Instructions:

Compute Paytons return on assets, profit margin, and asset turnover, both with and without the new product line.

Discuss the implications that your findings in part (A) have on Paytons decision.

Are there any other options that Payton should consider? What impact would each of these have on the above ratios?

Show your work and use MS Excel or Word for your submission. The written portion of your assignment should be 4-6 pages in length with document and citation formatting conformity with the CSU-Global Guide to Writing and APA Requirements.

Option #1: Analysis of Payton Furniture Corp. Payton Furniture Corp. is nationally recognized for making high-quality products. Management is concerned that the company is not fully exploiting its brand power. Payton's production managers are also concerned because their plants are not operating at near full capacity. Management is currently considering a proposal to offer a new line of affordable furniture. Those in favor of the proposal (including the vice president of production) believe that, by offering these new products, the company could attract a clientele that it is not currently servicing. It could also operate its plants at full capacity, thus taking better advantage of its assets. The vice president of marketing, however, believes that the lower-priced (and lower-margin) product would have a negative impact on the sales of existing products. The vice president believes that $10,000,000 of the sales of the new product will be from customers that would have purchased the more expensive product but switched to the lower-margin product because it was available. (This is often referred to as cannibalization of existing sales.) Top management feels, however, that even with cannibalization, the company's sales will increase and the company will be better off. The following data are available: (In Thousands) Current Results Proposed Results without Cannibalization Proposed Results with Cannibalization Sales Revenue $45,000 $60,000 $50,000 Net Income $12,000 $13,000 $12,000 Average total assets $100,000 $100,000 $100,000 Instructions: 1. Compute Payton's return on assets, profit margin, and asset turnover, both with and without the new product line. 2. Discuss the implications that your findings in part (A) have on Payton's decision. 3. Are there any other options that Payton should consider? What impact would each of these have on the above ratios? Show your work and use MS Excel or Word for your submission. The written portion of your assignment should be 4-6 pages in length with document and citation formatting conformity with the CSU-Global Guide to Writing and APA Requirements. Running Header: ANALYSIS OF PAYTON FURNITURE CORP. Analysis of Payton Furniture Corp. Samantha Caramanoff ACT301-1 - Financial Accounting Colorado State University - Global Campus Thanasak 'Ole' Ruankaew February 28, 2015 1 ANALYSIS OF PAYTON FURNITURE CORP. 2 Analysis of Payton Furniture Corp. When a nationally recognized company and/or business have a reputation in high-quality products, it is important that they company and/or business is fully exploiting its brand power. Another important factor for operating companies and/or businesses is that they utilize their full capacity. Currently Payton Furniture Corp. is looking to propose an offer for a new line of affordable furniture, before doing so they need to performs some research to support this proposal. Payton Furniture Corp. will need to look at the return on assets, profit margin, and asset turnover, both with and without the new product line. Definition Of Terms and Calculation Return on assets (ROA) is the ratio of annual net income to average total assets of a business during a financial year. It measures the effectiveness of the business in using its assets to generate net income. This is also known as a profitability ratio. ROA = Annual Net Income/ Average Total Assets. Return on assets indicates the number of cents earned on each dollar of assets. The higher values of return on assets show that the company and/or business are more profitable. For Payton Furniture Corp. the return on assets is $12,000/$100,000 = .12 in current results, $13, 500/$100,000 = .135 in proposed results without cannibalization, $12,000/$100,000 = .12 in proposed results with cannibalization. The Profit Margin Ratio is also called the return on sales ratio or gross profit ratio. Profit margin ratio is a profitability ratio that measures the amount of net income earned with each dollar sales made by comparing the net income to the net sales of the business. The profit margin ratio shows what percentage of sales is left over after all expenses are paid by the business. Creditors and investors use this ratio to measure how successfully a business can convert sales into net income. An extremely low profit margin would indicate the expenses are too high and the management needs to budget and cut expenses. The return on sales ratio is often used by ANALYSIS OF PAYTON FURNITURE CORP. 3 internal management to set performance goals for the future. The profit margin ratio formula can be calculated by dividing net income by net sales. Net sales are calculated by subtracting any returns or refunds from gross sales. Net income equals total revenues minus total expenses and is usually the last number reported on the income statement. The profit margin ratio directly measures what percentage of sales is made up of net income. In other words, it measures how much profits are produced at a certain level of sales. This ratio also indirectly measures how well a company manages its expenses relative to its net sales. That is why businesses strive to achieve higher ratios. They can do this by either generating more revenues why keeping expenses constant or by keeping the revenues constant and expenses lower. Since most of the time generating additional revenues is much more difficult than cutting expenses, managers usually tend to reduce spending budgets to improve their profit ratio. For Payton Furniture Corp. the Profit Margin is $12,000/$45,000 = .27 for current results, $13,500/$60,000 = .225 for proposed results without cannibalization, and $12,000/$50,000 = .24 for proposed results with cannibalization. The Asset Turnover Ratio is one of the items that businesses and potential stockholders look at in order to figure out how well a company's money is working for it. If a business can generate more sales with fewer assets it has a higher turnover ratio, which tells it is a good business because it is using its assets proficiently. A lower turnover ratio tells that the business is not using its assets to the best of its ability. Total Assets Turnover Ratio = Net Sales/ Average Total Assets, and Asset Turnover = Sales or Revenues/Total Assets. For Payton Furniture Corp. the asset turnover is $45,000/$100,000 = .45 for current results, $60,000/$100,000 = .60 for proposed results without cannibalization, and $50,000/$100,000 = .50 for proposed with cannibalization. Define Cannibalization And Discuss The Implications On The Findings in Part (A) Have ANALYSIS OF PAYTON FURNITURE CORP. 4 On Payton's Decision Market cannibalization refers to a situation where a new product "eats" up the sales and demand of an existing product. This can negatively affect both the sales volume and market share of the existing product. Market cannibalization occurs when a new product intrudes on the existing market for the older product, rather than expanding the company's market base. Rather than appealing to a new segment of the market and increasing market share, the new product appeals to the company's current market, resulting in reduced sales and market share for the existing product. Market cannibalization can have a negative effect on a business's bottom line, forcing an existing product's life to end prematurely because sales shifted to the new product, rather than tapping into a new market as intended. A product should cannibalize another product when it can increase profits even more for the entire product line or business. One of the ways to successfully ensure good cannibalization is to ensure a strong brand loyalty to the original product. Customers that are loyal to your product are more likely to try out a new one that is produced by the same business and may have a unique selling proposition compared to the old product. Cannibalization Rate is the percentage of a new brand or modification that come from an existing brand's sales which, is calculated by, regular brand purchasers opting for new brand / total new brand sales. The implications on the findings in part (A) have on Payton's decision if there is no cannibalization return on assets increases from 12% to 13.5%. This occurs even though the profit margin decreases from 27% to 22.5% because the asset turnover increases significantly, from .45 times to .60 times. However, if there is cannibalization, the return on assets remains unchanged at 12% because the increase in the asset turnover is offset by the decrease in the profit margin. Options That Payton Should Consider And What Impact On The Ratios ANALYSIS OF PAYTON FURNITURE CORP. 5 Payton's Furniture Corp is considering a proposal to offer a new line of affordable furniture. Payton Furniture Corp. believes that by proposing a new product line the company could attract new clientele that they are not currently servicing. Payton Furniture Corp. has some other alternatives the business can consider. Payton Furniture Corp. can increase spending for marketing purposes in an effort to increase sales of the high end products without offering the new low-end product line. If this shows successful, it would increase the asset utilization, which would then increase the asset turnover and return on assets. There is also benefit to reducing cannibalization that might make up for the increased marketing cost. This would increase the asset turnover and return on assets