ASSIGNMENT STAGE 2 (ASS#2):STEP 7: THREE PRODUCTS FROM HAYNES –

Student Manual - $40 Marriage Manual - $13 Millennium Falcon Manual - $30

VARIABLE COSTS – 60%

Student Manual - $40 x 0.6 = $24Marriage Manual - $13 x 0.6 = $7.80Millennium Falcon Manual - $30 x 0.6 = $18

CONTRIBUTION MARGIN

Student Manual - $40 - $24 = $16Marriage Manual - $13 - $7.80 = $5.2Millennium Falcon Manual - $30 - $18= $12

Product Sales Cost Variable Price CM CM RatioStudent Manual $40 $24 $16 40%Marriage Manual $13 $7.8 $5.2 40%Millennium Falcon Manual $30 $18 $12 40%

DISCUSSION-

WHY WOULD THE CONTRIBUTION MARGIN FOR EACH PRODUCT BE SIMILAR OR DIFFERENT?I choose the same variable cost rate for each product because I saw them as relatively the same type of product – a manual about specific interest topic that could be bought for someone on a special occasion like a birthday or wedding gift etc as a present or bought if you have a special interest in the topic. Maria Tyler did mention that high volume sellers usually have high variable costs. I chose a 60% variable rate as I didn’t see these items has high volume sellers as they aren’t a necessity. I also saw the niche market for the manuals as

quite specific and therefore the products not as high-volume sellers. Also, I couldn’t imagine manuals (books) would have high variable costs as they don’t have many ingredients/materials or hard labour costs. Although the three products had the same variable rate their contribution margins were a little different, mainly because of the sales cost of each product. I got the sales cost of the products from the website and rounded them up to the full dollar. I assume the student and Millennium falcon manuals cost more than the marriage manual because they have more detail and how to’s then the marriage manual. For example, the student manual has maintenance DIY tips and recipes whilst the marriage manual is mainly funny advice on how to propose or what to expect from the new husband or wife. The student manual has the highest contribution margin, followed by the Millennium flacon and then the marriage. This could possibly be because the student manual is in more demand than the millennium falcon or the marriage manual, which means they could increase the price.

WHY MIGHT YOUR FIRM PRODUCE A RANGE OF PRODUCTS/SERVICES WITH DIFFERENT CONTRIBUTION MARGINS? This was a good question, I felt that Haynes produces the manuals it does because they love doing it. But in assignment stage 1 I noted that Haynes didn’t want to be dependent on a single key customer or market, therefore, they may produce products with different contribution margins to enable them to expand their market and customers. A firm wouldn’t just produce the product with the highest contribution margin as that is really relying on one type of market and restricting their market output, as the demand for that one product may run out. Plus, a firm has to contend with other firms which sells similar products.

RESOURCE CONSTRAINTS THAT THE FIRM MAY FACE? Some manuals contain more pages then others and therefore require more resources then smaller manuals. This means if Haynes can only purchase a certain amount of a resource, like printing paper, this would determine how much of the larger manuals and how much or the small manuals can be produced. They would also have to decide which manuals are more valuable to make (car manuals or lifestyle manuals) for the sales market as they make a lot of different manuals on different topics.

MARKET CONSTRAINTS THAT THE FIRM MAY FACE? I feel this would be the main constraint Haynes may face. I can’t imagine that the lifestyle manuals would have a large sales revenue for the year, as they are not a necessity and with society moving more to technology and online, I think the market for hard copy books would be less and less. For the three Haynes products I chose, I feel the market niche is small and therefor this would be a market constraint as they can only produce as many copies of the book that they would sell.

HOW MIGHT THESE CONSTRAINTS BE RELEVANT WHEN DECIDING WHICH (AND HOW MUCH) OF THE THREE PRODUCTS SHOULD PRODUCE AND SELL?The market constraints would be relevant as it would help determine which product to produce more of, which would also help determine where their resources should go. For example, I would assume the student manual would have more sales as a lot of people would attend university and start life on their own this way, so this product may be bought for students as a help guide or as a present from a loved one. I would see this manual having more sales then the millennium falcon for example as although there are a lot of Star Wars fans this may only be useful for the really enthusiastic fans. The marriage manual I feel would be less popular as there is online research databases such as google and so buying a book may be a person’s last choice when researching about marriage. Looking at the market constraints would mean that I would be less likely to produce a large amount of the marriage manuals and a higher amount of the student manuals.

STEP 8:

As I looked a bit into the ratios for my firm I became a little confused as to what I was looking at. Not because I didn’t understand what the ratios meant, but because the ratio’s didn’t paint a very good picture for Haynes. Which mainly came down to the fact that their total CI was a loss for all years, which meant that all the ratios were actually a negative. How can a firm be doing this badly?

Profit Margin showed that Haynes was making a negative 6% return for every dollar of sales. With a huge negative return in 2015 (I’ll have to research what happened in 2015) and a increase in 2016 and then a decline in 2017 . The return on assets didn’t look any better with another negative number, albeit a smaller one. In 2017 Haynes was making a negative 3% return on their assets. Which I thought was really strange because the have a high number of assets.

With the negative CI, this also meant that theoretically Haynes couldn’t afford to pay dividends to their shareholders, with the earnings per share coming in at negative 0.11 in 2017, and yet, Haynes paid 0.07 per share. I would’ve thought they wouldn’t pay their shareholders anything.

Hayne’s current ratio however did show that they had a good amount of assets to pay their liabilities, meaning that they have less debts then they do assets (which seems like a positive to me). They had a 1.5:1 ratio in the 2017 & 2016 years and a 2:1 ratio in the 2015 & 2014 years. How is it that the company can have this aspect good but have a total CI of negative? It could possibly be because it is taking Haynes an average of 136.37 days to turn over their inventory, meaning they are not generating cash quickly at all – its nearly taking Haynes half a year to sell their stock. Their total asset turnover ratio told a similar story in that their assets weren’t working to well at turning into sales.

So far, I’m getting the picture that Haynes is simply not generating enough sales to sustain their costs. Looking further into their Financial structure ratios I noted that they are increasing their debt over the years also. Starting at .65c from the bank for every $1 from the shareholders, this has increased to $1.80 from the back for every $1 of shareholder investment – that’s a huge difference. Question, with this figure how is their current ratio good? This figure does make sense to me, as because Haynes is producing no profit there are less shareholders and so Haynes has had to reply more on the banks for funding. This is supported by the fact that their equity ratio is declining each year also, which means they aren’t generating more equity each year, yet their debts are increasing. How interesting.

The ratios based on the restated financial statements didn’t show that much of a promising story either. Return on equity was a high negative number with a slight increase in 2016 and a high decrease in 2015. The trend I saw from most the years figures was that there was high decline in 2015 followed by a slightly better result in 2016 and then a slight decline in 2017 again. This makes me wonder If there was a one-off non-recurring item which had an effect on the figures. The only thing I could note though was some high administrative expenses for the year (double the amount for the prior and following years). The note in the 2015 financial report disclosed the amount as an exceptional item - Impairment of intangible assets. They successfully acquired Teon Media Limited in the year and noted difficult trading condition in the market and so reviewed the value of the goodwill and other intangible assets.

With the Profit Margin ratio, it was clear that for every dollar in 2017, Haynes was turning negative 5.88 into profit. Which was similar to their net profit margin for the year and the same trend as discussed above.

The only thing I noted a difference in was their asset turnover compared to their total asset turnover. The asset turnover showed a much greater return on their operating assets with it steadily increasing through the years. Whilst the total asset turnover stayed at a small return, unchanging over the years.

Economic Profit

The key driver for the economic profit for my firm looked to be the return on net operating assets and NOA. When calculating the economic profit for my firm I used the 10% for the Weighted Average Cost of Capital (WACC) as I could not identify the cost of capital within Haynes annual reports. Which makes me wonder, how accurate this calculation actually is? If Haynes WACC was smaller than the 10% would the calculations have shown a different story? The fact that for most years Hayne’s had a large RNOA value I doubt that a smaller WACC value would have helped much for the economic profit, it might have told a better story, but still one of a firm running in a poor state none the less.

Firstly, NOA decreased slightly over each year, which didn’t help Haynes’ situation. But the main driver for the economic profit was the large negative value for the RNOA, which was contributed to mainly by the loss the firm made for the operating income. Haynes could not generate enough operating income to cover their costs. This is the case for most years but was worse in 2015 (the reason for this was mentioned above). To me, this says a lot about how well the firm is running. The PM for Haynes showed a similar trend to the RNOA, that Haynes cannot generate enough sales. Both values where high negative, meaning that PM was the main accounting diver for RNOA. The ATO calculation showed a relatively good return for their operating assets. So, to me, it seems that the main issue for Haynes is the generation of sales, as this related to PM and RNOA. Their sales simply isn’t enough to cover their costs.

Explain more about what I noted in others and discussed with others.

STEP 9:

CAPITAL INVESTMENT DECISION FOR HAYNES PUBLISHING

Two options:

1. Purchase of online software rights – Company 12. Purchase of online software rights – Company 2

Haynes is looking to establish their digital footprint more, and so they are looking into purchasing online software rights.

Online software rightsCompany 1

Online software rightsCompany 2

Original Cost 1.3m 2.1mEstimated life 5 years 5 yearsResidual Value .7m 1mEstimated Future cash FlowsMay 2019 (Time Period – 1yr) .25 .75May 2020 (Time Period – 2yr) .25 .75May 2021 (Time Period – 3yr) .25 .75May 2022 (Time Period – 4yr) .25 .75May 2023 (Time Period – 5yr) .25 .75

INVESTMENT 1 – ONLINE SOFTWARE RIGHTS FROM COMPANY 1NPV = -.14mIRR= 5.8%Payback period = approx. 4.3 years

INVESTMENT 2 - ONLINE SOFTWARE RIGHTS FROM COMPANY 2NPV=.31m IRR=15.1%Payback period= approx. 3.5 years

DECISION DISCUSSION After looking at the above analyses of the two options, the best decision for Haynes would be the Online software rights from Company 2. This is because although it has a higher initial cost, it has yielded better results for the payback period, IRR and NPV.

For starters, Option two had a greater NPV (.31m compared to -.14m). The fact that option one shows that it would destroy value based on the NPV rules it out of being the preferred option. as this would have a negative impact on the firms value, taking it away instead of adding it. Seccondly, Option two has a greater percentage return on the amount invested, as shown by the IRR figures. If the future cash flow figures are accurate, option two yield a return of 15.1% whilst option one yields a return of 15.1%. Lastly, option two has a shorted payback period of 3.5 years compared to 4.3 years. Therefore although company two has a substantially greater upfront cost (difference of .8m) the return rate, payback period and net present value all stipulate that this would be the most profitable purchase for Haynes to equip themselves with a greater online platform to deliver their services.