Problem 2-3
You are the operations manager for a small kayak and canoe
manufacturer (Valley Kayaks) located on the Pacific Northwest
(Oregon). Lately your company has experienced product quality
problems. Simply put, the kayaks that you produce occasionally have
defects and require rework. Consequently, you have decided to
assess the impact of introducing a total quality management (TQM)
program. After discussing the potential effects with
representatives from marketing, finance, accounting, and quality,
you arrive at a set of estimates (contained in the following
table). Top management has told you that they will accept any
proposal that you come up with PROVIDED that it improves the return
on assets measure by at least 15 percent. Use Figure 2.3.
| Category | Current Values | Estimated Impact of TQM | ||||||
| Sales | $ | 4,407,000 | 3 | % | + (improvement) | |||
| Cost of goods sold | $ | 3,390,000 | 0 | % | ||||
| Variable expenses | $ | 565,000 | 7.00 | % | − (reduction) | |||
| Fixed expenses | $ | 220,350 | 0 | % | ||||
| Inventory | $ | 360,000 | 10 | % | − | |||
| Accounts receivable | $ | 159,000 | 0 | % | ||||
| Other current assets | $ | 630,000 | 0 | % | ||||
| Fixed assets | $ | 414,000 | 0 | % | ||||
a.Calculate ROA with changes and without changes? (Round your answers to 2 decimal places.)
b. Would you go forward with this proposal to improve quality?
| Yes | |
| No |
a.
Without changes
Gross margin = Sales - Cost of goods sold = 4,407,000 - 3,390,000 = 1,017,000
Net profit margin = (Gross margin - Total expenses) / Sales = (1017000 - 565000 - 220350) / 4407000 = 0.05256
Asset turnover = Net sales / Total assets = Sales / (Inventory + receivables + current assets + fixed assets) = 4407000 / (360000+159000+630000+414000) = 2.81958
ROA = Net profit margin x Asset turnover = 0.05256 x 2.81958 = 0.1482 or 14.82%
With changes
Sales = 4,407,000 x 1.03 = 4539210
Variable expenses = 565000 x 93% = 525450
Inventory = 360000 x 90% = 324000
Gross margin = Sales - Cost of goods sold = 4539210 - 3390000 = 1149210
Net profit margin = (Gross margin - Total expenses) / Sales = (1149210 - 525450 - 220350) / 4539210 = 0.08887
Asset turnover = Net sales / Total assets = Sales / (Inventory + receivables + current assets + fixed assets) = 4539210 / (324000+159000+630000+414000) = 2.97263
ROA = Net profit margin x Asset turnover = 0.08887 x 2.97263 = 0.2642 or 26.42%
b.
Yes, because the ROA is improving.
Problem 2-3 You are the operations manager for a small kayak and canoe manufacturer (Valley Kayaks)...