Ncb office Products – a Wide Range of office Products
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NCB OFFICE PRODUCTS INC.
Executive Summery
NCB is a manufacturer and distributer of a wide range of office products. In Canada, NCB uses several distributers in different regions. One of the major distributers is Harrison Stationary and Office Supply LTD. Harrison had distributed NCBS products for over 50 years and NCB was the largest supplier of Harrison. In January 2003 Harrison was acquired by the president of the company and four senior officers. Most of the acquisition cost was financed by bank loans. Since the acquisition, Harrison had difficulties to pay NCB for the goods and the account receivable reached to unacceptable level. In September 2005 the Harrison account was 156 days old and amounted to $ 4.4 million. In addition, NCBs credit management tried to receive financial information from Harrisons management without great success. After 14 months of avoiding the requests of NCBs credit department, Harrisons management released the financial statements. The financial statements of Harrison revealed a very risky financial situation. The company had substantial losses and had an equity deficit position. Tutlte, NCBs credit manager recommended to stop shipments to Harrison immediately and let them get bankrupt. However, Pam Bookman, vice-president sales had a different opinion. She was afraid to lose market share because the company didnt have a contingency plan for another distributer. Now, NCBs management is facing a big dilemma concerning this issue and must decide how to handle this situation. MNCs decision will have a great impact on both companies.
1: stop doing business with Harrison by cutting off all credit
This action may cause serious consequences on both companies. Harrison will face bankruptcy and we need to estimate how it will impact NCB. The debt of Harrison to NCB is currently amounted to $ 4.4 million and we need to estimate how much debt can be recovered. In order to estimate the amount we can recover, we applied the liquidation process based on 3 assumptions:
75% of Harrisons account receivable will be saved.
50% of Harrisons inventory will be saved.
75% of Harrisons property.
Harrisons account receivable: 6832,000 * 0.75 (+)
Harrisons inventory: 9632,000 * 0.5 (+)
Property, plant and equipment + land: 3,295,000 * 0.75
Liquidation value: $ 12,276,000 (-)
Harrisons bank loan (operating): $ 5,199,000
Harrisons bank loan (term): $ 4,550,000
The amount left for paying the account payable: $ 2,528,000
2,528,000 / 9,462,000(AP) = 0.27 (27 Cent per 1 $).
4,400,000 * 0.27 = $ 1,188,000 (AR amount that can be recovered after liquidation process).
Finding A New Distributor
In addition to the losses on the Harrisons account receivable, MNCs management may face more losses because they didnt have a contingency plan for a new distributor. In 2004 the amount of sales to Harrison amounted to $10,000,000. Based on our estimation, if MNC will switch to another distributor they may lose 15% of their market share ($1,500,000).
$ 10,000,000 – $ 1,500,000 = $ 8,500,000 (estimated sales amount for the next year).
Due to that, profit margins will probably decline. In 2004 the average trading profit margin to Harrison was 22.3% (based on sales level of $ 10,000,000).
$ 10,000,000 * 0.223 = $ 2,230,000 (2004)
$ 8,500,000 * 0.223 = $ 1,895,500 (2005)
$ 2,230,000 – $ 1,895,500 = $ 334,500.
In conclusion, if Harrison will get bankrupt, MNC will lose at least:
$ 4,400,000 – $ 1,188,000 = $ 3,212,000 (AR – liquidation value).
$ 334,500 (decline in profits).
Estimated increase in shipping and administrative costs (1% for each). 1% of $ 8,500,000 = $ 85,000 * 2 = $ 170,000
Total estimated losses: $ 3,716,500
Starts Its Own Distribution Company
Another option for NCB is to start its own distribution company. This option will require a significant capital investment in addition to the losses due to Harrisons bankruptcy. If we look at the balance sheet of Harrison we can see that Net PP&E + Land amounted to $ 3,295,000. If NCB will decide to take this option, it must invest a similar amount. In addition, inventory investment is required and will be at minimum $ 500,000.
Total initial estimated investment: $ 3,795,000.
According to the income statement of Harrison, the average administration cost for a year is amounted to $ 2,425,000. The new company will handle NCBs products only therefore administration costs will be lower (around $1,500,000).
The initial investment and the yearly administrative cost are needed before even the new company is starting to generate revenues. Harrison had average net sales for the last 4 years of $ 34,097,000. Harrison has a loyal customer base built in its 80 years of existents. It will be very hard to enter the market because the new company doesnt have a customer base yet. We estimate the new company can generate approximately $ 5,000,000 in net sales for the first year.
Estimated losses from liquidation of Harrison: $ 3,716,500 (+)
Initial estimated investment: $ 3,795,000 (+)
Estimated administration cost: $ 1,500,000 (+)
Estimated profit margin decrease: