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Assignment Two: Step 7-10

Course ACCT 11059 – Accounting, learning & online communication

Degree Bachelor of Property

Patrick Turner 12074322

Campus Distance (Newcastle)

Step 7

In order to complete step seven, I ventured to the Bovis Homes official website to locate some

products to analyse. I was a little worried that I would not be able to find any specific prices on any

products or services offered as many websites nowadays like to just specify something along the

lines of ‘price on application’, or similar. This would not be idea as I don’t always trust my own

estimates of housing and land, particularly if they are speculative home-style builds where costs are

minimised due to bulk supply and production. To my surprise, I found quite a comprehensive e-

brochure, which even included floor plans and the option for a virtual tour! Unfortunately, there

was no breakdown of costs of different aspects or stages of the development, such as a price

estimate of land, only the full package price. I spent quite some time perusing through all the

different packages available and decided to focus on three of nine house plus land packages

currently offered within Winchester Village (sounds nice) in Hampshire on the southern coast of

England. The three products I selected were all quite different layouts and sizes, each contributing

to a reasonable variance in price. The specific packages and their respective selling prices are:

1. 3-bedroom terrace (‘The Gardiner’) selling price = £474,950.

2. 4-bedroom end terrace (‘The Ferrars’) selling price = £555,950.

3. 6-bedroom detached family home (‘Elliot’) selling price = £1,139,950.

To calculate variable costs, it is important to delineate what they encompass. Specifically, variable

costs are expenses that fluctuate depending on quantity (i.e. increase with increase production),

whereas fixed costs are those that are consistent irrespective of how many products are produced

(i.e. fixed in relation to quantity). Subsequently, I could not find reliable data to base my calculations

on as costs of building depend on a myriad of factors. Despite this, the variable costs for these

packages would be moderate as the cost of materials and trades is dilatorily related to and therefore

https://www.bovishomesgroup.co.uk/

vary with production output. Accordingly, I have assigned an estimated variable cost percentage of

70% to each of the house and land packages to account for the variable nature of trade, material

costs and other variable overheads associated with increases in production levels.

Variable cost of each package (using 70% as an estimate):

1. The Gardiner: VC = 0.7 x 474950 = £332465

2. The Ferrars: VC = 0.7 x 555950 = £389165

3. Elliot: VC = 0.7 x 1139950 = £797965

Contribution margin = sales price (S) – variable costs (VC):

1. The Gardiner: CM = 474950 – 332465 = £142485

2. The Ferrars: CM = 555950 – 389165 = £166785

3. Elliot: CM = 1139950 – 797965 = £341985

The Gardiner The Ferrars Elliot

Sales price 474950 555950 1139950

Variable cost 332465 389165 797965

Contribution margin (CM) 142485 166785 341985

CM ratio 30% 30% 30%

Given that contribution margins are contingent with sale prices and variable costs, products within a

similar category (in the case of Bovis homes, similar house and land packages in the same area, built

using similar processes) are likely to reflect similar contribution margins. This is due to the fact that

the variable expenses involved such as the cost of labour, materials and variable overheads will

increase proportionately with sale cost. Although a higher CM contributes most to profitability, the

demand for a product with the highest CM ratio may be relatively low. Thus, in many cases, it is

more beneficial for a company to offer a range of products that may or may not have a similar CM, in

order to meet demand and maximise profitability. This consideration also must take into account

possible constraints on supply and production within the market.

A primary constraint that may affect operations for Bovis Homes is the fact that there is a significant

skilled labour shortage currently in the United Kingdom (i.e. tight labour market where there are

more jobs than workers). As a result, Bovis has cited labour shortages as a key reason may homes

have not been finished on time. Furthermore, the cost of private contractors can be quite expensive

and still not make up for the shortage to ensure production can meet demand. This constraint is a

pertinent consideration with respect to deciding how much of each product should be sold. As such,

ensuring that the products/services offered are contributing most to profits is vital, particularly

under circumstances where access to labour is of greater concern than the availability and cost of

resources. Depending on the true contribution ratios amongst different house and land packages,

when the labour market is tight, the supply levels of each respective package may vary.

In addition to labour constraints, a market constraint may be the price of land in various regions

serviced by Bovis (i.e. United Kingdom). For example, areas close to major cities such as London may

have extremely high property prices making the products much less viable for Bovis, when compared

to a suburb further away from the city such as x. Another consideration would be the socio-

economic status of the various regions across the UK. In areas of lower socio-economic status, Bovis

is much less likely to be selling many 6-bedroom detached home and land packages such as ‘The

Elliot’. In this case, lower-cost alternatives such as the ‘The Gardiner’ may have a much higher

demand and therefore contribute more to profits, even if the contribution margins were equal.

Step 8

Net profit margin:

Net profit margin is essentially the percentage of revenue left over after all costs have been

deducted from sales. In other words, it quantifies the profit that a business is able to generate from

total sales. Accordingly, a greater net profit margin may suggest that Bovis is pricing its products and

services quite well and is managing costs appropriately. I found this ratio relatively difficult to gauge

as it is highly dependent on the industry. For instance, in cases where inventory is turned over quite

rapidly, such as in the case of supermarkets, a lower net profit margin may be adequate. Though for

Bovis Homes, it would likely need to achieve a much more substantial rate of cash flow in order to

be able to purchase land and materials. Though, from my own research, the consensus was that a

net profit margin of 10% or more is typically a sign of a healthy net profit margin. In 2016, Bovis

Homes generated 11.46 p of net profit for every £1 of sales. This indicates that Bovis is achieving a

fairly good net profit margin, though it has decreased slightly in the past two years. Nevertheless, it

appears that Bovis Homes is earning relatively efficient profits from its business.

Return on assets:

The return on assets (ROA) is also a ratio of profitability. ROA basically contrasts net earnings

against total assets. In doing so, this variable allows us to evaluate the efficiency with which assets

are used to make a profit by managers. Accordingly, a high ROA is indicative of better financial and

operational performance. However, similar to net profit margin, the particular industry the

company of interest is trading in must be considered. In 2016, Bovis Homes returned 7.4% (i.e. 7.4

p) for every 1 GBP of total assets. In general, ROA figures have tended to decrease over the past few

years in particular. This trend suggests that Bovis is typically extracting less profit for every 1 GBP of

assets each year since 2014. Total assets have increased every year since 2016, thus greater assets

will negatively affect ROA. This may in part explain why ROA is trending downwards since profit in

2016 is comparable to 2015 and substantially higher than both 2014 and 2013.

Days of inventory

Next, we calculated two common ratios reflecting efficiency, namely days of inventory (DSI) and

total asset turnover. DSI basically calculates the number of days it takes a given business to turn raw

materials into sales (i.e. average time a company’s money is tried up in inventory). As such, it

attempts to examine the efficiency of inventory management. While it is logical that a lower DSI

would be preferable, it is again imperative to account for the nature of the particular industry. Given

Bovis Homes is a relatively large company who builds ‘spec’ homes that utilise similar materials, they

are likely to maintain a larger inventory of commonly used materials. Consequently, if market

conditions change and demand falls, Bovis runs the risk of accruing debt that they cannot pay.

Further, given the long period of time between when land is purchased until the home is built and

sold, it is not surprising that Bovis’ DSI was 645 days in 2016. The key point to note here is that each

year (since 2013) this number has reduced and is significantly more efficient than the 833 days

reported in 2013. Therefore, the level of efficiency for inventory management appears to be

improving.

Total asset turnover ratio

The second efficiency ratio used to gain further insight into asset utilisation is total asset turnover.

This calculates the relative value of a business’s sales in relation to the value of its asset base. In

other words, we can see how efficiently Bovis is turning each 1 GBP of assets into sales. In this case

a higher number would indicate better productivity given the business would be generating more

revenue per GBP of assets. However, it is also important to consider how sustainable asset

utilisation is (i.e. is there any risk of burnout). In 2016, for every GBP of assets, Bovis was only

generating 65 p. While this trend is increasing, I could not find a ‘cut and dry’ interpretation of what

a good asset turnover ratio would look like. My intuition leads me to believe this is quite small,

though as homebuilding on the scale that Bovis operates is quite ‘asset-intensive’, I somewhat

expected this ratio to be relatively small. Given that sales and total assets have been increasing

since 2013, the lower ratio may be influenced by an increase in the amount of cash sitting in the

bank as well as inventory. Furthermore, given the relatively large accounts receivable (particularly

current assets: £84,992 m), Bovis’ collection policies may be too relaxed and therefore lowing total

asset turnover. Another contributing factor may be that property and equipment is not being

utilised to their full potential. Indeed, Bovis have a naturally lower asset turnover ratio due to the

large amount of asset purchases they make in anticipation of future growth. For instance, Bovis

added 3,047 plots to their land bank in 2016, which may not be turned over for several years.

Nevertheless, efficiency is trending in a favourable direction.

Current ratio

Based on Maria’s explanation, a current ratio is a calculation used to determine a company's ability

to settle their short-term obligations using current (i.e. liquid) assets. Given the ratio is current

assets divided by current liabilities, it is quite straightforward to understand that if a business has a

ratio of greater than one, they would be capable of paying off their short-term debts, if necessary.

In the case of Bovis Homes, the business had £3.54 for every GBP of current liability in 2016. From

my understanding, an acceptable ratio (while subject to the particular industry), typically may fall

between 1.5 -2:1. Therefore, it becomes clear that Bovis has the capacity to liquidate current

liabilities to pay for current assets. Although this ratio is down on previous years, the company has

also undergone fairly rapid expansion since 2013, evidenced by an increase in current assets. In

doing so, its current liabilities have increased substantially, which would imply less ability to pay

suppliers etc. Though a further consideration is that Bovis’ current assets consist of a large

proportion of inventory relative to other cash and receivables, which may be difficult to liquidate in

the short-term. Despite this, the financial health of the company from this aspect, appears to be

relatively good.

Debt/equity ratio

Debt to equity ratio is a common metric used to evaluate the relative riskiness of a firm’s financial

structure. This allows us to gauge a firm’s reliance on borrowed funds and gives an indication of

their capacity to fulfil any financial liabilities. While it would clearly be an advantage if a company

possessed a lower ratio, I was not able to determine a conventional norm through my own research.

In the case of Bovis, the debt to equity ratio was 0.60:1. This means that for every GBP of

shareholder equity, the company derives 60.5 p from external sources (e.g. a bank). This means that

approximately three-fifths of its capital financing is from debt. To me, this rate seems to be quite

high and the trend has been increasing in recent years (almost double since 2013). This pattern

implies that the firm is being increasingly financed by creditors as opposed to internal positive cash

flow, which is not preferable. This ratio carries important implications as too much debt may

endanger business operations if cash flow depletes.

Equity ratio

The debt equity ratio measures the percentage of total assets that are equity-financed, reflecting the

amount of assets in which investors have residual claim to. Clearly, a lower figure would infer that a

relatively less proportion of debt was employed to purchase assets. As such, higher ratios are better

from a risk standpoint, since equity does not demand interest payments. Bovis’ equity ratio for 2016

was 62.3%, meaning it finances over three-fifths of its assets using equity, and the remaining 37.7%

with debt. Given the equity ratio has been decreasing since 2013, this represents relatively

increasing risk to stockholders. According to Maria, when the debt proportion of total assets

reaches over 40%, it becomes concerning. This may suggest Bovis’ borrowings may be getting to

high, though the company is large and has reasonable profitability. While the equity ratio has been

decreasing in recent years, it has eased over the past year, potentially indicating a shift in trend.

Market Ratios

Three market ratios were also calculated to determine earnings and dividends per share as well as a

price earnings ratio. Earnings per share merely provides a measure of how much profit there is per

share issued. For Bovis’ equity investors in 2016, each share issued had a profit of 90 p. In general,

earnings per share have experienced a general increase since 2013, though was 5 p lower than 2015.

While revenue was up 11.4% on 2015 figures, net profit was less. The reason for this is due to the

fact that profits were impacted by incompletions and resulted in increased expenses in 2016,

particularly a £7 million customer care provision. Dividends per share are also of interest when

analysing a firm, particularly for equity investors as the shareholder payout traditionally always less

than the profit per share. Accordingly, Bovis paid out a dividend per share of 41 p. This dividend has

been consistently increased since 2013, despite the reduction in net profit compared with 2015.

Finally, the market price per share allows us to calculate what a share will earn, in comparison to

what it cost. This is particularly useful as it details how many years it would take to pay off an

investment in a share. In 2016, it would take 9.1 years to earn back the original investment. This

seems like a very long time before you make your money back! However, it is evident that this trend

is decreasing quite fast and is a drastically shorter time than 17.7 years in 2013. When put in

context, the average is understood to be 15-25 years. Therefore, 9 years is actually quite impressive

in reality.

Return on equity

The return on equity ratio (ROE) is a very useful metric that quantifies the proportion of return

earned on the shareholders' investment. Given this basically details the profit available to equity

investors in relation to the capital provided by those shareholders, it is of fundamental importance

to potential investors. In 2016, for each GBP of shareholders’ equity, Bovis generated £10.77 in

profit. My initial reaction was that this rate of return seemed quite good to me, considering the

building industry is relatively asset-dense. From additional research, I found the average ROE to be

around 10.5%. Although the trend has been decreasing since 2014, this return is above average.

The main reason for this decrease is that comprehensive profit after tax decreased by 14.7% from

2015, at least partly due to the provision payout discussed earlier. In addition, total equity has

increased during that time. Given greater capital has been provided and profits have decreased, the

return on equity is inherently affected.

Return on net operating assets

Return on net operating assets (RNOA) basically provides another measure of a company’s financial

performance by calculating the ratio between operating income after tax and net operating asset.

The main benefit of this variable is that it calculates how much operating income a firm generates

with respect to its operating assets. Accordingly, if RNOA is increasing across years, it suggests the

business is creating more profit from its operating assets. Therefore, a higher NOA is more

favourable, and is closely associated with the amount of operating income. In the case of Bovis

Homes, RNOA experienced increases between 2013 and 2015, though decreased in the last year,

which is not ideal. In 2016, the RNOA was 11.9%. The reason for the decrease is primarily that

comprehensive operating income after tax decreased by 14% in 2016 due to the effect of substantial

increases in costs resulting from remeasurements on a defined benefit pension scheme for

employees. Despite this, when RNOA is compared with return on assets, profitability increases

when financing assets are omitted. Overall, Bovis appears to be quite profitable.

Net borrowing cost

Net borrowing cost (NBC) gives an indication of the total charge of taking on a debt obligation, which

typically encompasses interest repayments and other fees in relation to loans. For Bovis Homes,

total financial assets have exceeded total financial liabilities each year since 2013. As a result,

expenses have generally trended in a negative direction, though increased 1.81% in 2016. This was

likely because total financial assets were relatively less in 2016 in comparison to 2015, while net

financial expenses were comparable over this period. It is worth noting here that if the interest rate

Bovis is paying on financing their investments is less than their return on assets (ROA), is it not a

good sign.

Profit margin

Profit margin (PM) is the percentage of revenue that a firm maintains after all costs have been paid

and is arguably the most prevalent (or at least well known) indicator used to appraise the financial

position of a company. Looking at Bovis Homes, the PM of the firm was increasing between 2013-

2015, though decreased in the past year to four year low of 10.79%. As far as I could gather from

web resources, a PM of 25% or better is considered good. With that consideration in mind, the PMs

of Bovis seem quite poor. When compared to net profit margin in 2016 which includes both

operating and financing profit, profitability is less. Despite the higher revenue achieved in 2016,

comprehensive operating income after tax reduced significantly since 2015 due to changes in other

comprehensive income line items. Nevertheless, Bovis is still generating 10.79 p per GBP of sales in

profit.

Asset turnover

Asset turnover (ATO) simply contrasts revenue and assets. The main purpose of this ratio is to

determine the amount of revenue created by investing in a given quantity of assets. Accordingly, a

higher ATO ratio would infer that the firm is efficient in using a relatively smaller investment in

assets to generate large proportion of revenue. From the data, Bovis’ ATO has been consistently

increasing each since 2013, which is a good sign. When ATO is compared to total asset turnover,

asset efficiency is actually better when financing assets are neglected. Overall, Bovis is trending in a

positive direction and was able to turn every GBP of assets into relatively higher amounts of revenue

each year (i.e. 1 GBP of asset into £1.10 in 2016) over the past four years.

Economic profit

It is a vitally-important metric to consider as it calculates the difference between the revenue

generated by a business from sales and the opportunity cost of the resources utilised by the firm.

Looking at key drivers, the main variables of interest that affect economic profit are and NOA and

RNOA given that it was assumed that the cost of capital was constant at 10%. With respect to NOA,

it has increased consistently each year since 2013 due to increases in both total operating assets and

obligations. Of particular relevance is the substantial increase in inventory over the past four years,

which rose almost 10% between 2015 and 2016. The reason for this was a spike in the value of

residential land, which increased by £6.9 million. This component of total operating assets is likely

the major catalyst underlying the boost in net operating assets observed since 2013. Moreover,

RNOA is inherently affected by both comprehensive operating income after tax (OI) and NOA. OI has

decreased in the past year mostly as a result of increased costs attributable to remeasurements

associated with a defined benefit pension scheme. Changes in operating profit before income tax

are also relevant factors since both revenue and administration expenses have increased over the

past four years. Taken collectively, accounting profit exceeds the cost of equity capital for Bovis,

every year with the exception of 2013, thus economic profit has generally been positive. Given NOA

has increased consistently over the past four years, the majority of variance in economic profit (and

hence the key driver) during this time must be related to components of RNOA. Specifically,

substantial fluctuations in OI as a consequence of changes in total other operating comprehensive

income.

Upon reflection of this entire assignment, I have gained a wealth of knowledge and appreciation for

the power and role that accounting plays in understanding a business. This has been an extremely

enlightening experience for me since before the beginning of this unit approximately 13 weeks ago, I

had not done any sort of business, accounting or economics courses at any stage throughout my

education. The major concept/insight that has been reinforced throughout this journey is that there

is more often than not, no ‘cut and dry’ answer to many issues faced in business and accounting.

Indeed, as with many situations in life, we must use logic, common sense to make our own educated

judgements on certain things. Based on steps 8-10 of assignment two, I now realise that ratios and

other calculations are often very industry-specific. For instance, very asset-dense industries may not

necessarily follow conventional trends. I also gained a greater understanding of the myriad of

caveats associated with focusing too much on certain ratios and other variables. This can be very

misleading since certain indicators can be skewed or manipulated (sometimes with significant risk).

Therefore, it pays to really know what exactly the firm of interest does and be aware of their past.

This highlights that it is best to take a holistic approach and utilise a diverse range of indicators when

analysing a firm to gain a more accurate insight. By the end of step 8 I found myself starting to know

and anticipate which variables interact with one another, making it easier to suspect the reasons

behind certain trends and ratios. This is a stark contrast to me only really knowing what profits and

costs were (sort of) back in week one!

Link to my blog can be found here.

Step 9

Bovis Homes Group are considering two potential investment proposals to replace an ageing fleet of

compact excavators, which are integral to their construction operations. The board have reached a

consensus that the 25 existing machines will be replaced by a fleet of 40 to account for expansion.

Komatsu has won the tender to supply the machines, and have offered either 40 brand new 2018

PC55MR-3 excavators, or the equivalent outgoing 2017 model at a reduced price. The 2018 models

cost 130,000 each, whereas the 2017 models cost 85,000 each. Bovis must now elect whether to

purchase brand new machines at a greater initial cost, or choose the 2017 models. In either case,

Bovis intends to keep the machines in operation for at least 8 years before they are deemed more

trouble than they are worth. In the case where the machines are no longer required, they may be

sold to other construction companies. The investment would be made on 01 January 2018 and the

estimated cash flows are to be received on 31 December of each year. The original cost, the

estimated life, residual value and estimate future cash flows of each investment opportunity are set

out in the table below. There is an assumption that a rate of return/discount rate/WACC of 10%

would apply. All amounts are expressed in GBP millions.

http://www.komatsu.com.au/Equipment/Pages/Excavators/PC55MR-3.aspx

2018 Model 2017 ModelCost per machine 0.13 0.085Original cost -5.2 m -3.4 mEstimated useful life 8 years 8 yearsResidual value 0.048 0.035

Estimated Future Cash flows for 8 years31 December 2018 (time period = 1 year) -2 -1.331 December 2019 (time period = 2 years) -1.5 -0.931 December 2020 (time period = 3 years) -0.5 -0.131 December 2021 (time period = 4 years) 2 131 December 2022 (time period = 5 years) 3 2.231 December 2023 (time period = 6 years) 4.5 3.531 December 2024 (time period = 7 years) 5.5 4.131 December 2025 (time period = 8 years) 6.4 5

Based on the data, both options have positive NPV values and would therefore be viable for Bovis to

add value to the firm. However, given that the two investment options are mutually-exclusive, it is

necessary to determine which option would contribute most to the business. NPV is a key variable

to consider when making capital investment decisions due to the fact that NPV accounts for all cash

flows and risk. A further benefit is that it is sensitive to changes in wealth and projects can be

ranked against one another. Although either investment would be beneficial, £ 3.08 m derived from

option two is considerably better in comparison to option one (i.e. £2.97 m). When considering the

internal rate of return (IRR), it should be noted that IRR cannot be used as an indicator of rank for

Comparison 2018 2017NPV £2.97 m £3.08 mIRR 15.8% 18.7%Payback 5.9 5.7

mutually-exclusive items. Thus, in this case, it would therefore not be a very relevant indicator.

However, IRR does consider all cash flows in addition to the ‘time value of money’. Typically, is

required that the IRR exceeds the WACC in order to be considered acceptable. As both models of

machinery are well above the WACC (i.e. 10%), both would be worthwhile (18.7% and 15.8% for the

2017 and 2018 models, respectively). Finally, for any investment proposal, it is crucial to calculate

how long it would take for each option to pay for itself. From the table above, it is evident that both

options have comparable payback periods (i.e. 5.7 years for the 2017 model; 5.9 years for the 2018

model). Both options are therefore within the acceptable range of 8 years specified. When

accounting for cumulative cashflow at the point that each option is paid off, the 2017 model (i.e.

option 2) is expected to have made more money.

When all variables are taken into consideration, opting for the 2017 clearance model at a lower

upfront cost would be the best investment option for Bovis, given the circumstances. The 2017

model is expected to contribute to greater profit, likely greater returns and a relatively shorter

payback period. Since the 2017 models are also still ‘new’, they would also not be anticipated to

incur any additional running or maintenance costs.

Step 10

As with the other steps within assignment one and two, I benefited mostly from providing feedback

to others. While in most cases I was not able to receive any feedback myself, this process

nevertheless provided me with an excellent opportunity to help others develop their work as well as

notice things that I could do to improve the quality of my own learning and work. I truly believe that

there is so much to be gained from peer learning – even more so than when your own work is

examined. I also found the forums and blogs really helpful as a distance student, given that my own

questions and issues were shared most of the time with several others in the unit. Accordingly, I

found the combination of peer appraisals and forum/blog interaction really rounded off my whole

learning experience during this course. Please see below for my feedback to three other students.

COMPLETED FEEDBACK FORMS

Feedback To: Tenille Ashton

A link to the feedback provided can be found here

My comments

Step 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

Did well to source 3 products given her company Phosphagenics is a biotechnology company that does not sell products per se.

Selling and variable prices as well as CM per unit are justified and seem reasonable. CM formula correct.

Insightful comments regarding product ranges with reference to varying CMs.

Constraints described were appropriate and demonstrated a strong understanding of the company’s past issues. Great work here!

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Ratios all seem to be correct, linked to other worksheets (i.e. financial and restated sheets).

No link to blog provided – would recommend embedding a link into your Word document to make it easy for markers.

Negative economic profit calculation seems to be correct and linked to appropriate variables.

I enjoyed reading your thoughts about the ratios you calculated. Even though your company does not turn over profit like most firms, your analysis could still benefit from elaborating on why your economic profit is negative and also what the main factor(s) are influencing that calculation. Overall, a solid job I think.

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Could include more contextual information about the scenario and would also recommend specifying any assumptions used.

Spreadsheet variables all seem correct (payback, NPV, IRR etc.) and linked appropriately.

Good formatting in spreadsheet.

Correctly recommended positive NPV option.

Discussion was quite short, but ideas are good.

Step 10

Individual feedback with other students

Thoughtful feedback provided to three people as required.

Overall Overall, I think this is a good effort. I agree with all your points of discussion based on your data, though I think your mark would be bolstered if you added a little more detail where I have mentioned. Great job overall, all the best!


Feedback To: Gareth Davies


My comments

Step 7





Selected three different products offered by Sigma Pharmaceuticals – good justification added.

Selling and variable price identified in addition to CM using correct formula.

Good understanding of CMs and also the products offered by Sigma. Offered interesting insight into reasons for varying CMs across the products.

Constraints were offered but not made obvious. I would recommend elaborating a bit more.

Step 8





All ratios appear to be calculated correctly and all cells are appropriately linked to either the financial or restated sheets.

Check your economic profit calculation. I am unsure as to why you have (RNOA-.1449)*NOA)*1000). I would recommend (RNOA-.1449)*NOA).

Great analysis and use of tables.

Shown good understanding of the significance economic profit and how it has changed over

the years.

Step 9




Clearly described assumptions and context of potential investment options.

Calculated all required variables with noteworthy skill – all seem correct.

Clean formatting.

Recommendation in line with calculations and correctly chose positive NPV – option 1.

Would benefit from a conclusion statement that is a bit more elaborate.

Step 10


N/A

Overall Great work here overall. You have been really succinct and show a good understanding throughout. I would just double check my comment regarding the calculation of economic profit. Congratulations on a great job, all the best!


Feedback To: Keira Esler


My comments

Step 7





Did well to locate three products along with their purchase price given the lack of access to information.

Variable costs calculated using two alternative methods that seem appropriate.

CM calculated using correct formula.

Good logic used to discuss different CMs among the 3 chosen products. Though could add a few more comments I think.

Appropriate constraints discussed that are relevant to the products.

Step 8





All calculations of ratios appear to be correct and you have linked the cells correctly to each sheet – well done.

Insightful comments throughout step 8 regarding ratios, though some variables discussed are relatively brief. Consider adding a little more to some of these.

Economic profit is calculated using the correct method and is linked.

Basic trends identified – would look further into annual report notes to see which contributors to operating assets are making the biggest impact on economic profit. Why is it positive and relatively large?

Step 9




Context is justified and well described.

All necessary assumptions covered.

Calculations of payback, NPV and IRR.

Appropriate option recommended (i.e. option 1) with sound justification.

Step 10 N/A


Overall Overall excellent job. You cover all the necessary requirements in a succinct manner. I would consider adding a few more details to key concepts such as economic profit to maximise your marks. Great work Keira! All the best.

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