Evaluation Of Financial Performance And Analysis Of BPX Division

Sales, Costs, ROI, and Residual Income

Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	A	B	C
Sales Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	9,425	11,220	8,520
Variable production costs	4,125	5,650	3,980
Variable non-production costs	850	1,150	1,280
Fixed production costs	2,450	2,500	1,850
Fixed non-production costs	1,150	980	870
Operating profit	850	940	540
Capital Employed	8,800	8,940	8,490
Return on capital employed	9.66%	10.51%	6.36%

Particulars	A	B	C
Operating profit	850	940	540
Minimum required rate of return	9%	9%	9%
Operating assets	8,800	8,940	8,490
Residual Income	58.00	135.40	(224.10)

The minimum required rate of return is assumed to be at the levels of 9%, which helps in identifying the residual income of different divisions of the company. Therefore, from the evaluation, it could be understood that divisions B has the highest residual income from the operations, while division C has negative residual income. Furthermore, calculation relatively provides in-depth evaluation of the different returns that is provided by division of the organisation. Division B provides the highest return on capital employed, while division C provides the least returns from investment. The evaluation of seals directly helps in identifying the overall profit that could be generated from a particular investment. In addition, the sales value of division B is the highest among all the three divisions, which is relatively represents the demand from customers regarding the product. Consequently, the organisation needs to make adequate decision regarding the investments in different divisions for making the highest returns from investment. In this context, Cheng, Ioannou and Serafeim (2014) stated that with the use of different ratios companies are able to detect the most profitable division, which could maximize the profit and reduce excess expenditure on its operations.

Particulars	A	B	C
Variable production costs	4,125	5,650	3,980
Fixed production costs	2,450	2,500	1,850
Total production cost	6,575	8,150	5,830
Variable non-production costs	850	1,150	1,280
Fixed non-production costs	1,150	980	870
Total non-production cost	2,000	2,130	2,150
Total expenses	8,575	10,280	7,980

Few strategic improvements need to be conducted in current system of BPX for increasing the performance of their divisions. From the analysis of Divisional sales and expenses, overall profit generated from the operation can be identified. This derivation of the profit is relatively essential to determine, which investment is providing the highest return from investment. Division B provides the highest sales while the total cost incurred by the operations is relatively high. The above table relatively evaluate because structure of the three divisions which helps in identifying the performance evaluation of the business. From the above calculation, it could be identified that division B has the highest total production caused due to the high level of sales. Moreover, following the total cost of production Division A ranks second and division C ranks third. However, the evaluation of non-production cost relatively changes the expense level of divisions. The highest non-production cost is incurred by division, while having the lowest sales, while division A has the lowest non-production cost. Therefore, it could be understood that the expense level of division C is relatively high for non-production activity, which needs to be evaluated by the organisation. Moreover, the company could implement the implementation of process costing measure to improve the level of production and minimise any kind of extra expenses incurred from its operations. The divisional expenses also need to be controlled by the company, as it helps in minimising the level of resource allocation to activities, which does not contribute to the revenue generation capability of the company (Van Essen, Otten and Carberry 2015).

Strategic Improvements

The decision made by Joe for discontinuing the operations in division B will be a drastic step for the company, as it highly profitable division for the organisation. In addition, the decision would negatively impact profit operations of BPX, while hampering its capability to generate exponential returns in future. This decision would directly hamper profit generation capability of BPX, as division B is considered to have the highest revenue and demand among customers. From the evaluation of calculations such as return on capital employed and residual income, the viability of division B can be identified, as it is providing the highest rate of return from investment. the return on capital employed of division B is at the levels of 10.51%, which is relatively higher than any other divisions. Moreover, the residual income generated by division B is relatively higher than other divisions at the levels of 135.40, which relatively depicts the disadvantages of implementing Joe’s recommendation.

Therefore, from the valuation it could be detected that if BPX takes the decision of discontinuing division B then there will be immense floors for the organization. However, the discontinuation of division C could eventually provide more benefits for the company, as it is providing the least returns from investment and has negative residual income. This mainly projects that discontinuation of division C would provide fruitful for the organization and improve its profit generation capacity (Brooks 2015).

The transfer pricing proposal is relatively focused on minimizing the corporation tax that is currently presented in Caribbean Island. However, the transfer of new division in Caribbean Island would immensely have disadvantages which could directly hamper operational capability of the organization. Firstly, the transfer pricing proposal is focused on minimizing the corporation tax that is imposed on the organization for conducting their business. Secondly, the proposal does not address the concerns regarding availability of adequate raw materials and manpower, which is needed for continuing the operations in the new division (Filatotchev and Nakajima 2014).

The third limitation that could be identified from the Proposal is the detection of cost which could relatively increase in Caribbean Island due to the transfer of raw materials and other amenities to the facility. this would eventually increase the overall cash outflow of the organization while minimizing its cash inflows. The fourth limitation is transfer of finished goods from the Caribbean Island to the market, which would relatively increase the transportation expenses and reduce profitability of the organization.  The fifth limitation that could be identified is the increment in non-production expenses, as the production facility is in the outskirts. Therefore, the transfer pricing method should not be continued by the organization, as that only focus is in minimizing the corporation tax, while other expenses would eventually increase for the organization (Garner et al. 2017).

Particulars	2015	2016	2017
DIO	218.73	282.60	305.07
DSO	26.66	40.61	85.17
DPO	38.62	29.62	27.60
CCC	206.76	293.59	362.64

Decision-making Process for Discontinuing Divisions

Above table relatively represents the cash conversion cycle of D Ltd from 2015 to 2017, which has a relatively increased over the period of 3 fiscal years. This relatively indicate that the organization’s position has declined due to the increment in cash conversion cycle value from 206.76 to 362.64. Furthermore, increment in cash conversion value was due to the reduction in days payable of the organization from 38.62 to 27.60. Moreover, days in inventory and days of receivables has relevantly increased from 2015 to 2017. The increment in value of cash conversion cycle relatively indicates the low improvements, which is conducted by the management to curb the rising blockage of essential cash. Therefore, the output derived from the cash conversion cycle relatively indicates capability of the organization to receive the cash after conducting the relevant production expenses. The overall payable days of the organization has a relatively declined, while the inventory and receivable days of the organization has increased (Mahmoud 2016).

Financial Analysis: BPX Division
Particulars	C	D
Leverage
Debt / (debt and equity)	40%	21.06%
Interest cover	5	8.28
Efficiency
Inventory turnover	3	1.20
Asset turnover	1.95	2.88
Liquidity
Acid test	1.2	3.59
Current ratio	2.3	9.08
Profitability
Gross profit margin	50%	33%
Net profit margin	18%	13%
Sales growth rate	8%	-6%

From the overall evaluation of the ratios it could be understood that Profitability ratio of D Ltd is not adequate in comparison to division C, as gross profit margin, net profit margin, and sales growth rate of the division is a relatively lower. Moreover, the leverage evaluation indicates a positive attribute for D Ltd, as the temperature is lower and interest coverage ratio is higher in comparison to division C. The efficiency ratio also shows a of positive attribute, as inventory turnover ratio is low while the Asset turnover ratio is high for D Ltd as compared to division C. Lastly, the liquidity position is also relatively higher for D Ltd, as both acid test ratio and current ratio have the highest value in comparison to division C. Therefore, from the evaluation of the above ratios it would be identified that D Ltd is relatively providing a positive attribute for the organization as compared to the division C. However, the organization could improve profitability ratio of D Ltd to effectively obtain higher income from operations (Gul et al. 2017).

The organization could take the following fractions to remedy the underperformance of D Ltd.

1. Improve the level of revenues that could be generated from the organisation, as it might help in increasing its profitability ratio.
2. Decline in the cost features also needs to be implemented in D ltd, as it might help in improving gross profit margin and net profit margin of the organisation.
3. Reduction in the accumulation of current assets would be effective for the organisation, as it might help in increasing activities of the organisation.
4. Improvement in inventory accumulation could be conducted for increasing the inventory turnover ratio.
5. Continuous increment in revenues needs to be achieved by the company to improve its sales growth rate.

From the overall evaluation it could be identified that return on total Assets of DF Limited has not increased adequately over the period of 3 years, acid declined from the levels of 2.52% to 1.26%. Furthermore, the return on total assets is not close to the sectoral values, which directly indicates the inability of the organization to adequately obtain the required rate of return by implementing its total assets. Addition the sales growth rate of the organization has a red to be improved oh the period of 3 years, where the current values at the levels of 18.90%. Moreover, the sectoral sales growth rate is at the levels of 4.50%, which is been less than the actual growth obtained by DF Limited. Gross profit margin of the company has a relatively declined from the levels of 61.99% to 50% in 2017, which is relatively lower than the sectoral values of 58%. This relatively indicates that the gross profit margin of the company is not up to the industrial standard. Furthermore, the sectoral net profit margin is at the levels of 14%, while the company has obtained net profit for 2017 at the levels of 3.66%, which is relatively lower for DF Limited.

Transfer Pricing Proposals

The inventory turnover ratio is also not adequate for the organization, as it does not fall under the sectoral values of 10. Therefore, improvements and inventory turnover ratio needs to be conducted by DF Limited for raising its revenues from operations. The trading receivables is relatively higher for the organization, as calculated from the data, while there are no trade payable days for DF Limited. Moreover, the gearing ratio is a relatively higher in case of BS Limited as compared to sectoral values, which indicates the low financial position of the organization (Campbell et al. 2018). Furthermore, the interest coverage ratio is also not adequate in comparison to the factorial values, as it is at the levels of 1.47, by the sectoral values are at the levels of 7.5.

There are different areas of concern regarding the operations of DF limited, where are the improvements in total assets of the organization needs to be conducted. this improvement needs to be conducted by increasing the net income of the organization, which is only possible by reducing the administrative and material expenses of the organization. The improvement in gross profit margin and net profit margin can also be conducted with the declining expenses of administrative and material cost, which might eventually improve the profit generation capacity of DF Ltd. The overall gearing ratio needs to be improved by reducing the overall Noncurrent liabilities of the organization, as it directly affects its debt collection. Improvement and interest coverage ratio also need to be conducted by reducing the debt accumulation of the organization. Moreover, the increment in operating profits could also help in improving the interest coverage ratio. Therefore, the above improvements in DF Ltd could eventually help to raise the level of profits that could be generated by the organization, while increasing its financial stability (Gilinsky Newton and Eyler 2018). The improvement could also help in generating higher returns from investment while reducing the excessive expenses incurred by DF Ltd.

From the evaluation of the calculation it could be identified that DF Ltd does not use any kind of credit in its purchases, which is relatively hampering its overall operational capability. the company is needing more and more capital to support its operations, as there is an absence of purchase credit. The use of purchase credit could benefit DF Ltd immensely by reducing the overall debt accumulation conducted by the organization during the three fiscal years. The standard industry credit limit is at the levels of 30 days, which might allow the organization to accumulate the required funds in 30 days to pay the supplier. this would eventually reduce the excessive accumulation of credit from Bank to pay the suppliers. the credit capability of the organization is relatively high, as its financial position is improving. Moreover, the use of standard industry credit for purchase would eventually allow the organization to maintain adequate cash flow within the operational period and reduce any kind of cash stagnation (Shahzad et al. 2016). Hence, it could be assumed that with the implementation of adequate measures and use of purchase credit the profit level of DF Ltd would eventually rise and allow the organization to generate higher rate of return.

Cash Conversion Cycles

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