Warp, Clipboard Tablet Company Had the Ability

¶ … warp, Clipboard Tablet Company had the ability to look back and use data based on previous known financial performance in their decision making. The company made decisions regarding pricing strategies along with the allocation research and development resources following the analysis of past performance. During the second warp period, the company used CVP to make critical financial decisions not only based on the past performance but also the present and future perfomances (Baye, 2007). Though the use of these strategies during the first and second warp were beneficial to the company, the decisions they helped in making led to the decline of sales of both the X5 and X6. In addition, these strategies concentrated only on the pricing and increasing the contribution of the computers. The company also resorted to maximizing the profit without further investment and setting the price of the X7 higher to make it competitive, including decreasing the price of both the X5 and the X6. This led to decline in profits and to curb this, there is need for the implementation of a new strategy. The new strategy recommended for Clipboard Tablet Company is the profitability ratio analysis; which is correlated to the CVP.

Review of the Literature

Profitability ratios is the most used financial analysis tool in determining a company's bottom line and return to its investors. Profitability measures are important to company managers and owners alike since the outside investors who have put their own money into the company, will have to be convinced by the company that it is doing well financially..

According to Bodie, Kane, & Marcus (2004), profitability ratios measure a company's ability to generate earnings relative to sales, assets and equity. These ratios assess the ability of a company to generate earnings, profits and cash flows relative to some metric, often the amount of money invested. The widely used profitability ratios are return on sales, return on equity, gross profit margin and net profit margin among others. All of these ratios indicate how well a company is performing at generating profits or revenues relative to a certain metric (Bodie, Kane, & Marcus, 2004). Different profitability ratios provide different useful insights into the financial health and performance of a company. For example, gross profit and net profit ratios tell how well the company is managing its expenses. Return on capital employed tells how well the company is using capital employed to generate returns. Return on investment tells whether the company is generating enough profits for its shareholders.

In their book Finance, Groppelli & Ehsan argue that profitability ratios form a core set of bottom-line ratios crucial to all investment analysis. Profitability ratios are typically based on net earnings, but variations will occasionally use cash flow or operating earnings. In addition, they outline that for most of these ratios, a higher value is desirable (Groppelli & Ehsan, 2000). A higher value means that the company is doing well and it is good at generating profits, revenues and cash flows. Profitability ratios give meaningful information only when they are analyzed in comparison to competitors or compared to the ratios in previous periods. Therefore, trend analysis and industry analysis is required to draw meaningful conclusions about the profitability of a company.

Time Warp 3

Both the first and second time warps though helped the company make critical decisions concerning their products pricing, they nevertheless led to loss of revenue for some tablets and overall diminished profitability for the company. For this forecast, we use the Gross Profit Margin Ratio which is calculated by dividing the Gross Profit by the Net Income. Lower ratios show the company is not profitable and for every net income there is a recorded loss realized by the firm. The gross profit margin looks at cost of goods sold as a percentage of sales. This ratio looks at how well a company controls the cost of its inventory and the manufacturing of its products and subsequently passes on the costs to its customers. The larger the gross profit margin, the better for the company.

Analysis of margins from 2012 through 2015

To assess the gross profit margin of the products, the first step is to calculate the gross profit then it is divided by total sales revenue. It is the percentage by which gross profits exceed production costs. Gross margins reveal how much a company earns taking into consideration the costs that it incurs for producing its products or services. The calculation of this is shown in table 1. It should be noted that in analyzing these profit margins, they change throughout the four years, so they need to be recalculated for each subsequent year.

Table 1: Gross Margins for the X5, X6 and X7 for 2012

X5 ($)

X6($)

X7($)

Total Revenue

469,563,809

554,269,513

31,461,253

Total Profit

43,991,298

154,134,825

-23,065,952

Gross Margin

9.37%

27.81%

-73.32%

During this fiscal year, the company recorded lower gross profit ratios. This shows that the company's products are not profitable and for every net income there is a recorded loss realized by the firm. The X6 tablet computer recorded higher returns and the X7 recorded substantial losses and should be discontinued or its pricing be regulated.

Table 2: Gross Margins for the X5, X6 and X7 for 2013

X5 ($)

X6($)

X7($)

Total Revenue

611,502,211

918,020,206

45,068,365

Total Profit

206,738,942

285,254,260

-13,397,741

Gross Margin

33.81%

31.07%

-29.73%

From it is clear that the X5 and X6 are both profitable. The X7 gained little increases thus lowering the loss incurred during this year. The firm could reduce the price of the X7 or opt to withdraw it from the market to reduce losses realized from the sale of the X7 computers.

Table 3: Gross Margins for the X5, X6 and X7 for 2014

X5 ($)

X6($)

X7($)

Total Revenue

528,155,442

1,016,546,240

64,305,057

Total Profit

167,258,894

320,769,459

64,305,057

Gross Margin

31.67%

31.55%

0%

The X5 tablet is on a decline trend, with a decrease in 2% in sales, the computer which was the cash cow for the firm is facing the last phase of the cycle. The X6 is now reaching it maturity stage, and with the highest of all profit margins levels, there is room to reduce the price in order to increase sales. Although the target market initially were not price sensitive, as this is now a mature product it may appeal to new target markets and those who may not have been the earlier adopters and may be more price sensitive so the impact may be greater than expected. The X7 should now be established in the market place. If the price decreases of the previous have been implemented, increased market share and brand name awareness should help to support the sales, with the increased research and development justifying a price increase.