BADM 2001: Assignment 4 Model Answer- Spring 2022

Points: (25 points to be put out of 3.75 %)

Using the attached Foundation FastTrack with the Industry ID F112210, Round 7, answer the
following questions explaining the reasons and justification for your answers by showing all
needed calculations.
1) Calculate the capital structure and the leverage ratio of company Ferris. Justify if the
leverage ratio is a good one (5 points).
By looking at the Balance Sheet, we can say the following:
To evaluate the capital structure, we need to look at how much of assets’ value was
financed by equity and how much was financed by debt:
Total equity: $54,830
Total Debt: $56,648
Total Assets: $111,478
Therefore, Total Equity/Total Assets= 54,830 / 111,478= 0.49= 49%
And Total liabilities/Total Assets= 56,648/111,478 = 0.508= 50.8%
This means that the company is almost financing its assets equally by equity and
liabilities.
To calculate the leverage ratio,
Leverage = Assets/ Equity= 111,478/54,830 = 2.03
The leverage recommended range is from 1.8 to 2.8
A ratio of 2.03 is an accepted leverage ratio indicating that the company is balancing the
way it is financing its assets (by equity and liabilities).

2) Compare the performance of both companies Chester and Digby by explaining which
company is more efficient in the use of its assets to generate sales and profits? (5
points).

To compare performances of both companies in terms of efficient use of assets to

generate sales and revenues (profits), we need to calculate Asset Turnover and Return
on Assets.
By looking at the financial statements: Balance Sheet and Income Statement we can
note the following:
● Asset Turnover compares sales with the company’s assets; it measures the
efficiency of a company’s use of its assets.
o Asset Turnover= Sales/ Assets
 ● Return on Assets calculates the percentage of how profitable a company’s
assets are in generating revenues (profits)
o Return on Assets (ROA) = Profits/ Assets

Chester Digby
Asset Turnover= 90,579 / 103,935 = 131,823 / 138,205 =
Sales/Assets 0.87 0.95

ROA= Profits/Assets 2,451 / 103,935 = 15,139 / 138,205 =

2.35% 10.95%

We can conclude that Digby has a better performance in terms of efficient use of
assets in generating both sales and revenues.

3) Which company has the highest SG&A percentage of sales? Justify if the percentage is
accepted or is too high (3 points).

Andrews Baldwin Chester Digby Erie Ferris

Sales Revenues $103,722 $124,902 $90,579 $131,823 $96,763 $101,086
SG&A $19,878 $18,569 $20,707 $21,088 $17,818 $17,630
fixed cost/salesrevenues 19.2% 14.8% 22.8% 16 % 18.4% 17.4%
percentage
Chester is the company that has the highest SG&A percentage to sales with a value of
22.8% which is a high value; the company must control its fixed cost and revisit its
decisions. As per the Balanced Score Card, the company gets full credit if the SG&A costs
are controlled in the range from 7% to 20% of sales.

4) Explain and justify which company has the lowest plant utilization; what does this
indicate? (2 points)

By looking at the production page we can conclude that Erie is the company that has the
lowest plant utilization. It has 5 products with very low plant utilization:

Product Capacity Plant Utilization

Eat 1150 86%
Ema 940 21%
Ego 1000 48%
End 700 60%
Era 550 85%
 It indicates that the company invested in buying more capacity than it needs, which
means that the company invested in assets not used and is paying depreciation and
interests on underused assets.
Also according the Balanced Score Card, the full credit is given to the company which
has a plant utilization between 100 and 180%

5) Explain the reasons why company Andrews got an emergency loan with the value of
$11,850 (5 points).

By looking at the cash flow statement we can say that Andrews made investment with $
10,668 and did not raise capital to finance it: 0 sales of common stock and 0 cash from
long term debt issued. They also paid dividends with a total of $11,369. They also have
an inventory piling up with a value of $ 9898. Their products Aroma and Aurora did not
sell well; mainly a problem with their sales forecasting. They ended up with a negative
net change in cash position of $5916 and received an emergency loan with the value of
$11,850.

6) What is Digby’s overall competitive strategy? Justify your answer by explaining the
company’s functional decisions for each of its products in the R&D, Marketing and
Production (5 points).

If we look at the company’s functional decisions in R&D, Marketing and Production we can
deduce the following: Digby is a cost leader in the low-tech segment and differentiator in
the high-tech segment.

In the low-tech segment, Digby is a cost leader with the products Daze and Drogo and
differentiator in the high-tech segment with the products Dragon, Dnyrus and DumDum

Low Tech Segment High Tech Segment

R&D Material Cost is low High Material cost
Age of products is good Age is kept optimum with
with constant updates constant updates
MTBF is low MTBF is high
Products are positioned
The products are not
on ideal spots
 positioned on ideal spot
of LT segment
Marketing Price kept at lowest. Products are priced at top
High awareness and range.
accessibility budget. High awareness and
accessibility budget.
Production Automation at maximum Automation is low
at level of 10 And the company is
Capacity is good but more investing more in capacity
investment in automation

We can note that the sales and promo budget are not consistent with a cost leader strategy in
the low tech; they should have paid less on those two items.