NikoTech--Individual Assignment

SCM 800

Cover Page

NikoTech Case

Score: _____________________

Date Submitted: ______________

Your Name: _________________

Your Email Address: ___________

Q1. Calculate the following three measures for both Y1 and Y2 for NikoTech (6 points).

a. Days of inventory (DOI)

Determine the cost of goods sold and the average inventory

Divide the cost of goods sold by the average inventory

Year 1 Year 2

COGS= 990 COGS=1239

Inventory= 480 Inventory= 660

DOI=COGS/Inventory

DOI= 2.0625 DOI= 1.8773

b. Days of receivables (DRO)

This is the day receivable outstanding.

It is calculated by; year end accounts receivable balance/ average sales for the business per day i.e. sales/365

Year 1 Year 2

Net sales/365= average/day

1440/365= 3.945 1698/365= 4.652

285/3.945=72.24 450/4.652= 96.73

c. Length of the operating cycle

It shows the time it takes a company to buy inventory, and to convert it into sales and receive the money from the accounts receivable.

Divide the annual COGS/365

Year 1 Year 2

990/365= 2.712 1239/365= 3.395

Closing inventory/COGS/365=DIO

Year 1 Year 2

480/2.712= 176.99 660/3.395= 194.4035

In step2, divide annual sales revenue/365

Year 1 Year 2

1440/365= 3.945 1698/365= 4.652

Accounts receivable/revenue per day=DSO

285/3.945= 72.24 450/4.652= 96.73

Step3, divide accounts payable balance at the year end/cost of goods sold/day=DPO

285/2.712= 105.088 360/3.395= 106.038

Step4, Add DIO+DSO-DPO

Year 1 year 2

176.99+72.24-105.088 194.4085+96.73-106.038

=144.142 = 185.100

Q2. Calculate the following two measures for both Y1 and Y2 for NikoTech (4 points). 

a. Days of payables (DPO)

This is the ratio of payables to daily average of cost of sales

Calculated as, accounts Payable / (cost of Sales/365)

Year 1 Year 2

Divide accounts payable balance at the year end/cost of goods sold/day=DPO

285/2.712= 105.088 360/3.395= 106.038

b. Length of the cash-to-cash cycle

Is the number of days it takes a company to generate revenue with assets

Cash conversion cycle= days inventory outstanding + days sales outstanding + days Payable outstanding

Year 1 Year 2

176.99+ 72.24+105.088 194.405+ 96.73+106.088

= 354.318 =397.223

Q3. Days of inventory (DOI) can be reduced by reducing average inventory or by increasing cost-of-goods sold (COGS).  However, because COGS is a cost, a firm desires COGS to be increasing only for the “right” reasons. 

a. Do COGS appear to be increasing for the right reasons for NikoTech between Y1 and Y2? 

No, the cost of goods does not increases for the right reason

b. Please clearly explain why or why not. 

The amount of gross profit margin is very minimal since the cost increase has not been converted into higher profits.

c. If you believe COGS is not increasing for the right reasons, what value for COGS in Y2 would make you believe COGS is increasing for the right reasons? 

It should be a value that increases the gross margin.

At 0.27 in year 1 and 0.313 in year 2, the cost of goods can be increased more to a figure close to 1 by reducing the rate of cost of sales increase.

Year1 Year 2

Arbitrary 0.7 margin that is closer to one

X*450=0.7 x*459= 0.7

X=315 x=316

Q4. Is average inventory or COGS primarily responsible for driving the Y1-Y2 trend in DOI for NikoTech?  (5 points)

Yes they are since they are the two variables that are used to determine the DOI. If the variables change then the DOI will also change in the same proportion. From the formula we have realized that if we change any of the variables then the DOI will change in the same trend.

Year 1 Year 2

COGS= 990 COGS=1239

Inventory= 480 Inventory= 660

DOI=COGS/Inventory

DOI= 2.0625 DOI= 1.8773

Q5. NikoTech’s COGS changes between Y1 and Y2.  Given this change in COGS, do you find the Y1-Y2 trend in DOI to be even more alarming or is it somewhat less alarming?  (5 points)

DOI is the time that it takes the business to clear the inventory in the business. If the DOI decreases in such a rate as in the Niko tech, then the business will not be required to do much to check the changes.

2.0625-1.8773= 0.1852

Q6. This question has two parts.  Both parts concern the change in days of receivables (DRO) that you calculated in Q1.

a. Are net sales or average receivables primarily driving the Y1-Y2 change in DRO?  Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation. (5 points)

The average receivable and not the net sales that is important in determining the DRO, since it is from the averages that we find the denominator, and the more the denominator, the lesser the DRO figure.

It is calculated by; year end accounts receivable balance/ average sales for the business per day i.e. sales/365

Year 1 Year 2

Net sales/365= average/day

1440/365= 3.945 1698/365= 4.652

285/3.945=72.24 450/4.652= 96.73

For the two years, the difference in the denominator 4.652-3.945

b. Describe the impact on DRO of the change in returns and allowances between Y1 and Y2.  Be sure to use data and calculations to enhance your response.  Note that returns occur when customers return defective, damaged, or otherwise undesirable products to the seller.  Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price. (5 points)

When the DRO reduces, the returns and the allowance too reduce. The DRO is dependent on the net sales. If the returns and allowances increases then it means that the net sales will reduce hence the denominator will be dominant over the reduced numerator

For example in year 1 if we increase the allowances and returns to 100, then the net sales will reduce to 1400/the average day=3.83

DRO will be 285/3.83 which is an increased figure compared to the initial.

Q7. From the data provided, is days payable outstanding (DPO) contributing significantly to the change in value of NikoTech’s cash-to-cash cycle between Y1 and Y2? (5 points)

Yes it is contributing since it makes part of the amount that is added together to form the cash to cash cycle.

Cash conversion cycle= days inventory outstanding + days sales outstanding + days Payable outstanding

Year 1 Year 2

176.99+ 72.24+105.088 194.405+ 96.73+106.088

= 354.318 =397.223

Q8. This question has three parts (12 total points):

a. Calculate inventory turnover for Y1 and Y2, again assuming that the values in the balance sheet are average values for each year (4 points).

Inventory turnover= cost of goods sold /average inventory

Year1 Year2

990/480= 2.0625 1239/660= 1.877

b. Mathematically express inventory turnover in terms of days of inventory, being sure to show how you derived your mathematical expression.  In other words, write an equation such as: Inventory turnover = expression, where “expression” contains the DOI term (4 points).

DOI= Inventory Turnover

The COGS/Average sales=inventory turnover

c. Would you consider the change in inventory turnover from Y1-Y2 a positive or negative indication of inventory management performance for NikoTech?  Please explain. (4 points)

Q9. Calculate the following Strategic Profit (du Pont) Model measures for Y1 and Y2 for NikoTech: (9 points)

a. Net profit (income) margin (%)

Net income after taxes/revenue=net profit margin

Year1 Year 2

25.2/1440= 0.0175 12.6/1698= 0.00742

b. Asset turnover

Asset turnover= revenue/net assets

Year 1 Year 2

1440/1599= 0.9 1698/1776=0.96

c. Return on assets (%)

ROA=annual net income/average total assets

Year 1 Year 2

25.2/1599 = 0.0158 12.6/1776= 0.0070

Q10.  NikoTech’s return on assets deteriorates between Y1 and Y2 despite a 23% increase in sales and a nearly 18% increase in net sales from Y1 to Y2.  Identify the financial reasons or drivers of this deteriorating performance by answering the following two questions (10 total points):

a. Is net profit margin or asset turnover primarily driving the Y1-Y2 change in NikoTech’s return on assets?  Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation. (5 points)

ROA=annual net income/average total assets

Year 1 Year 2

25.2/1599 = 0.0158 12.6/1776= 0.0070

It is true that the profit margin and asset turnover affects the ROA since the changes in Assets turnover are positively related to ROA

Asset turnover= revenue/net assets

Year 1 Year 2

1440/1599= 0.9 1698/1776=0.96

b. For the primary driver (net profit margin or asset turnover) identified in part a, what are the 2-3 principal financial factors that account for the deteriorating trend in this measure? Please be sure to explain your response, using data and calculations where appropriate to enhance your explanation. (5 points)

The increase rates of interest for the two years

The levels of depreciation that affects the net assets and the profits

The taxes charged.

The three factors affect the net income therefore affects the level of the net income for calculating the margins

Net income after taxes/revenue=net profit margin

Year1 Year 2

25.2/1440= 0.0175 12.6/1698= 0.00742

References

Gardner, D.L. (2004). Measuring Results: Niko Tech, Inc in supply chain vector, methods for linking the executive of global business model with financial performance Boca Raton, FL.J Ross Pub. Pg 157-172