Tricorp Financial Leverage
Essay by tmhafiz • June 10, 2018 • Case Study • 343 Words (2 Pages) • 1,092 Views
1 Current State
Based on the financial data provided for TRICORP (shown below), the current Gross profit is at $7 Million with profit margin of 9.33%. The Asset turnover is at 1.97 and return on asset is 18% which the company wants to improve upon.
Income Statement (partial)
Sales $75,000,000
Sheet Metal $20,000,000
Dies $5,000,000
Total Material $25,000,000
Forming Labour $10,000,000
Polishing Labour $15,000,000
Total Labour $25,000,000
Overhead $18,000,000
Cost of Goods Sold $68,000,000
Gross Profit $7,000,000
Balance Sheet (partial)
Inventory $7,000,000
Cash $5,000,000
Accounts Receivable $7,000,000
Total Current Assets $19,000,000
Fixed Assets $19,000,000
Total Assets $38,000,000
Profit Margin 9.33%
Asset Turnover 1.97
Return on Assets 18%
2 Improvement Option 1
Considering decrease in sheet metal cost by $2 Million,
Sheet Metal cost is now $18 Million
Dies remain same at $5 Million
Total Material cost is $23 Million (decrease of 8% from current state of $25 Million)
Similarly, the inventory also decreases by 8% to $6,440,000
The effects on balance sheet are:
Profits increase by $7 Million to $9 Million
The Profit Margin increases from 9.33% to 12% ($9,000,000 divide by $75,000,000)
Current assets decrease to $18,440,000
Total assets decrease to $37,440,000
Asset turnover increases to 2.0 ($75,000,000 divide by $37,440,000)
ROA increases to 24% (12% X 2.0)
Income Statement (partial)
Sales $75,000,000
Sheet Metal $18,000,000
Dies $5,000,000
Total Material $23,000,000
Forming Labour $10,000,000
Polishing Labour $15,000,000
Total Labour $25,000,000
Overhead $18,000,000
Cost of Goods Sold $66,000,000
Gross Profit $9,000,000
Balance Sheet (partial)
Inventory $6,440,000
Cash $5,000,000
Accounts Receivable $7,000,000
Total Current Assets $18,440,000
Fixed Assets $19,000,000
Total Assets $37,440,000
Profit Margin 12.00%
Asset Turnover 2.00
Return on Assets 24%
3 Improvement
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