Costing Methods And Financial Analysis Of JB Hi-Fi Company

Costing Methods and Decision Making

With the ramified economic changes and complex business structure, each and every organization is making effective efforts to increase their overall earning.  It is considered that investors are more inclined towards investing their capital in company which provides short term and long terms benefit to them at large.  In the first part of the report, costing methods and decision making to continue or discontinue particular project has been taken into consideration.  It is evaluated that management is in the mist to decide whether continued losses shown by the round trampolines and wants a recommendation as to whether or not the line should be discontinued. Therefore, costing technique has been used to make effective decision making.  It is evaluated that if company could gauge the possibility of short term and long term debts then it will increase the overall productivity and earning of company. In addition to this, continue and discontinue of the business is totally depends upon the contribution margin of company. If company is having positive contribution margin in its value chain activities then it should surely continue its business operation even if it is showing negative output in its business. The second part of the report is based on the financial analysis of the business functioning of company. This report has reflected the key understanding on the financial analysis of the company. In this report, financial analysis tools such as Ratio analysis, top down analysis and bottom up analysis have been used to gauge the performance of company. This part of the report is based on the company name JB HI FI Company. It is the listed company running its business on international level. It is considered that if investors want to make create value on his investment capital then they needs to invest their money in value created company.

1. a) In this part of the question, there are following points are undertaken which are given as below

• All the production fixed cost has been allocated in different department on the basis of sales.
• If production of round trampolines is stopped then equipment engaged in this will be of no use.
• If production of round trampolines is stopped then there will be saving of line supervisor’s salary.
• Company has no other use of these assets and working capacity to produce other things. Therefore, it will be loss for the business if they discontinue production of round trampolines.

These are the above factor which needs to be taken into consideration while undertaking the production.  After evaluating the various factors and key contribution factors in this part, it is considered that round trampolines production is not profitable and not creating value for the capital engaged in business. Therefore, it could be determined that management department should stop the production of round trampolines at large. If management department of company consider the other factors such as production capacity, opportunity cost then there will be following recommendations.

It is considered that if management department will stop the production of round trampolines then it will result to saving of only line supervisor’s salary. In addition to this, management department has to bear other losses like general factory overhead, depreciation and advertisement expenses. Even if, company stops its production of round trampolines, it will result to loss of 5, 11,000. This is the actual loss and company could save only 19,000 after discontinue business.

Income/Expenses Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Total, RM	Round, RM	Traingular, RM	Square, RM
Sales	1,000,000	140,000	500,000	360,000
Less: Variable expenses	-410,000	-60,000	-200,000	-150,000
Contribution margin	590,000	80,000	300,000	210,000

After evaluating the details and data of these round trampolines, it is considered that contribution margin of company is positive and showing 5, 90,000 amount of profit margin. It shows that company has high amount of profit from its total sales of round trampolines.

Financial Analysis

In addition to this, if management department discontinue its business then it will have to bear the following losses.

Advertising	216,000	41,000	110,000	65000
Depreciation	95,000	20,000	40,000	35,000
Line supervisor’s salary	19,000	6,000	7,000	6,000
Gen. factory overhead*	200,000	28,000	100,000	72,000
Total fixed expenses	-530,000	-95,000	-257,000	-1780000
Less	19,000	6,000	7,000	6,000
Total loss still face by company	-511,000	-101,000	-264,000	-172000

It is evaluated that management department should understand that even if this operation is discontinue then it will have to face total loss of 5, 11,000 in its business.  This business operation has shown that if company wants to create value on its investment then it should not discontinue its business operation. The main reason of the same is related to the contribution margin from its business operation of RM.  Company is having positive contribution margin in tis total RM production that reflects the positive output. This has shown that if investors want to increase its overall profit and business output then it should run its Total Rm production for long run otherwise company will have to face destruction in its invested capital.

Now in the end, it could be inferred that manager needs to analyze the others factors of the business before taking decision of discontinue of business. In this case, management department should understand that earning contribution margin from the investment is the valuable for the organization and organization if reduces its business operation then it will eventually increase the overall cost of the production

1. b) Recast the above data in a format that would be more usable to management in assessing the long-term profitability of the various models (Ondraczek, Komendantova, and Patt, 2015).

Income/Expenses	2016	20017	2018	2019
Sales	1,000,000	1500000	2000000	2500000
Less: Variable expenses	410,000	615000	615000	461250
Contribution margin	590,000	885,000	1,385,000	2,038,750
Less: Fixed Expenses		1,060,000	1,060,000	1,060,000
Advertising	216,000	216,000	216,000	216,000
Depreciation	95,000	95,000	95,000	95,000
Line supervisor’s salary	19,000	19,000	19,000	19,000
Gen. factory overhead*	200,000	200,000	200,000	200,000
Total fixed expenses	530,000	530,000	530,000	530,000
Net profit	60,000	355,000	855,000	1,508,750

With the help of excel tool, there is following information has been extracted which reflects that company will increase the sales and will also increase the variable cost at the same. In addition to this, company should not discontinue its operation. It is considered that with the increase in its sales company will also increase its profit and loss arise from the round material will be compensated by the profit earned from other units of organization. This level of measurement reflects that company or management department should run its RM production business in long run. However, company might be facing loss in short term but in long run it will result to saving good amount of profit at large (Yahoo finance, 2017).

This excel tool has been used to measure the profitabiltity of the total RM production of organization and assumption has been taken that company will increase the sales of its total RM by 5,00, 000 each year which will surely increase its profitability throughout the time.  In 2016 company had profit of $ 60,000 which will increase to 3, 55,000 in 2017 if company increases its sales by 5, 00,000.  Moreover, this profit will increase each year if company will increase its sales by 500000 each year on consistent basis (Bodie, 2013).

 Financial analysis is the important step which investors should adopt while making investment decision in particular company. In this report, JB HI-FI Company has been undertaken to identify its growth, business performance and financial capacity of company. It is evaluated that investors need to analyze the financial performance and capital structure of JB Hi-Fi Company (Vogel, 2014).

Case Study of JB Hi-Fi Company

It is an Australian and New Zealand Retailers Company selling consumer goods, specializing in video games, DVD and electronic home appliance, Company is fastest growing most successful business of its kind. This company has been running its business on international level.  This company has shown high amount of increment of profit in its business functioning and effective sustainable future (Damodaran, 2016).

Vision of company

The main vision of company is to increase its overall market share to 40% including domestic and international market with the help of its product differenciation strategies.

Mission of company

The main mission of company is to implement new process system in its business and customize its products and services for the better satisfaction of clients (JB Hi FI Company 2016).

Value of the company

The main value of company is to increase its production by following ethical means and create employees oriented value chain activities (Kou, Peng, and Wang, 2014).

Objective of study

This report is prepared to evaluate the financial performance of company and how proper financial tools could be used to assess the growth and business functioning of company. There are financial analysis tools such as Ratio analysis, top down analysis and bottom up analysis have been used that will help reader to identify all the ups and down and trend of company. The main objective of this study is to learn the key performance measures of company (Gitman, Juchau and Flanagan, 2015).

The Financial analysis of the JB HI-FI company is implemented with a view to analyzing the business performance and growth trend of company. Ratio analysis has been used to evaluate the business performance and capital structure of company. However, annual report of company has shown that company has high profitability and sustainable business practice. In addition to this, investors should keep his money in JB Hi-Fi Company in long run (Baños-Caballero, García-Teruel and Martínez-Solano, 2014).

Ratio analysis

This ratio analysis helps in determining the relation between two associated factors of the financial statement of company and establish interlink between these factors. There are five types of ratio such as liquidity, efficiency, profitability, investment and debt structure of company.  This ratio analysis will showcase the trend and financial performance of company throughout the time (Brigham and Ehrhardt, 2013).

Liquidity ratio of company

This ratio reflects company’s ability to pay off its current liabilities with the help of its current assets. This ratio has shown how well company has maintained its liquidity cash to run its operating activities in determined approach.  

Current ratio

This ratio depicts company’s ability to pay off its current liabilities with the help of its current assets. Company has maintained effective stable current ratio since last five years with less fluctuation. In 2013, JB Hi-Fi Company had 1.38 current ratio which increased to 1.32 in 2017. This shows that company has maintained strong current ratio and increased its current assets (Vernimmen, et al 2014).

Description	Formula	JB Hi-Fi Limited
		2017	2016	2015	2014	2013
Current ratio	Current assets/current liabilities	1.32	1.57	1.62	1.64	1.28
Quick Ratio	Current assets-Inventory/current liabilities	0.35	0.35	0.36	0.34	0.31

 Quick ratio

 This ratio divulges company’s ability to pay off its current liabilities with the help of its quick assets. JB Hi-Fi had .31 quick ratios which increased to .35 and shown that company has increased its investment in keeping more inventory in its value chain activities. This quick ratio is high as compared to market industry player therefore, investors should evaluate whether company has establish optimum cash blockage to run its business effectively (Ehrhardt and Brigham, 2016).

Profitability ratio

This ratio reflects the relation between total turnover and earning of company. It has been observed that there are following sub ratio which divulges the profitability of company. After evaluating the net profit shown in the annual report of company, it is evaluated that company has stable profitable earning capacity and has increased its overall turnover throughout the time. The main considered point of profitability ratio is that company has maintained stable profitability in it business (Duchin and Sosyura, 2014)

Return on equity

In this ratio, return available to equity shareholders and total revenue of company has been considered (Bloomberg, 2017). Company has decreased its return on equity to .030 returns on equity in 2017 as compared to .035 data shown in 2013. It reflects that company has decreased its efficiency to earn profit. It is further observed that company is not paying much interest on its debts which resulted to availability of dividend to shareholders (Zhu, 2014).

Return on assets

It establishes the relation between return earned by company and assets investment. It has shown that company has decreased its return on assets from .47 to .201 in 2017 since last five years.  This level of decrease in its net profit has shown that company reduced its earning throughout the time and resulted to non-effective business. In addition to this, it will also decrease the overall return on capital employed by the company (Ongore. and Kusa, 2013).

Description	Formula	JB Hi-Fi Limited
		2017	2016	2015	2014	2013
Profitability
Return on equity	Net profit/revenues	0.0305615	0.0384421	0.0375137	0.0367394	0.03507
Return on assets	Net profit/Equity	0.2014052	0.3753086	0.3994169	0.4338983	0.47737
Financial leverage	EBIT / EBIT – Interest	1.0428016	1.0184332	1.0307692	1.0494505	1.05952
Asset turnover	total assets / total sales *365	159.0876	91.665402	89.450986	90.097589	93.0154
Earnings per share	Net income – pref. div / shares outstanding	0.3917995	3.1020408	2.4035088	2.2068966	1.84127

Financial leverage ratio- This ratio has shown how company could cover its fixed interest expenses from its earning. Company has maintained stable interest coverage ratio of 1.04 since last five years. It reflects company’s standards financial planning to reduce the overall financial leverage.  This leverage ratio reflects that company should decrease its debt structure to reduce the interest payment to increase its sustainability (Bloomberg, 2017).

Earnings per share- It reflects relation between earning net income earned and equity share of company. Company has shown downfall in its earning per share from 1.84 to .39 since last five years. However, in 2016, JB Hi-Fi had good amount of earning per share of 3.1 which decreased to .39 in 2017 (Flannery, 2016).

Efficiency ratio of JB Hi-Fi Company

Receivable turnover ratio- This ratio reflects how well company has been maintained 29.31 in 2017. It has increased its receivable turnover by 2 points since last five years. This shows that company has reduced its investment in operating capital in and increased its return on capital employed. Company needs to maintain effective receivable turnover with a view to reduce its cash blockage and increase the overall productivity in determined approach (Evans and Mathur, 2014).

Description	Formula	JB Hi-Fi Limited
		2017	2016	2015	2014	2013
Receivable turnover	Receivables/ Total sales*365	29.31	36.02	33.03	30.13	27.71
Inventory turnover	Inventory / cost of goods sold *365	71.37	64.52	61.26	61.03	59.57

Inventory turnover

This ratio reflects the relation between total cost of goods sold and average inventory of JB Hi- Fi Company. It has increased its inventory turnover by 12 points in 2017 as compared to last five year data. This has shown how company has increased its overall inventory efficiency by reducing overall cost of capital and increasing the rotation of the same in business (Lundholm, and Sloan, 2013).

Capital structure of company

It is evaluated that JB Hi-Fi Company has maintained highly effective interest coverage ratio of 24.36 in 2017 which is 7% high as compared to last five years data. It has shown how interest payment of company is covered from the earning of the company. This capital structure of company reflects that company has maintained effective capital structure and company needs to evaluate all the possible pros and cons while maintain high debt potion in its business.  The capital structure of company should be like that it could increase the overall return on capital and employed and financial leverage at large. It is further observed that JB Hi-Fi Company should have arranged all of its finance in stable manner. In order to maintain its financial leverage, it should reduce its debt portion by 3 points which will reduce the financial risk and increase the overall return on capital employed at large (Altman, 2008).

Description	Formula	JB Hi-Fi Limited
		2017	2016	2015	2014	2013
Times interest earned	EBIT / Interest expenses	24.363636	55.25	33.5	21.222222	17.8
Cash coverage ratio	EBIT + non-cash expenses / interest expenses	269.00	222.00	202.00	192.00	179.00
Debt to Equity Ratio	Debt/ Equity	1.87	1.45	1.61	1.92	2.47

 Debt to equity ratio

This ratio reflects how well company has managed its debt to equity. It has divulged that company has decreased its debt to equity by increasing its equity partition and decreasing its debt portion in its capital structure. This will reduce the financial leverage and increase the overall cost of capital of company. Therefore, it could be inferred that if company wants to maintain effective business functioning in this sluggish market condition then it will have to maintain optimum capital structure. Ideally, company cannot determine the optimum capital structure but it should be like debt portion equal to 30 % of the total capital and 70% part of the capital should be consist of equity capital (Demirgüç-Kunt and Maksimovic,  2008).

There are several points to consider in the business functioning of JB Hi-Fi which showcase the profitability and value creation opportunity for investors. It is considered that JB Hi-Fi Company has shown stable growth and if investors want to invest their money in JB Hi-Fi business functioning then they should consider their investment in long run. In addition to this, sluggish market condition and increasing competition in these technologies filed, company, investors needs to analyze the business performance of industry and how far company has made positive efforts in its business.  This has shown that if investors who could invest their capital in JB Hi-Fi company then they should invest for long run only. If they invest their money in short run then it will surely result to no increment in the investment of their invested capital. In addition to this, investment for long term in JB Hi-Fi will help investors to increase the value of their invested capital (Gupta, 2009).

After evaluating the annual report and financial statement of company, it is considered that company has not made much change in its financial performance and maintained stable business performance; there are no such changes in the financial performance of company and shown overall stable earning. For instance, total revenue of JB Hi-Fi has increased by 70% in last five years. In 2017 company had AUD $ 5628 million investment which is 70% more as compared to total turnover of company in 2013. In addition to this, if investors want to earn return on investment then they should invest their money in long run. JB Hi-Fi has adopted sustainable business practice in which it has planned to increase its overall turnover and earning slowly throughout the time. Company has been facing problems and issues while introducing new technologies and customization of its products and services in its business (Dalen, Kuzey, and Uyar, 2013).  Company has also followed LIFO method in its inventory management which reduces the overall cost of capital and increase the efficiency of business. In addition to this, ratio analysis of JB Hi-Fi has shown that company has increased its overall turnover and earning throughout the time. Company has also reduced its debt to equity capital with a view to face sluggish market condition. The investment decision of investors should be based on the data collected through ratio analysis, top down analysis and other financial tools. Investment in JB Hi-Fi should be for long run if investors want to create value on their investment. Company has shown very slight increment in its overall earning but in long run company will divulge high value creation to its shareholders. Therefore, investors who could keep their money looked in for longer time period in JB Hi-Fi Company then it will help them to create value on their investment capital (Damodaran, 2016).

JB HI FI LTD  (JBH) Cash flow of  INCOME STATEMENT
Fiscal year ends in June. AUD in millions except per share data.	2017-06	2016-06	2015-06	2014-06	2013-06
Revenue	5628	3954	3652	3484	3308

In addition to this, cash flow from operating financial, investment activities and financial activities of JB Hi-Fi Company has shown that company has increased the value of the investment. Furthermore, it is evaluated that investors should invest their capital only after 2020 in JB Hi-Fi for the short term purpose; the trend analysis on the financial performance of JB Hi- Fi has shown that company will be having high increment in its total turnover.  Now in the end, it could be inferred that if company could increase the overall production and reduce the overall effectiveness of the business. It will increase the overall functioning and productivity of the organization. Now in the end, it could be inferred that if CEO wants to invest capital in JB Hi-Fi then it should invest his money for long run. Investment for short term purpose in JB Hi-Fi will destruct the value of the investors.

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