I've managed to get through this with only one major breakdown so I'm pretty happy :)
Happy reading :)
Step 1 – Chapter 4 KCQ’s
Looking at Chapter 4 my head was
spinning to say the least. All concepts that were mentioned are familiar to me,
however it has been an incredibly long time since I have had to explain these
topics in detail… good thing I read this chapter as I had forgotten the
meanings and vaguely remembered the terms. The concept of this chapter was an
understanding on how to utilise the information within a firms financial
statements in order to gain meaning, this is a concept that is important as
financial statements are useless unless we have effective means to analyse the
information.
Firstly the important concept of
Return on net operating assets and its relationship with profitability and
efficiency underpinned the chapter. My understanding of RNOA is that it is a
ratio or measurement that aims to assist in showing the return on operating
assets, however it also shows information from the past in an attempt to prove
useful in the future. This formula represents operating income divided by net
operating assets, both terms I understand! This topic made even more sense when
referred to in relation to capital.
I understand ratios in general serve
the purpose of giving useful analysis to the information contained within the
financial statements, however I’ve always wondered how people came up with
these ratios. Was it just randomly decided one day that this was how the
information was to be analysed? Who determined the usefulness of the
information?
Economic profit to me seemed to
make sense in theory, economic- economy must be to do with money right? Sort
of. Finding out that the more invested into operating assets would mean that
there is less free cash flow- this is easy to make sense of however as soon as Greek
symbols were added into algebraic equations I was lost. I did however manage to
grasp the fact that free cash flow is a measure of transfer of value rather
than a measure of creation of value. In simpler terms free cash flow can be
decreased by investing more, or increased by investing less.
As I could easily understand
firms have both operating and investing activities this would make sense as
there are activities that directly relate to creating products and the operation
of the business, and there are also activities that relate to creating capital.
Operating activities to me would be activities that serve some form of
assistance to the creation of products. My definition was a little off as the operating
activities were defined as activities where value is either added or destroyed.
This chapter contained so many
strange acronyms, many of which I know for a fact that I will have trouble
remembering (hence why I was glad to see the diagram stating for net operating
activities the parties were simply customers and suppliers, whilst investing
activities were equity and debt investors. I guess this is an easy concept to
grasp as it is simply an association of who contributes to these activities.
At first I had no clue at all as
to why we should restate our firms’ financial statements, to me they are made
the way they are so they should be fine that way, right? Apparently not.
Restating a firms financial statements is a task that enables us to see
information from an operating and investment point of view. I guess this
assists in analysing and planning functions within the business.
Overall my head was spinning
after reading this chapter, there’s no point in saying it didn’t because it did.
So many ratios and so many financial statements, however in an attempt to put
this theory into practice I’m sure that these topics will make much more sense.
Step 2
SPREADSHEET https://docs.google.com/spreadsheets/d/1ajlHKklEFJbGvMEVoP0muPBakK4sv6TRdNVwk2bCSpw/edit#gid=1252688492
I could not be any happier having finished this section of
the assignment. In between the moments of feeling like my head was going to
explode due to information overload and trying to make sense of all of this
information I managed to complete this section of the assignment. The major
issues I found were that there was so many different perspectives within the
cohort of how to do this section (each time you read one post, the next post
confuses you even more). I asked a question on the facebook page, which was
beneficial however I found that going through the information step by step helped
me to complete this section. The hardest thing about this assignment wasn’t the
actual content, it was the perspectives of other students and using these
perspectives to try and understand what we had to do.
Conversations were had with Jade Tringale and various other
students on the facebook page in relation to tax rates. My company listed tax
rates in their financial statements, however I could not relate these to the
tax rates indicated by KPMG. I posted on the facebook page, and It was
established that I was to use the rates by KPMG, as these are the global tax
rates, rather than the industry specific tax rates that I was referring to.
At first I was confused with the concept of translation
edges, however after some research I established that these were used in
conjunction with securities (therefore making them a financing activity).
Translation hedges then to me would refer to the costs involved in transferring
these securities between the differing values of the different countries in
which the company operates.
Step 3
6 hydroxy Dopamine (conjugated) antibody
“6-hydroxy dopamine (6-OHDA)
is a neurotoxin. When injected into certain brain areas it produces selective
destruction of catecholamine (adrenaline, noradrenaline, and dopamine)
neurotransmitter neurons. Animal models in which central dopamine neurons have
been destroyed are used to study the neurodegenerative disease process
associated with Parkinson's Disease”
Selling Price – 50 microliters
for $370
Estimated variable Costs : $150
Contribution margin = 220
Bladder (Human) Tissue Lysate - adult normal tissue (ab44658)
Selling Price : 170
Estimated Variable Costs : 75
Contribution Margin : 95
“This product belongs to a
range of individual sets of lysates that were extracted from very specific
tissues and are gender-, cancer subtype-, tumor grade- and cellular morphology-
specific. They allow for consistency, reproducibility, and comparative studies
from experiment to experiment, due to the existence of specific (matched)
lysates that can be used as controls.”
58K Golgi protein peptide
Selling price : 100
microlitres for $181
Variable Cost: $80
Contribution margin =$101
“Folate-dependent enzyme, that
displays both transferase and deaminase activity. Serves to channel one-carbon
units from formiminoglutamate to the folate pool.
Binds and promotes bundling of vimentin filaments originating from the Golgi.”
Binds and promotes bundling of vimentin filaments originating from the Golgi.”
Contribution Margin
The contribution margin is a representation of the portion
of the products sales that are available to cover the fixed costs. Of the three
products that I have chosen, there was a neurotoxin, lysate and a protein.
The neurotoxin is a product that is injected into the brain,
for this reason I would assume that the product is of an incredibly high
standard. Variable costs such as
packaging (both internally and also in freight), and the chemicals themselves
would be classified as variable costs, however there would be a large number of
fixed costs such as electricity, lighting, cooling, etc in regards to this
product. The contribution margin for this product is quite high based on the
estimate as the variable costs are low, however the break-even point may be
somewhere in the range of $250 due to the large amount of fixed costs and how
these would be apportioned over products.
The lysate product required purification In the process of
production, which to me would indicate the use of extra chemicals or equipment
in order to complete the step. For this reason the variable costs were
increased in addition to the costs of basic packaging (not as complex as the
neurotoxins), and chemicals.
Finally the protein product. The protein has strict
guidelines in the fact that it has a specific temperature range to be kept
within. To me this would indicate that there would be a specific and complex
form of packaging used throughout the process. In addition to this, the product
sounds highly complex, which to me would indicate that there is a complexity
level in making / extracting the product. As these costs are seen as being
directly related to this product, and changing based on the number of products
produced, I would say that the variable costs of this product are quite high.
The contribution margin for these products differs not only
as a result of the variable costs, but also as a result of the selling price.
For example, the neurotoxin; even though this product is half the size of the
other two products, it is twice the price of the other products. This means
that this product may not be as sought after in comparison to the other two
products, it may also mean that the product is incredibly complex to produce in
comparison to the other products.
Although based on purely contribution margins, it may appear
to be beneficial to produce only the products with the highest contribution
margin, this is not the case. By selling multiple products at different prices,
a business is able to attract a wider range of markets and therefore attract
higher sales. By instead only producing one product with the highest
contribution margin, there is only one product attributable to cover fixed
costs, and only one product able to contribute to profit. The business does
however have to monitor products to ensure that the sales are covering the
costs.
A constraint that this business may face, is in the respect
of the nature of the products. The products produced by this firm are medical
technology (an industry that is booming), however the market to sell these
products to are purely researchers, meaning that at any point if one of the
products fails to prove as being useful to researchers, the product would then
no longer be profitable. Similarly, there are market constraints in the sense
that individuals cannot buy these products as they serve no use.
Knowing the constraints of both the industry, market and the
products themselves assists in the manufacturing stage as profitability is able
to be determined.
By understanding constraints, trends can be established and
the appropriate number of products can be obtained. If there was no demand for
neurotoxins, yet the company decided to produce many products, there would be a
large amount of wastage (at a high cost), this means that it is crucial for a
business to understand its constraints and the effect that they have on the
business in order to avoid costly bad decisions.
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