Assignment Two: Step 7-10
Course ACCT 11059 – Accounting, learning & online communication
Degree Bachelor of Property
Patrick Turner 12074322
Campus Distance (Newcastle)
Step 7
In order to complete step seven, I ventured to the Bovis Homes official website to locate some
products to analyse. I was a little worried that I would not be able to find any specific prices on any
products or services offered as many websites nowadays like to just specify something along the
lines of ‘price on application’, or similar. This would not be idea as I don’t always trust my own
estimates of housing and land, particularly if they are speculative home-style builds where costs are
minimised due to bulk supply and production. To my surprise, I found quite a comprehensive e-
brochure, which even included floor plans and the option for a virtual tour! Unfortunately, there
was no breakdown of costs of different aspects or stages of the development, such as a price
estimate of land, only the full package price. I spent quite some time perusing through all the
different packages available and decided to focus on three of nine house plus land packages
currently offered within Winchester Village (sounds nice) in Hampshire on the southern coast of
England. The three products I selected were all quite different layouts and sizes, each contributing
to a reasonable variance in price. The specific packages and their respective selling prices are:
1. 3-bedroom terrace (‘The Gardiner’) selling price = £474,950.
2. 4-bedroom end terrace (‘The Ferrars’) selling price = £555,950.
3. 6-bedroom detached family home (‘Elliot’) selling price = £1,139,950.
To calculate variable costs, it is important to delineate what they encompass. Specifically, variable
costs are expenses that fluctuate depending on quantity (i.e. increase with increase production),
whereas fixed costs are those that are consistent irrespective of how many products are produced
(i.e. fixed in relation to quantity). Subsequently, I could not find reliable data to base my calculations
on as costs of building depend on a myriad of factors. Despite this, the variable costs for these
packages would be moderate as the cost of materials and trades is dilatorily related to and therefore
vary with production output. Accordingly, I have assigned an estimated variable cost percentage of
70% to each of the house and land packages to account for the variable nature of trade, material
costs and other variable overheads associated with increases in production levels.
Variable cost of each package (using 70% as an estimate):
1. The Gardiner: VC = 0.7 x 474950 = £332465
2. The Ferrars: VC = 0.7 x 555950 = £389165
3. Elliot: VC = 0.7 x 1139950 = £797965
Contribution margin = sales price (S) – variable costs (VC):
1. The Gardiner: CM = 474950 – 332465 = £142485
2. The Ferrars: CM = 555950 – 389165 = £166785
3. Elliot: CM = 1139950 – 797965 = £341985
The Gardiner The Ferrars Elliot
Sales price 474950 555950 1139950
Variable cost 332465 389165 797965
Contribution margin (CM) 142485 166785 341985
CM ratio 30% 30% 30%
Given that contribution margins are contingent with sale prices and variable costs, products within a
similar category (in the case of Bovis homes, similar house and land packages in the same area, built
using similar processes) are likely to reflect similar contribution margins. This is due to the fact that
the variable expenses involved such as the cost of labour, materials and variable overheads will
increase proportionately with sale cost. Although a higher CM contributes most to profitability, the
demand for a product with the highest CM ratio may be relatively low. Thus, in many cases, it is
more beneficial for a company to offer a range of products that may or may not have a similar CM, in
order to meet demand and maximise profitability. This consideration also must take into account
possible constraints on supply and production within the market.
A primary constraint that may affect operations for Bovis Homes is the fact that there is a significant
skilled labour shortage currently in the United Kingdom (i.e. tight labour market where there are
more jobs than workers). As a result, Bovis has cited labour shortages as a key reason may homes
have not been finished on time. Furthermore, the cost of private contractors can be quite expensive
and still not make up for the shortage to ensure production can meet demand. This constraint is a
pertinent consideration with respect to deciding how much of each product should be sold. As such,
ensuring that the products/services offered are contributing most to profits is vital, particularly
under circumstances where access to labour is of greater concern than the availability and cost of
resources. Depending on the true contribution ratios amongst different house and land packages,
when the labour market is tight, the supply levels of each respective package may vary.
In addition to labour constraints, a market constraint may be the price of land in various regions
serviced by Bovis (i.e. United Kingdom). For example, areas close to major cities such as London may
have extremely high property prices making the products much less viable for Bovis, when compared
to a suburb further away from the city such as x. Another consideration would be the socio-
economic status of the various regions across the UK. In areas of lower socio-economic status, Bovis
is much less likely to be selling many 6-bedroom detached home and land packages such as ‘The
Elliot’. In this case, lower-cost alternatives such as the ‘The Gardiner’ may have a much higher
demand and therefore contribute more to profits, even if the contribution margins were equal.
Step 8
Net profit margin:
Net profit margin is essentially the percentage of revenue left over after all costs have been
deducted from sales. In other words, it quantifies the profit that a business is able to generate from
total sales. Accordingly, a greater net profit margin may suggest that Bovis is pricing its products and
services quite well and is managing costs appropriately. I found this ratio relatively difficult to gauge
as it is highly dependent on the industry. For instance, in cases where inventory is turned over quite
rapidly, such as in the case of supermarkets, a lower net profit margin may be adequate. Though for
Bovis Homes, it would likely need to achieve a much more substantial rate of cash flow in order to
be able to purchase land and materials. Though, from my own research, the consensus was that a
net profit margin of 10% or more is typically a sign of a healthy net profit margin. In 2016, Bovis
Homes generated 11.46 p of net profit for every £1 of sales. This indicates that Bovis is achieving a
fairly good net profit margin, though it has decreased slightly in the past two years. Nevertheless, it
appears that Bovis Homes is earning relatively efficient profits from its business.
Return on assets:
The return on assets (ROA) is also a ratio of profitability. ROA basically contrasts net earnings
against total assets. In doing so, this variable allows us to evaluate the efficiency with which assets
are used to make a profit by managers. Accordingly, a high ROA is indicative of better financial and
operational performance. However, similar to net profit margin, the particular industry the
company of interest is trading in must be considered. In 2016, Bovis Homes returned 7.4% (i.e. 7.4
p) for every 1 GBP of total assets. In general, ROA figures have tended to decrease over the past few
years in particular. This trend suggests that Bovis is typically extracting less profit for every 1 GBP of
assets each year since 2014. Total assets have increased every year since 2016, thus greater assets
will negatively affect ROA. This may in part explain why ROA is trending downwards since profit in
2016 is comparable to 2015 and substantially higher than both 2014 and 2013.
Days of inventory
Next, we calculated two common ratios reflecting efficiency, namely days of inventory (DSI) and
total asset turnover. DSI basically calculates the number of days it takes a given business to turn raw
materials into sales (i.e. average time a company’s money is tried up in inventory). As such, it
attempts to examine the efficiency of inventory management. While it is logical that a lower DSI
would be preferable, it is again imperative to account for the nature of the particular industry. Given
Bovis Homes is a relatively large company who builds ‘spec’ homes that utilise similar materials, they
are likely to maintain a larger inventory of commonly used materials. Consequently, if market
conditions change and demand falls, Bovis runs the risk of accruing debt that they cannot pay.
Further, given the long period of time between when land is purchased until the home is built and
sold, it is not surprising that Bovis’ DSI was 645 days in 2016. The key point to note here is that each
year (since 2013) this number has reduced and is significantly more efficient than the 833 days
reported in 2013. Therefore, the level of efficiency for inventory management appears to be
improving.
Total asset turnover ratio
The second efficiency ratio used to gain further insight into asset utilisation is total asset turnover.
This calculates the relative value of a business’s sales in relation to the value of its asset base. In
other words, we can see how efficiently Bovis is turning each 1 GBP of assets into sales. In this case
a higher number would indicate better productivity given the business would be generating more
revenue per GBP of assets. However, it is also important to consider how sustainable asset
utilisation is (i.e. is there any risk of burnout). In 2016, for every GBP of assets, Bovis was only
generating 65 p. While this trend is increasing, I could not find a ‘cut and dry’ interpretation of what
a good asset turnover ratio would look like. My intuition leads me to believe this is quite small,
though as homebuilding on the scale that Bovis operates is quite ‘asset-intensive’, I somewhat
expected this ratio to be relatively small. Given that sales and total assets have been increasing
since 2013, the lower ratio may be influenced by an increase in the amount of cash sitting in the
bank as well as inventory. Furthermore, given the relatively large accounts receivable (particularly
current assets: £84,992 m), Bovis’ collection policies may be too relaxed and therefore lowing total
asset turnover. Another contributing factor may be that property and equipment is not being
utilised to their full potential. Indeed, Bovis have a naturally lower asset turnover ratio due to the
large amount of asset purchases they make in anticipation of future growth. For instance, Bovis
added 3,047 plots to their land bank in 2016, which may not be turned over for several years.
Nevertheless, efficiency is trending in a favourable direction.
Current ratio
Based on Maria’s explanation, a current ratio is a calculation used to determine a company's ability
to settle their short-term obligations using current (i.e. liquid) assets. Given the ratio is current
assets divided by current liabilities, it is quite straightforward to understand that if a business has a
ratio of greater than one, they would be capable of paying off their short-term debts, if necessary.
In the case of Bovis Homes, the business had £3.54 for every GBP of current liability in 2016. From
my understanding, an acceptable ratio (while subject to the particular industry), typically may fall
between 1.5 -2:1. Therefore, it becomes clear that Bovis has the capacity to liquidate current
liabilities to pay for current assets. Although this ratio is down on previous years, the company has
also undergone fairly rapid expansion since 2013, evidenced by an increase in current assets. In
doing so, its current liabilities have increased substantially, which would imply less ability to pay
suppliers etc. Though a further consideration is that Bovis’ current assets consist of a large
proportion of inventory relative to other cash and receivables, which may be difficult to liquidate in
the short-term. Despite this, the financial health of the company from this aspect, appears to be
relatively good.
Debt/equity ratio
Debt to equity ratio is a common metric used to evaluate the relative riskiness of a firm’s financial
structure. This allows us to gauge a firm’s reliance on borrowed funds and gives an indication of
their capacity to fulfil any financial liabilities. While it would clearly be an advantage if a company
possessed a lower ratio, I was not able to determine a conventional norm through my own research.
In the case of Bovis, the debt to equity ratio was 0.60:1. This means that for every GBP of
shareholder equity, the company derives 60.5 p from external sources (e.g. a bank). This means that
approximately three-fifths of its capital financing is from debt. To me, this rate seems to be quite
high and the trend has been increasing in recent years (almost double since 2013). This pattern
implies that the firm is being increasingly financed by creditors as opposed to internal positive cash
flow, which is not preferable. This ratio carries important implications as too much debt may
endanger business operations if cash flow depletes.
Equity ratio
The debt equity ratio measures the percentage of total assets that are equity-financed, reflecting the
amount of assets in which investors have residual claim to. Clearly, a lower figure would infer that a
relatively less proportion of debt was employed to purchase assets. As such, higher ratios are better
from a risk standpoint, since equity does not demand interest payments. Bovis’ equity ratio for 2016
was 62.3%, meaning it finances over three-fifths of its assets using equity, and the remaining 37.7%
with debt. Given the equity ratio has been decreasing since 2013, this represents relatively
increasing risk to stockholders. According to Maria, when the debt proportion of total assets
reaches over 40%, it becomes concerning. This may suggest Bovis’ borrowings may be getting to
high, though the company is large and has reasonable profitability. While the equity ratio has been
decreasing in recent years, it has eased over the past year, potentially indicating a shift in trend.
Market Ratios
Three market ratios were also calculated to determine earnings and dividends per share as well as a
price earnings ratio. Earnings per share merely provides a measure of how much profit there is per
share issued. For Bovis’ equity investors in 2016, each share issued had a profit of 90 p. In general,
earnings per share have experienced a general increase since 2013, though was 5 p lower than 2015.
While revenue was up 11.4% on 2015 figures, net profit was less. The reason for this is due to the
fact that profits were impacted by incompletions and resulted in increased expenses in 2016,
particularly a £7 million customer care provision. Dividends per share are also of interest when
analysing a firm, particularly for equity investors as the shareholder payout traditionally always less
than the profit per share. Accordingly, Bovis paid out a dividend per share of 41 p. This dividend has
been consistently increased since 2013, despite the reduction in net profit compared with 2015.
Finally, the market price per share allows us to calculate what a share will earn, in comparison to
what it cost. This is particularly useful as it details how many years it would take to pay off an
investment in a share. In 2016, it would take 9.1 years to earn back the original investment. This
seems like a very long time before you make your money back! However, it is evident that this trend
is decreasing quite fast and is a drastically shorter time than 17.7 years in 2013. When put in
context, the average is understood to be 15-25 years. Therefore, 9 years is actually quite impressive
in reality.
Return on equity
The return on equity ratio (ROE) is a very useful metric that quantifies the proportion of return
earned on the shareholders' investment. Given this basically details the profit available to equity
investors in relation to the capital provided by those shareholders, it is of fundamental importance
to potential investors. In 2016, for each GBP of shareholders’ equity, Bovis generated £10.77 in
profit. My initial reaction was that this rate of return seemed quite good to me, considering the
building industry is relatively asset-dense. From additional research, I found the average ROE to be
around 10.5%. Although the trend has been decreasing since 2014, this return is above average.
The main reason for this decrease is that comprehensive profit after tax decreased by 14.7% from
2015, at least partly due to the provision payout discussed earlier. In addition, total equity has
increased during that time. Given greater capital has been provided and profits have decreased, the
return on equity is inherently affected.
Return on net operating assets
Return on net operating assets (RNOA) basically provides another measure of a company’s financial
performance by calculating the ratio between operating income after tax and net operating asset.
The main benefit of this variable is that it calculates how much operating income a firm generates
with respect to its operating assets. Accordingly, if RNOA is increasing across years, it suggests the
business is creating more profit from its operating assets. Therefore, a higher NOA is more
favourable, and is closely associated with the amount of operating income. In the case of Bovis
Homes, RNOA experienced increases between 2013 and 2015, though decreased in the last year,
which is not ideal. In 2016, the RNOA was 11.9%. The reason for the decrease is primarily that
comprehensive operating income after tax decreased by 14% in 2016 due to the effect of substantial
increases in costs resulting from remeasurements on a defined benefit pension scheme for
employees. Despite this, when RNOA is compared with return on assets, profitability increases
when financing assets are omitted. Overall, Bovis appears to be quite profitable.
Net borrowing cost
Net borrowing cost (NBC) gives an indication of the total charge of taking on a debt obligation, which
typically encompasses interest repayments and other fees in relation to loans. For Bovis Homes,
total financial assets have exceeded total financial liabilities each year since 2013. As a result,
expenses have generally trended in a negative direction, though increased 1.81% in 2016. This was
likely because total financial assets were relatively less in 2016 in comparison to 2015, while net
financial expenses were comparable over this period. It is worth noting here that if the interest rate
Bovis is paying on financing their investments is less than their return on assets (ROA), is it not a
good sign.
Profit margin
Profit margin (PM) is the percentage of revenue that a firm maintains after all costs have been paid
and is arguably the most prevalent (or at least well known) indicator used to appraise the financial
position of a company. Looking at Bovis Homes, the PM of the firm was increasing between 2013-
2015, though decreased in the past year to four year low of 10.79%. As far as I could gather from
web resources, a PM of 25% or better is considered good. With that consideration in mind, the PMs
of Bovis seem quite poor. When compared to net profit margin in 2016 which includes both
operating and financing profit, profitability is less. Despite the higher revenue achieved in 2016,
comprehensive operating income after tax reduced significantly since 2015 due to changes in other
comprehensive income line items. Nevertheless, Bovis is still generating 10.79 p per GBP of sales in
profit.
Asset turnover
Asset turnover (ATO) simply contrasts revenue and assets. The main purpose of this ratio is to
determine the amount of revenue created by investing in a given quantity of assets. Accordingly, a
higher ATO ratio would infer that the firm is efficient in using a relatively smaller investment in
assets to generate large proportion of revenue. From the data, Bovis’ ATO has been consistently
increasing each since 2013, which is a good sign. When ATO is compared to total asset turnover,
asset efficiency is actually better when financing assets are neglected. Overall, Bovis is trending in a
positive direction and was able to turn every GBP of assets into relatively higher amounts of revenue
each year (i.e. 1 GBP of asset into £1.10 in 2016) over the past four years.
Economic profit
It is a vitally-important metric to consider as it calculates the difference between the revenue
generated by a business from sales and the opportunity cost of the resources utilised by the firm.
Looking at key drivers, the main variables of interest that affect economic profit are and NOA and
RNOA given that it was assumed that the cost of capital was constant at 10%. With respect to NOA,
it has increased consistently each year since 2013 due to increases in both total operating assets and
obligations. Of particular relevance is the substantial increase in inventory over the past four years,
which rose almost 10% between 2015 and 2016. The reason for this was a spike in the value of
residential land, which increased by £6.9 million. This component of total operating assets is likely
the major catalyst underlying the boost in net operating assets observed since 2013. Moreover,
RNOA is inherently affected by both comprehensive operating income after tax (OI) and NOA. OI has
decreased in the past year mostly as a result of increased costs attributable to remeasurements
associated with a defined benefit pension scheme. Changes in operating profit before income tax
are also relevant factors since both revenue and administration expenses have increased over the
past four years. Taken collectively, accounting profit exceeds the cost of equity capital for Bovis,
every year with the exception of 2013, thus economic profit has generally been positive. Given NOA
has increased consistently over the past four years, the majority of variance in economic profit (and
hence the key driver) during this time must be related to components of RNOA. Specifically,
substantial fluctuations in OI as a consequence of changes in total other operating comprehensive
income.
Upon reflection of this entire assignment, I have gained a wealth of knowledge and appreciation for
the power and role that accounting plays in understanding a business. This has been an extremely
enlightening experience for me since before the beginning of this unit approximately 13 weeks ago, I
had not done any sort of business, accounting or economics courses at any stage throughout my
education. The major concept/insight that has been reinforced throughout this journey is that there
is more often than not, no ‘cut and dry’ answer to many issues faced in business and accounting.
Indeed, as with many situations in life, we must use logic, common sense to make our own educated
judgements on certain things. Based on steps 8-10 of assignment two, I now realise that ratios and
other calculations are often very industry-specific. For instance, very asset-dense industries may not
necessarily follow conventional trends. I also gained a greater understanding of the myriad of
caveats associated with focusing too much on certain ratios and other variables. This can be very
misleading since certain indicators can be skewed or manipulated (sometimes with significant risk).
Therefore, it pays to really know what exactly the firm of interest does and be aware of their past.
This highlights that it is best to take a holistic approach and utilise a diverse range of indicators when
analysing a firm to gain a more accurate insight. By the end of step 8 I found myself starting to know
and anticipate which variables interact with one another, making it easier to suspect the reasons
behind certain trends and ratios. This is a stark contrast to me only really knowing what profits and
costs were (sort of) back in week one!
Link to my blog can be found here.
Step 9
Bovis Homes Group are considering two potential investment proposals to replace an ageing fleet of
compact excavators, which are integral to their construction operations. The board have reached a
consensus that the 25 existing machines will be replaced by a fleet of 40 to account for expansion.
Komatsu has won the tender to supply the machines, and have offered either 40 brand new 2018
PC55MR-3 excavators, or the equivalent outgoing 2017 model at a reduced price. The 2018 models
cost 130,000 each, whereas the 2017 models cost 85,000 each. Bovis must now elect whether to
purchase brand new machines at a greater initial cost, or choose the 2017 models. In either case,
Bovis intends to keep the machines in operation for at least 8 years before they are deemed more
trouble than they are worth. In the case where the machines are no longer required, they may be
sold to other construction companies. The investment would be made on 01 January 2018 and the
estimated cash flows are to be received on 31 December of each year. The original cost, the
estimated life, residual value and estimate future cash flows of each investment opportunity are set
out in the table below. There is an assumption that a rate of return/discount rate/WACC of 10%
would apply. All amounts are expressed in GBP millions.
2018 Model 2017 ModelCost per machine 0.13 0.085Original cost -5.2 m -3.4 mEstimated useful life 8 years 8 yearsResidual value 0.048 0.035
Estimated Future Cash flows for 8 years31 December 2018 (time period = 1 year) -2 -1.331 December 2019 (time period = 2 years) -1.5 -0.931 December 2020 (time period = 3 years) -0.5 -0.131 December 2021 (time period = 4 years) 2 131 December 2022 (time period = 5 years) 3 2.231 December 2023 (time period = 6 years) 4.5 3.531 December 2024 (time period = 7 years) 5.5 4.131 December 2025 (time period = 8 years) 6.4 5
Based on the data, both options have positive NPV values and would therefore be viable for Bovis to
add value to the firm. However, given that the two investment options are mutually-exclusive, it is
necessary to determine which option would contribute most to the business. NPV is a key variable
to consider when making capital investment decisions due to the fact that NPV accounts for all cash
flows and risk. A further benefit is that it is sensitive to changes in wealth and projects can be
ranked against one another. Although either investment would be beneficial, £ 3.08 m derived from
option two is considerably better in comparison to option one (i.e. £2.97 m). When considering the
internal rate of return (IRR), it should be noted that IRR cannot be used as an indicator of rank for
Comparison 2018 2017NPV £2.97 m £3.08 mIRR 15.8% 18.7%Payback 5.9 5.7
mutually-exclusive items. Thus, in this case, it would therefore not be a very relevant indicator.
However, IRR does consider all cash flows in addition to the ‘time value of money’. Typically, is
required that the IRR exceeds the WACC in order to be considered acceptable. As both models of
machinery are well above the WACC (i.e. 10%), both would be worthwhile (18.7% and 15.8% for the
2017 and 2018 models, respectively). Finally, for any investment proposal, it is crucial to calculate
how long it would take for each option to pay for itself. From the table above, it is evident that both
options have comparable payback periods (i.e. 5.7 years for the 2017 model; 5.9 years for the 2018
model). Both options are therefore within the acceptable range of 8 years specified. When
accounting for cumulative cashflow at the point that each option is paid off, the 2017 model (i.e.
option 2) is expected to have made more money.
When all variables are taken into consideration, opting for the 2017 clearance model at a lower
upfront cost would be the best investment option for Bovis, given the circumstances. The 2017
model is expected to contribute to greater profit, likely greater returns and a relatively shorter
payback period. Since the 2017 models are also still ‘new’, they would also not be anticipated to
incur any additional running or maintenance costs.
Step 10
As with the other steps within assignment one and two, I benefited mostly from providing feedback
to others. While in most cases I was not able to receive any feedback myself, this process
nevertheless provided me with an excellent opportunity to help others develop their work as well as
notice things that I could do to improve the quality of my own learning and work. I truly believe that
there is so much to be gained from peer learning – even more so than when your own work is
examined. I also found the forums and blogs really helpful as a distance student, given that my own
questions and issues were shared most of the time with several others in the unit. Accordingly, I
found the combination of peer appraisals and forum/blog interaction really rounded off my whole
learning experience during this course. Please see below for my feedback to three other students.
COMPLETED FEEDBACK FORMS
Feedback To: Tenille Ashton
A link to the feedback provided can be found here
My comments
Step 7
Identify three products or services of your firm
Estimate selling price, variable cost & CM
Commentary – contribution margins
Constraints – identify & commentary
Did well to source 3 products given her company Phosphagenics is a biotechnology company that does not sell products per se.
Selling and variable prices as well as CM per unit are justified and seem reasonable. CM formula correct.
Insightful comments regarding product ranges with reference to varying CMs.
Constraints described were appropriate and demonstrated a strong understanding of the company’s past issues. Great work here!
Step 8
Calculation of ratios
Ratios – commentary (blog)
Calculate economic profit
Commentary – drivers of economic profit (blog)
Ratios all seem to be correct, linked to other worksheets (i.e. financial and restated sheets).
No link to blog provided – would recommend embedding a link into your Word document to make it easy for markers.
Negative economic profit calculation seems to be correct and linked to appropriate variables.
I enjoyed reading your thoughts about the ratios you calculated. Even though your company does not turn over profit like most firms, your analysis could still benefit from elaborating on why your economic profit is negative and also what the main factor(s) are influencing that calculation. Overall, a solid job I think.
Step 9
Develop capital investment decision for your firm
Calculation of payback period, NPV & IRR
Recommendation & discussion
Could include more contextual information about the scenario and would also recommend specifying any assumptions used.
Spreadsheet variables all seem correct (payback, NPV, IRR etc.) and linked appropriately.
Good formatting in spreadsheet.
Correctly recommended positive NPV option.
Discussion was quite short, but ideas are good.
Step 10
Individual feedback with other students
Thoughtful feedback provided to three people as required.
Overall Overall, I think this is a good effort. I agree with all your points of discussion based on your data, though I think your mark would be bolstered if you added a little more detail where I have mentioned. Great job overall, all the best!
COMPLETED FEEDBACK FORMS
Feedback To: Gareth Davies
A link to the feedback provided can be found here
My comments
Step 7
Identify three products or services of your firm
Estimate selling price, variable cost & CM
Commentary – contribution margins
Constraints – identify & commentary
Selected three different products offered by Sigma Pharmaceuticals – good justification added.
Selling and variable price identified in addition to CM using correct formula.
Good understanding of CMs and also the products offered by Sigma. Offered interesting insight into reasons for varying CMs across the products.
Constraints were offered but not made obvious. I would recommend elaborating a bit more.
Step 8
Calculation of ratios
Ratios – commentary (blog)
Calculate economic profit
Commentary – drivers of economic profit (blog)
All ratios appear to be calculated correctly and all cells are appropriately linked to either the financial or restated sheets.
Check your economic profit calculation. I am unsure as to why you have (RNOA-.1449)*NOA)*1000). I would recommend (RNOA-.1449)*NOA).
Great analysis and use of tables.
Shown good understanding of the significance economic profit and how it has changed over
the years.
Step 9
Develop capital investment decision for your firm
Calculation of payback period, NPV & IRR
Recommendation & discussion
Clearly described assumptions and context of potential investment options.
Calculated all required variables with noteworthy skill – all seem correct.
Clean formatting.
Recommendation in line with calculations and correctly chose positive NPV – option 1.
Would benefit from a conclusion statement that is a bit more elaborate.
Step 10
Individual feedback with other students
N/A
Overall Great work here overall. You have been really succinct and show a good understanding throughout. I would just double check my comment regarding the calculation of economic profit. Congratulations on a great job, all the best!
COMPLETED FEEDBACK FORMS
Feedback To: Keira Esler
A link to the feedback provided can be found here
My comments
Step 7
Identify three products or services of your firm
Estimate selling price, variable cost & CM
Commentary – contribution margins
Constraints – identify & commentary
Did well to locate three products along with their purchase price given the lack of access to information.
Variable costs calculated using two alternative methods that seem appropriate.
CM calculated using correct formula.
Good logic used to discuss different CMs among the 3 chosen products. Though could add a few more comments I think.
Appropriate constraints discussed that are relevant to the products.
Step 8
Calculation of ratios
Ratios – commentary (blog)
Calculate economic profit
Commentary – drivers of economic profit (blog)
All calculations of ratios appear to be correct and you have linked the cells correctly to each sheet – well done.
Insightful comments throughout step 8 regarding ratios, though some variables discussed are relatively brief. Consider adding a little more to some of these.
Economic profit is calculated using the correct method and is linked.
Basic trends identified – would look further into annual report notes to see which contributors to operating assets are making the biggest impact on economic profit. Why is it positive and relatively large?
Step 9
Develop capital investment decision for your firm
Calculation of payback period, NPV & IRR
Recommendation & discussion
Context is justified and well described.
All necessary assumptions covered.
Calculations of payback, NPV and IRR.
Appropriate option recommended (i.e. option 1) with sound justification.
Step 10 N/A
Individual feedback with other students
Overall Overall excellent job. You cover all the necessary requirements in a succinct manner. I would consider adding a few more details to key concepts such as economic profit to maximise your marks. Great work Keira! All the best.