Identifying Three Products and Estimating Selling Price and Variable Cost
Aspermont Information for Industry engages in the business of providing content based services. The company prepares reports as per client’s instructions, issues publications, and arranges conferences and events (Aspermont, 2017). The three types of primary services provided by the firm have been identified as under along with their estimated prices, variable costs, and contribution margin:
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Services
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Reports
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Online Publications
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Conferences and Events
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Sales price
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1000.00
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500.00
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1500.00
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Variable cost
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450.00
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250.00
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900.00
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Contribution margin
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550.00
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250.00
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600.00
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The company provides services of content writing which includes preparation of research reports and online publications. Further, the company also arranges events and conferences. The sale price of services depends upon the efforts and expertise required to provide services. Further, the variable cost of the services also differs based on the type of labor required to provide a particular service. As the sales price and the variable cost of services differ from each other, therefore, the contribution margin also differs.
The company earns highest contribution margin from the services of conferences and events, thus, it should use more of its capacity to provide services of arranging conference and events. However, there might be constraints on the capacity to provide services of conference and events. Further, there might also be demand of such services limited in the market leading to decide the company to diversify its service portfolio.
Ratio Analysis and Economic Profits
Ratio Analysis
The ratio analysis covers financial analysis of the company from four core aspects such as profitability, liquidity, efficiency, and solvency. In the case of Aspermont Information for Industry, the ratios covering these four aspects have been computed for four financial years (Tracy, 2012). In regards to profitability, it has been observed that the company is incurring losses. The net margin and return on assets of the company are negative. The net margin has gone down from 8.80% in 2013 to -30.30% in 2016. Further, the return on assets has also gone down from 8.0% in 2013 to -25.70% in 2016. The average of net margin and return on assets of other students has been found to be 10% and 12% respectively (excel attached).
As the company engages in providing services, it does not maintain inventory, hence, the inventory day ratio could not be computed. The asset turnover ratio shows a downwards trend over the period, which depicts degradation in the efficiency of the management. In the year 2013, the asset turnover ratio of the company was observed to be 0.91 times while it went down to 0.85 times in 2016 (excel attached). The downfall in the ratio depicts deterioration in the management’s efficiency. The average of other students has been found to be 1.20 times which depicts lower efficiency of the management (Tracy, 2012).
The current ratio of the company has been found to be falling down from 0.58 times in 2013 to 0.30 times in 2016. The decrease in the current ratio indicates deterioration in the liquidity position of the company. Further, it has been observed that the company’s liquidity is lower than the average of the firms. The average of other students shows a current ratio of 1.30 times. The debt to equity ratio of the company is very high which indicates high risk of solvency. The debt to equity rose from 312.30% in 2013 to 2165.40% in 2016. The average debt to equity ratio is 200%.
Economic Profits
The analysis of economic profits gives insight into the operating efficiency and profitability of the business. The economic profits are computed with reference to the return on net operating assets, cost of capital, and net operating assets. In the case of Aspermont Information for Industry, the economic profits have been computed as -$449,000.20, $523,000.90, $2,967,000.50, and- $3,160,000 for 2016, 2015, 2015, and 2013 respectively (excel attached). It could be observed that the economic profits of the company were highest in the year 2015 when the return on net operating assets was 45.67%. The return on net operating assets gone negative in 2016 and same caused the economic profits to be negative.
Capital Investment Decisions
It has been assumed that Aspermont Information for Industry is considering investing and expanding its operations. For this purpose, the company has two alternative courses of action. Under the alternative-1, the company can undertake the project with small amount of initial investment while under the alternative-2; the initial investment amount would be higher. The applicable cost of capital for both the companies would be 8%. Further, both the alternatives would have a life of 6 years.
The capital budgeting techniques such as net present value, internal rate of return, and the payback period have been applied for evaluating the financial viability of both the alternatives (Shapiro, 2008). As per the results of net present value, the alternative-1 has net present value of $3,800.80 while the alternative-2 has net present value of $16,039.90 (excel attached). The net present value of alternative-2 is higher than the alternative hence the same should be selected for investment.
The internal rate of return of alternative-1 has been found to be 19.91% and that of alternative-2 it is 15.58%. Further, the payback period of both the alternatives has been found to be 4.68 years and 3.87 years for alternative-1 and 2 respectively (excel attached). It could be observed that IRR of alternative-1 is higher than alternative-2 which depicts that the alternative-1 is preferable. However, the payback period of alternative-1 is higher than the alternative-2 which indicates that alternative-2 is better than the alternative-1. As the initial capital outlay of alternatives is different therefore, the company should not base its decision on payback period.
Thus, Aspermont Information for Industry should take decision based on the results of NPV and IRR. The NPV and IRR of alternative-1 is higher than the alternative-2 therefore, the company should select the alternative-2.
References
Aspermont. 2017. Company Overview. Retrieved June 06, 2017, from, https://www.aspermont.com/about/
Shapiro. 2008. Capital Budgeting and Investment Analysis. Pearson Education India.
Tracy, E. 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. RatioAnalysis.net.
