ACCT11059 Accounting, Learning and Online Communication Rebecca TuesleyAss#2 Steps 7-10

Step 7Products – Price, Variable Cost and Contribution MarginMy company is Myer who have such a huge range of products and services however for

this step I have chosen the following:

1. Perfume

2. Manchester

3. Clothing

Product #1

Product #2

Product #3

GIORGIO ARMANIPrive Rose Alexandrie EDT 100ml

Price – $228.00

Variable Cost – $45.60

Contribution Margin – $182.40

GREG NATALEDiane Range in Navy/White

Price – $329.95

Variable Cost – $72.59

Contribution Margin – $259.36

SASSFloral Bell Sleeve Dress

Price – $89.95

Variable Cost – $29.68

Contribution Margin – $60.27

Table format of results:

Giorgio Armani Perfume

$

Greg Natale Duvet

$

Sass Dress

$Selling Price 228.00 329.95 89.95

Variable Costs 45.60 72.59 29.68

Contribution Margin 182.40 257.36 60.27

Why these figures for contribution margins?

Perfume is produced in mass volumes compared to dresses and duvets. For example in

any one Myer store they may stock for Giorgio Armanti Perfume 200 bottles, Greg Natale

Duvet might be 60 based on sizes double, queen and king and having 20 of each size; and

Sass Dress might be 30 based on sizes 6-16 and having five or each size.

There are 67 Myer stores across Australia therefore the units per item are as following:

1. Giorgio Armanti Perfume – 200 x 67 = 13,400 units

2. Greg Natale Duvet – 60 x 67 = 4,020 units

3. Sass Dress – 30 x 67 = 2,010 units

As variable costs vary with production output and include materials, labour and

distribution, I have broken down each product as follows:

1. Giorgio Armanti Perfume

Raw Materials $15.60 inc. content, bottle, lid, label, box, wrapping

Direct Labour $30.00 inc. mix, bottle and lid maker, printing, distribution

Total $45.60 or 20%

C/Margin $182.40 or 80%

2. Greg Natale Duvet

Raw Materials $29.59 inc. material, thread, studs, wrapping and label

Direct Labour $43.00 inc. sewing, printing, packaging, distribution

Total $72.59 or 22%

C/Margin $257.36 or 78%

3. Sass Dress

Raw Materials $ 8.68 inc. material, thread, zip and label

Direct Labour $21.00 inc. cutting, sewing, printing, distribution

Total $29.68 or 33%

C/Margin $60.27 or 67%

Differences versus similarities:

The Contribution Margins percentage wise are very similar with the perfume and duvet

because even though there are a lot more perfumes produced, the raw materials and

direct labour costs of perfume is very low compared. According to an article by Thau

(2012), it only costs $2.00 for the actual “liquid concentrate” that is the perfume. In fact at

$6.00, the actual bottle it comes in is the most expensive component. Direct labour costs

are higher for the duvet taking into account the time and manual labour to sew and

produce this product compared to mostly machine operated manufacturing of the perfume

product.

While the raw material cost of the dress is the lowest of all the products, the direct labour

is two and a half times the amount of raw materials. This is due again to the cost of

manual labour to sew and product this product.

Reasons to offer products with different contribution margins:

It is fair to say though that whilst the contribution margin is higher for the dress, this

is a quick turnaround product. Clothing sells at a faster rate than Manchester (such

as the duvet).

Perfume has a good contribution margin and is a quick selling item. In fact whilst

dresses are a seasonal item, perfume can be a stable product year after year.

Chanel No.5 for example is a perfume that has been around for decades.

Perfume rarely goes on special at Myer and even if it does, it’s usually an offer to

spend over a certain amount and receive something for free like a cosmetic kit. The

cosmetic kit could be a variable cost.

So why not only produce products with high contribution margins?

Some items with a higher contribution margin may not have the quick turnaround as

items with a lower contribution margin.

Department stores such as Myer who’s clothing lines dominate the floor space in

store and online is one of if not ‘the’ major seller.

Reputation needs to be upheld. A long serving department store such as Myer

would take a huge hit financially if it decided to only stock and sell high contribution

margin items.

Resource and market constraints Myer may face

Supplies delayed or not available

Delivery disaster – in 2014 the Svendborg Maersk lost over 500 sea containers in

heavy seas (2014)

Marketing product to the wrong demographic or using the wrong method of

marketing to not reach the desired demographic

Season – even though products can be released in a season e.g. the Sass dress

might fall under the ‘winter’ range, if winter has arrived early and is bitterly cold, a

dress like the Sass dress might not sell as well with its ‘bell-shaped’ sleeves

making it awkward to wear a coat over and the length of the dress being so short.

(This may be classified as a ‘time’ constraint).

Lack of trained staff – in the ability to service and sell products to customers.

How might constraints effect decisions in what Myer should sell?

As a department store etched in the history of Australia with its humble beginnings in

Victoria, there is expectation from the general public on what products they expect to see

when they visit a store. Perfume, manchester and clothing are but three.

It is important for Myer to remain competitive. This might include providing the highest

customer service available. Customers who have an exceptional experience will not only

give a company repeat business, they will be champions for the business to others. Those

that have a good experience ‘may’ return and but not necessarily shout it to the world.

Those that have a bad experience usually don’t return and tell others why.

In this sense the customer is ‘the’ most important focus when deciding what to sell and

now to tackle constraints. They are what the business needs to have in mind, not just

financial considerations.

Myer must also have excellent relationships with its manufacturers and suppliers in order

to avoid delays or other hiccups. Manufacturers and supplies committing to ensuring

products are delivered to the set standard, negotiated prices and agreed timeframes gives

all stakeholders confidence.

Step 8Ratio Analysis and Economic Profit

Wow this was a huge task and by the time I’d completed my spreadsheet, it was such a

relief! It was also interesting to see my company Myer in a different light looking at the ratio

analysis then the economic profit.

I’ve tried to keep positive about my company, being a Myer customer myself and knowing

they have survived through tough times before, but really, the amount of ‘decreases’ since

2013 is very concerning.

My calculations for my ratios and economic profit are located in my spreadsheet under the

‘Ratios’ tab.

Ratios and Economic Profit – a commentary

Profitability Ratios

I can’t say I was thrilled when the calculations of my Net Profit Margin (NPM) for 2016 was

1.8%. Does this mean that for every dollar of sales Myer generates 1.8 cents in profit?

That means that I would need to have $55.00 in sales to make just over $1 profit! The

Return of Assets (ROA) is not much better for every dollar of assets, Myer generated 3.2%

or 3.2 cents in profit.

Comparing this to three other students’ companies ratios I looked into, two were quite low

like mine (not as low, but low) and one was a lot higher at 10.5% for NPM and 14% for

ROA.

On a positive note however whilst 2013 to 2015 decreased each year, 2016 had a slight

increase. Not as good as 2013 and 2014 but definitely an improvement on 2015.

Efficiency Ratios

I was shocked at the results of the Days of Inventory and had to triple check I did the

formula correctly. 95 days to move! And it was relatively balanced between the last four

years. I guess I was shocked because I see Myer as a busy department store and think

once something is ready for sale it runs out the door. This may be the case for some items

but for others it may be a completely different story. I mean, take a complete dinner set of

Wedgewood. It’s an item that may be purchase once in a person’s life (or not in my case)

and therefore sales might be few and far between. Whilst a new line of perfume might walk

out the door upon release, a Wedgewood dinner set may take months and months to sell.

All this needs to be averaged out and hence 94.69 days to move is the result for 2016.

The Total Asset Turnover (TATO) has remained steady from last year and slightly

improved from 2013 and 2014. For every dollar in assets, there is $1.43 in sales for 2015

and 2016 and $1.37 for 2013 and 2014.

Compared to other students’ results, one had Days of Inventory of 9.36 days and 4.56 for

TATO however the others were more than double that of Myer for Days of Inventory and

had less TATO.

Liquidity Ratios

Liquidity Ratios looks at how well a company can pay short term debt. This was extremely

low and not good at 0.11. In fact it was getting worse each year from 2013 of 0.21, 2014 of

0.17, and 2015 of 0.14. Is Myer not good at paying off short term debts? It seems that way.

All other students’ companies had much higher results.

Financial Structure Ratios

Borrowings have been way too high for Myer as demonstrated in the Debt/Equity Ratio. In

2013 for every dollar investors put in, external sources such as a bank is putting in 114.2

cents. This increased in 2014 and 2015 however had a large decrease in 2016 which is

positive. It is now 68.6 cents.

The Equity Ratio has increased from 46.7% in 2013 to 59.3% in 2016 which means the

Debt Ratio has decreased. This is a good sign again showing borrowings have reduced

and there is a turnaround in Myer’s equity.

Market Ratios

The Earnings per Share (EPS) is very low at only 7 cents which is less than a third of

what it was in 2013. What is more surprising is the Dividents per Share (DPS) because in

2015 the DPS was higher at 11 cents than that of the EPS at 4 cents. This means that

more dividends were paid out of the company than what the shares were actually earning.

As low as it is too, the DPS for 2016 was only 2 cents. From 2013 through to 2016 has

been a decrease in dividends from 19 cents, 17 cents, 11 cents and 2 cents. That just

doesn’t look like a company I would want to buy share in that’s for sure.

Things don’t look any better for the Price Earnings Ratio which was calculated to be zero

because the weighted average per share was ‘nil’ in 2016. This means that the stock price

per share divided by the earnings per share is not looking promising for future growth. Or

could it be undervalued or trying to survive through another challenging time in its long

history? It seems to be quite a see-saw from a modest 13.68 and 15.51 in 20.13 and 2014,

jumping to 56.48 in 2015 and dropping to zero in 2016.

Ratios Based on Reformulated Financial Statements

This is where I breathe a little easier (but only slightly) as we look at the rations based on

the restated financial statements and I think to myself, this is not the end of the world for

Myer (not just yet!)

The Return on Equity (ROE) is 4.14% which means that for every dollar of shareholders

equity 4.14 cents is being generated in profit. So the higher to percentage the better which

in the case of the last four years 2013 was the winner at 15.39%. So again I dare to say,

another area in the decline.

The Return on Net Operating Assets (RNOA) in 2016 is 4.57%, just slightly better than

2015! Yay! This is quite low though but compare to the Return on Assets of 3.2%, this is

abit more profitable.

The Net Borrowing Cost (NBC) is the general cost of borrowings or you could call it the

interest rate which we want to see as a low percentage and decrease – yes, this is where

we want to see a decrease. But no, 8.53 percent in 2016! This is the average interest rate

Myer is paying. This is over double the average interest rate to the previous year.

The Profit Margin (PM) of 2.09% is better than the NPM of 1.8% which shows Myer’s

profitiabilty in a better light, however the PM has decreaed over the last four years. It is

saying that for every dollar of sales there is a 2 cent profit. So Myer would need $50 in

sales to gain a $1 profit compared to the NPM of $56 in sales.

The Asset Turnover (ATO) is great, it’s fantastic, it’s on the increase to previous years.

Hooray! Now increase means 2.09 up to 2.18 from 2013 through to 2016 but with all the

‘decrease’ figures I’ve been looking at, it’s worth feeling a little but of joy! And compared to

the TATO of 1.43, it’s so much better! I can certainly see the ratios based on the restated

financials paint Myer in an improved light.

The final area in the ratios is Economic Profit (EP) which is (RNOA minus the cost of

capital which is 10%) x NOA which in the case of Myer results in a negative profit. I must

say though that there was an improvement from 2015 which I have found to be consistent

with other areas of the ratios I have reviewed. 2015 seemed to be a very volatile year for

Myer and 2016 looked ever so slightly better.

What could be attributed to the negative profit? Well Myer’s RNOA is only 4.57% and the

cost of capital is 10%. The formula for EP is (RNOA – cost of capital) which results in a

negative percentage. 2013 was in the positive because the RNOA for that year was higher

than 10%. So the RNOA has dramatically decreased from 12.52% in 2013 to only 4.57%

in 2016. The NOA has also taken a hit by over $50 million in the last twelve months.

Myer are purely a product of custom. They are subject to a highly fluid public demand for

consumable goods. This by its very nature makes their economic sustainability hard to

predict. Yet they have taken a gamble in the New Myer plan, a strategy for sustained

improvement. They have invested in additional capital to improve earnings which is a key

driver to work towards economic profit.

To me personally Myer seem to be in a very sensitive state. Though 2016 fared better than

the year before, there’s still a long way to go to prove it is a strong company. I still hold

onto the fact that Myer has been around for so long and weathered many economic storms

and this is another one of their challenges. But if someone gave me money to buy shares

in any company I would be reluctant to choose Myer. But I’m still happy to shop there!

Step 9Capital Investment Decision

Myer are looking at expanding their brand destinations and are looking at two potential

clothing labels: Topshop and Mimco. These will be the two capital investment decisions.

Topshop is a UK based brand with only nine locations in Australia with the potential to

have a brand destination in 17 of its Myer stores. The brand was established in 1964 and

arrived in Australia in 2011. Partnering with Myer would include holding 20% of the market

and Myer investing $1,250,000.

Mimco is owned by the Country Road Group and have a design team based in Melbourne

with a motto ‘Accessible Luxury Designed with Quirk’ (2017). There are over 100 Mimco

stores in Australia, New Zealand and South Africa and has partnerships with David Jones.

The brand was established in 1996. Partnering with Myer would include an investment of

$1,700,000.

Both brands would enter into a seven year agreement with the investment being made 1

July 2018. The estimated future cash flows are to be received 30 June each year. The

discounted rate is 10%.

Topshop

$’000

Mimco

$’000

Original Cost $2,250 $3,700

Estimated Useful Life* 7 years 7 years

Residual Value** $250 $500

Estimated Future Cash Flows***

Year 1 – 30 June 2019 $750 $1,250

Year 2 – 30 June 2020 $769 $1,281

Year 3 – 30 June 2021 $788 $1,313

Year 4 – 30 June 2022 $808 $1,346

Year 5 – 30 June 2023 $828 $1,380

Year 6 – 30 June 2024 $849 $1,415

Year 7 – 30 June 2025 $870 $1,450

* Contractual arrangement to distribute brand

** Dependant on arrangement not renewed

*** This is based on 2.5 percent Gross Domestic Product

I had no idea what the results would be for the figures I used for Option 1 – Topshop and

Option 2 – Mimco. The Net Present Value (NVP) for Mimco was higher. Even though the

original cost was more the cash flow was also more. Interestingly the Internal Rate of

Return (IRR) was nearly equal at 30% for Topshop and 31% for Mimco and the payback

period of 2.93 years for Topshop and 2.89 years for Mimco was also virtually equal.

Based on the NVP and IRR either option would be deemed viable to enter into, even both!

Based on the cumulative cash flow however, Mimco would create more and if having to

choose between one of the other, Mimco would be more financially beneficial.

References

Lister, T. (2014). Ship loses more than 500 containers in heavy seas. Retrieved from

https://edition.cnn.com/2014/02/21/world/container-ship-loses-containers/

Mimco. (2017). Corporate Overview. Retrieved from https://m.mimco.com.au/about-

mimco/corporate-overview

Myer. (2017). Giorgio Armani Prive Rose Alexandrie. Retrieved from

https://m.myer.com.au/shop/mobile/mystore/prive-rose-alexandrie-edt-100ml-133009210-

133009840

Myer. (2017). Greg Natale Diane Range. Retrieved from

https://m.myer.com.au/shop/mobile/mystore/greg-natale-diane-range-in-navy-white

Myer. (2016). Myer Annual Reports. Retrieved from http://investor.myer.com.au/Reports/

Myer. (2017). Sass Floral Bell Sleeve Dress. Retrieved from

https://m.myer.com.au/shop/mobile/mystore/sass-tash-floral-bell-sleeve-dress

Thau, B. (2012). Behind the Spritz: What Really Goes Into a Bottle of $100 Perfume.

Retrieved from https://www.aol.com/article/2012/05/22/celebrity-perfume-cost-

breakdown/20237724/

Topshop. (2017). About Topshop. Retrieved from https://au.topshop.com/about-us/