Tricorp Financial Leverage
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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
$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
$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
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
$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
$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
Improvement