.4 months to pay off this investment decision, the IRR is 8% but with a -?22.24m NPV it will probably be over looked. Maybe with some further research it might become a viable option.Step 10 Feedback ................
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