Finance Portfolio help

Denver Furniture Corp. is a nationally recognized high quality producing firm whose production managers feel operations is not at full capacity. New products are being proposed to attract new clientele and to implement operations at full potential. According to those who are in favor of the new proposal lower-margin products were obtained by consumers only because it was available and that even with cannibalization, sales will increase due to obtaining new consumers. Below is a calculated proposal based on Denver Furniture Corp’s with and without cannibalization.

1) (a) Denver Furniture Corp’s return on Assets for proposed results without Cannibalization

Return on Assets = Net Income/Average total Assets *100

= $13,000/$100,000*100

=13%

(b) Denver Furniture Corp’s return on Assets for proposed results with Cannibalization

Return on Assets = Net Income/Average total Assets *100

= $12,000/$100,000*100

=12%

2) (a) Denver Furniture Corp’s Profit Margin for proposed results without Cannibalization

Profit Margin = Net Income/ Sales Revenue*100

=$13,000/$60,000*100

= 21.67%

(b) Denver Furniture Corp’s Profit Margin for proposed results with Cannibalization

Profit Margin = Net Income/ Sales Revenue*100

=$12,000/$50,000*100

= 24%

3) (a) Denver Furniture Corp’s Asset turnover for proposed results with Cannibalization

Asset turnover = Sales Revenue/ Average Total Assets

= $60,000/$100,000*100

=60%

(b) Denver Furniture Corp’s return on Assets for proposed results with Cannibalization

Return on Assets = Sales Revenue/Average total Assets *100

= $50,000/$100,000*100

=50%

Implications of the findings on Denver Furniture Corp’s decision

1) Returns on assets show the net income produced by the assets during the trading period and it measures the effectiveness of the company’s investment. The return on asset without cannibalization is 13% implying that for every dollar the company invested on investment during the trading period, it produced a net income of $ 0.13. On the other hand the return on investment with cannibalization is 12% implying that for every dollar the company invested on assets it earned $ 0.12 net income. Therefore, Denver Furniture Corp should go for the option of without cannibalization since it brings more net income to the company per asset investment hence more effective.

2) Profit margin shows the amount of profit or net income the company gains from each dollar generated by sales. It shows how effective companies can covert sales into income. Profit margin for Denver Furniture Corp without cannibalization is 21.67% implying that the company converts 21.67 percent of its sales into income. On the other hand the profit margin with cannibalization is 24% implying that the company coverts 24 percent of its sales into income. This difference can imply that cannibalization reduces the operating expenses of the company hence increasing the profit margin of the company.

3) Asset turnover indicates the company’s ability to convert its assets into revenue. This shows how efficient the company uses its assets to generate revenue. In the case of Denver Furniture Corp, Asset turnover without t cannibalization is 60% implying that for every dollar of asset the company generates $ 0.6 of sales. On the other Asset turnover with cannibalization is 50% implying that for every dollar in assets the company generates $ 0.5. This means that with respect to asset turnover introduction of cannibalization is not efficient.

Other option that the Denver Furniture Corp can consider

Denver Furniture Corp can decide to lower the price of the existing goods. Lowering the price of the goods will attract more clients and the increase the sales volume. As a result the companies will sale more getting higher sales revenue. However there will be reduction in net income per unit sold hence a lower return on assets sold. Lowering price also may lower the profit margin by lowering the profit per unit sold. Price reduction can increase the Asset turnover ratio by increasing the total sales revenue

Another strategy the company can employ is advertising the products. Advertisement will increase the operation cost but will increase the sale revenue at long run. This strategy has some effects on the ratios discussed above. Advertisement will increase the operating expenses hence reducing the net income per unit sold. Reduction in net income will subsequently decrease the return on asset ratio. Also the profit per unit sold will go down which has an adverse effect on the gross profit margin therefore there will be reduction in profit margin ratio. However the sale Revenue will increase at long run hence increasing the Asset turnover ratio.

2