Assessing Divisions for Low Value Added Items (Research Paper Sample)

Management accounting report
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Word Count: 3468
EXECUTIVE SUMMARY
The analyses involved assessment of Triton manager’s decision with respect to issues of retaining divisions, evaluating divisions producing low value items, assessing the gearing rate of the firm as well as the factors to consider when setting a PBP. The report would extend to asses issues of ethical consideration, and firm reliance on financial ratios and budgetary control.
The assessment key finding included; that the firm should sell bathroom and pipe division, they have electrical, floor and pipes as the capital intensive divisions but producing low value adding items. The report also found that for the firm to be able to make investment decision a proper PBP would be needed and would be reliant on inflation, interest rates, finances available, political stability, environmental policies, and economic growth rate. In addition, the result showed that the firm needed to reduce its gearing which was relatively high since it would improve investors trust and investments. Besides, the report sorted that the firm would rely on financial and budgetary measures since they would give a foresight to the firms. In addition, their operation would change based on host country as well as the ethical requirements.
Therefore, the study concluded that the manager thoughts and foresight would be crucial to the firm. From the assessment the manager would undertake different decisions to effect. Thus the report recommended that the manager should implement his thoughts since they are effective.
Table of Contents TOC \o "1-3" \h \z \u EXECUTIVE SUMMARY PAGEREF _Toc55730127 \h 11.0: INTRODUCTION PAGEREF _Toc55730128 \h 32.0: BODY PAGEREF _Toc55730129 \h 32.1: Assessing divisions for low value added items PAGEREF _Toc55730130 \h 32.2: Implication of low value added items to financial returns and profitability PAGEREF _Toc55730131 \h 42.3: evaluation of sale of divisions PAGEREF _Toc55730132 \h 52.4: Factors influencing period of the PBP PAGEREF _Toc55730133 \h 62.5: Importance of reducing gearing and improving investments PAGEREF _Toc55730134 \h 72.6: Reliance on financial rations and budgetary controls PAGEREF _Toc55730135 \h 92.7: Ethical issues and management functions on expansion PAGEREF _Toc55730136 \h 123.0: CONCLUSION PAGEREF _Toc55730137 \h 134.0: REFERENCES PAGEREF _Toc55730138 \h 14
1.0: INTRODUCTION
Firms are faced with a lot of management and strategic issues. Therefore, managers have to make decision best for the firm to be able to achieve the firm’s objectives of profit maximization, maximisation of shareholders wealth, and social and ethical considerations (Kaplan and Atkinson, 2015). In line with the firm’s objectives, managers are always working to ensuring the firm is able to operate strategically to be able to deal with the competitive environments. Besides, they have to make decisions that improve the corporate image of the firm. Consequently, to be able to attract more investors (Bromwich and Bhimani, 2005).
Therefore, the current report will seek to evaluate management decision making reference to Triton that is a firm in the manufacturing industry and that has six divisions to evaluate. The report will briefly evaluate the different divisions and assess the value they bring to the firm, evaluate options to dispose some divisions, look at investment decisions and factors to consider in the investment, ways and importance of reducing gearing, as well as evaluate use of financial ratios and budgetary control by firms.
2.0: BODY
2.1: Assessing divisions for low value added items
Firms will work to evaluating divisions that increase value as well as those that do not. This will be in an attempt to removing the low value adding items and capitalising on the ones that add value since they increase the firm’s financial returns and profits (Bromwich and Bhimani, 2005). To be able to evaluate the divisions return on investment, the analysis made use of the sales margin component of return on investment.
Sales margin = income/sales revenue








electrical

Floor

car

industrial

Bathroom

pipes

Income

2.2

1.4

3

8

0.5

0.1

Sales revenue

40

25.4

17.1

33.7

7

6

Sales margin

0.055

0.0551

0.175

0.237

0.0714

0.0167

Sale margin %

5.5%

5.51%

17.5%

23.7%

7.14%

1.67%

The sales margin will show the amount of profit generates for each dollar of sales. Thus, a high margin will depict that the divisions is more efficient. One of the decision managers need to make to ensure a high sales margin is by reducing expenses or by increasing revenue. The revenue will be increased by increasing price without increasing volumes. Thus, for products that a higher price will be earned are those that are value adding. A sales margin more than 20% is considered high enough, that of 10% and above is good, while one of 5% and below is considered low (Drury, 2013). From Triton results shown on the table below, industrial services division is a high value adding division as well as car accessories. Electrical, floor, and bathroom are relatively good, while pipes is a low value adding division. However, with regards to requiring high capital investment, electrical products and floor boards require more capital although their sales margins are low. Thus, for triton divisions with low value adding items include; electrical products, floor boards, Bathroom, and pipes
2.2: Implication of low value added items to financial returns and profitability
Low value-added items are items that do not increase the benefit of the item to the users. Thus, this has an implication to the finances of the firm and its overall profitability. This is because, customers are not willing to add an extra coin to the value added to the item. As such, the cost of producing the item will be higher. Consequently, requiring higher capital investments and producing low profits to the firm (Pelham, 2000). One of the major goals of a firm is to maximize profits as well as maximize shareholders wealth. In this regards, firms will try to have production costs at minimal as well as satisfy customers. For the low value added items, the customers will not be willing to pay extra thus the price of the product will be low. Consequently, having a negative impact on the profits of the firm.
2.3: evaluation of sale of divisions
If the manager would make a decision to sell the two divisions, there would be implications on the overall performance of the firms. First, the effect would be on overall profit. As shown on the table below, if the two divisions were to be sold, the firm would loss profit equal to $0.6 million (600,000). Therefore, the manager must make a sale that is more than the revenue which could have been generated by the two divisions.
Item

Amount (millions)

Current profit

15.2

Profit without the divisions

14.6

Difference

0.6

However, to another edge the firm will have saved in terms of costs of producing in the two divisions. The firm will have saved $12.4 million as shown on the table below.
Item

Amount (millions)

Current cost

114

cost without the divisions

101.6

Difference

12.4

The firm will also loss in terms of customer base, and the market they have built with the two divisions of 8% and 3% for bathroom and pipes respectively.
On a positive note, more will be reserved, and the firm will be able to expand operations of other divisions. In addition, the firm will be able to concentrate on a few product lines thus improving on customer satisfaction. Assets, especially the current ones are likely to reduce without the two division. But this will be countered with lower liabilities and thus will not put the firm at liquidity risk. Besides, the firm will reduce its gearing rates which have been high and thus would be more attractive to customers. Since, we have already seen that the two divisions especially pipes has been producing low value added items, it may not be having high financial returns to the firm. Thus, hurting the firm’s objective to maximize profits. In addition, the firm will not be able to increase prices on the items since the market is very competitive. They may actually need to reduce prices to leap a bigger market.in addition, the cost being saved is higher than the return from the two divisions. As such, the two divisions will be less profitable and not economical for the firm to retain them....