Cash Flow Statement And Investment Proposals In JB Hi-Fi - Annual Report FY2017 Essay.

Cash Flow from Operations

Refer to the company you studied for Assignment one. Using some of the information you gleaned there, as well as additional information, calculate the cash cycle period for each of the five years. Then, reviewing the Statement of Cash flows for the most recent two years, evaluate the trends of overall cash flows, but particularly those related to cash flows from operating activities.

Question 2 
Telesmart Ltd. manufactures a high end smart phone with dual sim cards that is popular with young travelers. Related financial data for this product for the last year is as follows:
 Sales 5,000 units
 Selling price $420 per unit
 Variable manufacturing cost $144 per unit
 Fixed manufacturing costs $460,000
 Variable selling and administrative costs $36 per unit
 Fixed selling and administrative costs $500,000.

The CEO is under pressure from the Board of Directors to increase the profitability of the phones and has asked executives from different departments for suggestions. Three managers have responded with the following ideas:
a) The production manager, Aaron Jacobsen, suggests making improvements to the quality of the product. These quality improvements would increase the variable costs by $28 per unit.This would be accompanied by a $30,000 national advertising campaign which he expects would boost sales volume by 30%.

b) The sales manager, Joanne Arnett, believes that the product is unique, but not yet well known enough. Based on her market research, she feels that advertising should be increased by $50,000 and that the product would also be able to bear an increase in price of $60 with sales volume reduced by 10% from the current levels.
c) The marketing director, Jennifer Saunders, wants to undertake a promotion campaign where a $30 rebate is offered to the first 1,500 phones sold. She expects that the rebate program would boost sales by an additional 1,000 units if spending on advertising was increased by $60,000.

You have been asked by the CEO, Sharon Whitmore, to comment on each of these three proposals before she presents them to the Board of Directors. Draft a report in response to this request. You are not asked to make one particular choice or recommendation, but rather to explore the potential strengths and weaknesses that includes discussion on the breakeven, potential profits and, where possible, the margin of safety related to each proposal. Keep in mind that the sales volumes should be treated as estimates only and your report should consider potential variations in actual sales and their effects. Give both qualitative and quantitative support to your comments. 

Question 3 
You are the accountant for FreeWheels Ltd, a tandem bicycle manufacturer that is located in Coffs Harbour and has customers in Australia and the USA. Their estimated current sales volume is 6,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit:

Manufacturing Costs per unit (Based on production of 6,000 units per month)
Direct Material Cost $75.00
Direct Labour Cost 35.00
Variable Factory Overhead 10.00
Fixed Factory Overhead 20.00
Total Manufacturing Cost 140.00
Selling & Administrative Costs
Variable Selling and Administrative Cost 25.00
Fixed Selling and Administrative Cost 20.00 45.00
Total Cost Per Unit 185.00
Selling Price Per Unit $370.00

Cycle World Ltd is an overseas company that sells bicycles all over the world, with the majority of their market in China and India. They have approached FreeWheels about obtaining a quote for a special one-off order as they would like to purchase 25,000 bikes. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred.This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Cycle World Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses. 

Computation of cash cycle (JB Hi-Fi)

Cash show statement (JB Hi-Fi –Annual Report FY2017)

Cash flow from operations – A significant increase in the cash flows generated from operations is apparent in FY2017 which is the result of acquisition of “The Good Guys”. As a result, the customer receipts have surged which despite being partly annulled by rising payment to suppliers and employees still have not been able to completely undo the impact of rising top-line.  The jump in the operating cash flow would have been even more significant if it had not been to the surge in tax paid in FY2017 by about $ 32 million (JB Hi-Fi, 2017).

Cash flow from investing – There is a huge outflow of cash in FY2017 on account of the acquisition of “The Good Guys” for a sum of $870 million which has dwarfed other items in the investing activities (JB Hi-Fi, 2017).

Cash flow from financing – The company has funded this big ticket acquisition by ensuring that incremental proceeds are raised from both debt and equity. As a result, the incremental debt inflow is $ 450 million along with $ 359.9 million of cash derived from equity related proceeds (JB Hi-Fi, 2017). 

Question 2

Proposal 1: Aaron Jacobsen (Production manager)

It has been stated in the proposal that the higher quality mobile phones should be manufactured leading to an additional variable cost of $28. Also, the advertisement cost associated with the proposal would be $30,000. The execution of proposal would lead to boost in sales volume of mobile phone by 30%.

• The quantitative analysis for the proposal 1 is furnished below.
• The sensitivity analysis for the proposal 1 is furnished below.
• The break-even analysis for the proposal 1 is furnished below.

Let x units is the sale volume for the break-even. The profit in this case would be $240,000.

Computation of break-even units

Computation of margin of safety

• Comment – The proposal has the potential of higher profit generation provided the estimates are met in practical. The most crucial of these is sales volume increase. Considering the above computations, an increment of 802 units from the current sale of 5000 units is required to ensure that the profit remains at $ 240,000 (Arnold, 2015).

• The key qualitative factor for this proposal include consideration on the idle capacity available to provide the incremental mobile phone units coupled with ensuring supplies in a timely manner.

Proposal 2: Joanne Arnett (Sales manager)

It has been stated in the proposal that the existing mobile phones are unique but they are not sufficient popular among the customers. Hence, it is essential to advertise the phones more which mean the advertisement cost associated with the proposal would be $50,000. The execution of proposal would lower the sales of mobile phone by 10% but the unit price would be increased by $ 60 per unit.

• The quantitative analysis for the proposal 2 is furnished below.
• The sensitivity analysis for the proposal 2 is furnished below.
• The break-even analysis for the proposal 2 is furnished below.

Let x units is the sale volume for the break-even. The profit in this case would be $240,000.

Computation of break-even units

• Comment – The proposal has the potential of higher profit generation provided the estimates are met in practical. The most crucial of these is sales volume increase. Considering the above computations, an decrement of 333 units from the estimated sales of 4500 units is allowable to ensure that the profit remains at $ 240,000, thereby presenting only a limited cushion for uncertainty (Damodaran, 2015).

• The key qualitative factor for the proposal 2 would be the preference of the consumers with regards to the price and features that they want since the company is planning to raise the prices.

Proposal 3: Jennifer Saunders (Marketing director)

It has been stated in the proposal that company should give rebate of $30 on initial 1500 mobile phones under promotional campaign. Hence, it is essential to advertise the rebate program among the people, the advertisement cost associated with the proposal would be $60,000. Due the execution of the proposal, the company would be able to sell extra 1000 mobile phones.  

• The quantitative analysis for the proposal 3 is furnished below.

• The sensitivity analysis for the proposal 3 is furnished below.

• The break-even analysis for the proposal 3 is furnished below.

Let x units is the sale volume for the break-even. The profit in this case would be $240,000.

Computation of break-even units

Further,

• Comment – The proposal has the potential of higher profit generation provided the estimates are met in practical. The most crucial of these is sales volume increase. Considering the above computations, a decrement of 542 units from the incremental expected sales of 1000 units is required to ensure that the profit remains at $ 240,000 and hence providing plenty of cushion to the company (Petty et. al., 2015).

• The key qualitative factor for the proposal 3 would be the idle capacity coupled with response of price lowering by peers. It is possible that they may also lower prices so as to keep market share intact and thereby a price way may commence.

Question 3

• Capacity (units) = 100,000

It is apparent that company is selling 72,000 units to their regular customers and the capacity of firm is 100,000 and therefore, company has spare amount of units to complete 25,000 units of bikes for Cycle World Ltd. The following factors needs to be taken into consideration.

• No surplus fixed cost
• No surplus selling cost
• No surplus administrative cost
• Expenses in terms of variable cost ($10 per unit)

• Capacity (units) = 90,000

It is apparent that company is selling 72,000 units to their regular customers and the capacity of firm is 90,000 and therefore, company does not have spare amount of units to complete 25,000 units of bikes for Cycle World Ltd under current scenario.  Hence, company has to pull back the supply from regular customers to accommodate the 7,000 units. Cost would be saved for 7000 nits under no selling and administrative costs.

(2) The quote derived by the company is a function of essentially two key factors (Brealey,, Myers & Allen, 2014).

• Production costs (incremental) which are incurred by the company for fulfilling the special order which would be only limited to variable production costs only.
• Desired margins or mark-up which has been kept in line with the current customers where 100% margin is earned by the company.

Opportunities for company from special order

• Acquiring a long term customer
• Improving capacity utilisation
• Improvement in financial position and profits of the company
• Potential expansion to cater to other big clients

Disadvantages for company from special order

• Lack of focus from direct customers to bulk orders
• Reduce the profitability owing to lower price being charged 

References

Arnold, G. 2015 Corporate Financial Management. Financial Times Management, Sydney:

Brealey, R. A., Myers, S. C., & Allen, F. 2014 Principles of corporate finance, McGraw-Hill, New York

Damodaran, A. 2015. Applied corporate finance: A user’s manual, Wiley, John & SonsNew York:

Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. 2015. Financial Management, Principles and Applications, Pearson Education, French Forest Australia , NSW

JB Hi-Fi 2017 Annual Report 2017, viewed on September