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Tricorp Financial Leverage

Essay by   •  June 10, 2018  •  Case Study  •  343 Words (2 Pages)  •  154 Views

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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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