Financial Performance Analysis And Competitive Strategies For EK Toys

Overview of EK Toys

Discuss about the Theorizing Contingencies In Management Control.

The East Asian market has grown steadily in this segment and hence EK Toys has been able to reap its profits. But in consideration to the growing competition from Chinese toys and such other low-cost manufacturers, EK toys have reported a loss for the recent two quarters. There are many low-cost toy manufacturers coming up who are into the production of similarly designed toys as that of EK Toys. This loss has alarmed the management and hence steps need to be taken to analyze the same. Another hit to the sales of EK Toys is the growth of e-commerce and online purchases. Most of the customers prefer it due to the flexibility; traditional toy stores are getting hit. This business report evaluates the financial performance of the company from various perspectives like revenue, cost, profit and activity drivers, with an elaboration on the possible reasons for the improvement or deterioration of the company (Drury, 2011). In addition to this, the competitive strategies are also discussed for the company to improve its performance.

The Sales Revenue of the HEM figures has increased steadily over the years but the revenue from CAF figures has not increased to a similar extent. The company can look forward to increasing its sales in this area to overcome the losses to an extent (Drury, 2011). The Annual Report contains the key financial highlights which include percentage increase in revenue, profitability, Return on Equity and Return on Capital employed. This gives a bird’s eye view of the company performance.

The revenue analysis with the percentage increase year by year is tabulated below:

Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	2015	2016	Change	2016	2017	Change
Sales Revenue	$ ‘000	$ ‘000	+ / –	$ ‘000	$ ‘000	+ / –
– HEM Figures	102,000	104,550	3%	104,550	110,900	6%
– CAF Figures	25,500	25,500	0%	25,500	27,864	9%
Total Sales Revenue	127,500	130,050		130,050	138,764
% HEM Sales to Total	80%	80%		80%	80%
% CAF Sales to Total	20%	20%		20%	20%

On comparison of the year 2015 with 2016, the sales of HEM figures have increased by 3% whereas the sales of CAF figures have not increased at all. In comparison of the year 2016 with 2017, the sales of HEM figures have increased by 6% which is double the increase rate for the previous year. The sales of CAF figures have also seen a significant increase of 9%.

It can thus be analyzed that with the increase in customization requirements, toys need to be unique and hence EK toys can increase its business by tapping the opportunities in the CAF figures sales segment in addition to the increasing the sales in HEM figures (Hopper & Bui, 2016).

From the total sales, the proportion of HEM and CAF sales has remained constant at 80:20 over the years.

Revenue Analysis

The major costs of the company are direct costs and indirect costs, while the direct material, direct labor and production overhead costs fall under the manufacturing costs, the selling and distribution overheads are classified under indirect costs (Marsh, 2009). An analysis of the same is tabulated below:

Particulars	2015	2016	Change	2016	2017	Change
	$ ‘000	$ ‘000	+ / –	$ ‘000	$ ‘000	+ / –
Direct Materials	42,200	44,880	6%	44,880	58,890	31%
Direct Labor	3,850	4,081	6%	4,081	5,500	35%
Production Overheads	32,000	33,400	4%	33,400	39,900	19%
Selling and Admin OH	10,200	11,900	17%	11,900	14,900	25%
Total Expenses	88,250	94,261		94,261	119,190
% Direct Expenses to Total	88%	87%		87%	87%
% Indirect Expenses to Tota	12%	13%		13%	13%

The direct material cost has increased only by 6% in 2016 when compared with 2015, it has increased by 35% in 2017 in comparison to the year 2016. Direct labor cost has also increased on similar lines. Production overhead has also increased significantly at the rate of 19% in 2017 in comparison to the prior year (Phua et.al, 2011).

Selling and Admin Overheads have also increased but not so rapidly like the direct costs. Thus it can be seen that the global price rise and such factors have led to the high cost manufacturing cost rise for the company (Oker & Ad?guzel, 2016).

The proportion of direct and indirect expenses to the total expenses remains almost constant through the years.

The sales revenue has increased but at the same time, the costs have also increased significantly. This has led to the percentage of profits fall year after year (Parrino et. al, 2012). An analysis is tabulated below:

Particulars	2015	2016	Change	2016	2017	Change
	$ ‘000	$ ‘000	+ / –	$ ‘000	$ ‘000	+ / –
Gross Profit	49,450	47,689	-4%	47,689	34,474	-28%
Net Profit	39,250	35,789	-9%	35,789	19,574	-45%

A comparison and analysis of the year 2015 with 2016 shows that as the sales have increased by 3% in the year 2016, the direct costs have increased by 6% leading to a drop in the Gross margin by 4% in the year 2016. The Net Profit margin has fallen by 9% as the selling and administrative overheads have increased by 17%.

On comparison of the year 2016 with 2017, it can be seen that though the sales have increased by 7%, the direct manufacturing costs have seen an alarming increase of 28% leading to the gross margin fall by 28%. The Net Profit margin has fallen by 45% as the selling and administrative overheads have increased by 25%.

The increasing costs are a major cause of concern as it has almost halved the company’s profitability levels.

Apart from the major elements of analysis like costs, revenue and profitability, the activity drivers are another area of understanding and interpreting the company performance. The results of the same are tabulated:

Particulars	2015	2016	Change	2016	2017	Change
Drivers			+ / –			+ / –
No. of production operators	60	65	8%	65	79	22%
No. of HEM / year	1000	1220	22%	1220	1377	13%
No. of CAF / year	200	222	11%	222	233	5%
No. of defects / year	30	61	103%	61	90	48%

The production capacity has increased by 8% in the year 2016 and 22% in the year 2017. The number of units produced of HEM has increased by 22% in the year 2016 but 13% in the year 2017. The number of units of CAF production has increased by 11% in 2016 and 5% in the year 2017. Though the number of units produced is more in the year 2016, the direct costs are incurred more in the year 2017. This implies that the increase in the cost of materials, labor and production overheads are not in line with the number of units produced. Rather, the individual rate increase is pretty high in the year 2017 which has reduced the profits significantly (Petersen & Plenborg, 2012). In terms of quality, the rate of defects was 103% in the year 2016 which has reduced to 48% in the year 2017, which is a considerable improvement.

Cost Analysis

Strategies and Conclusion

The first major issue that the company is currently facing is increasing costs. Rather than having too many products, it can focus on one or more products.

EK toys need to streamline its product line and focus on one or two products that are high revenue generating. If there are too many products, then a proper management might not be possible which can also lead to increased costs for the company. Consolidation of product lines also helps in the effective management of costs. From the analysis, it can be understood that though the production operators have increased from the year 2015 to 2017, the sales have declined and so have the profits. This is due to the fact that the company is not making the most optimal use of its production operators and available capacity and also the percentage of defects is eating up the units produced and profitability (Lee et. al, 2015). Hence examination of the current workflow will help in achieving an organized business structure and hence rationalization can be seen as an effective strategic tool.

The success of the company depends not only upon the financial factors but also the non financial factors. Balanced scorecard is an effective tool used for measuring and analyzing the same. The balanced scorecard is thus used to reinforce good and positive environment within an organization to help achievement of the goals and objectives. The four legs of analysis are learning and growth, business processes, customers and finance. Companies can identify the value addition in terms of the strategic initiatives and strategic objectives. The factors hindering the company performance can also be studied and analyzed.

Kaizen costing is a system of maintenance of the present level of costs at the current production level via the systematic set of efforts to achieve the desired level of costs. Cost reduction strategy requires a continuous discipline and monitoring of the costs. This should be the short term objective of the company. The optimum utilization of the resources and the negotiation of business purchases are also a part of this strategy (Chenhall, 2007).

Apart from this, it is seen that the rate of defects is pretty high for the company which is a totally non-value added cost and a burden for the company. Thus quality control measures like Continuous Quality Improvement measures help in the identification of defects and minimization of the same (Lee et. al, 2015).

Conclusion

In consideration of the modern-day technologies, EK Toys should develop and establish an online store to boost its sales. As time passes by, it is going to be difficult to attract customers to the physical store. As the marketing techniques have changed, EK Toys also needs to evolve to keep up with the current trend. Social media is a magical thing that cannot be ignored in today’s world. It has become a direct platform for customers and the companies. Thus it is considered to be a very powerful business tool. It helps to reach the target audience and also helps in growing the business in areas where it is not possible to open a store. Thus these are the few strategies the company can use to increase its sales and profitability.

References

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Horngren, C. (2011). Cost accounting. Frenchs Forest, N.S.W.: Pearson Australia.

Lee, J., Park, M., Lee, H.S., Lee, K.P & Hyun, H. (2015). Application of Activity-Based costing (ABC) for Modular Building Construction Indirect Costs Calculation at the Manufacturing Stage. Korean Journal of Construction Engineering and Management, 16(4),139-145

Marsh, C. (2009) Mastering financial management. Harlow: Financial Times Prentice Hall.

Merchant, K. A. (2012) Making Management Accounting Research More Useful. Pacific Accounting  Review. [online]. 24(3), 1-34. Available from https://pdfs.semanticscholar.org/6ccf/f78a452763f17ed5e4f4ddc6b96703801403.pdf

Oker, F & Ad?guzel, H. (2016). Time?driven activity?based costing: An implementation in manufacturing company. Journal of Corporate Accounting & Finance, 27(3), 39-56.

Parrino, R,  Kidwell, D. & Bates, T. (2012).  Fundamentals of corporate finance. Hoboken,

Petersen, C. and Plenborg, T. (2012) Financial statement analysis. Harlow, England: Financial Times/Prentice Hall.

Phua, Y. S., M. A. Abernethy, and A. M. Lillis. (2011) Controls as exit barriers in multiperiod outsourcing arrangements. The Accounting Review. [online].  86, p. 1795–1834. [Accessed 20 May 2018]