​Denver Furniture Corporation Analysis

Sep 5th, 2017
Anonymous
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Question description

Denver Furniture Corp. is nationally recognized for making high-quality products. Management is concerned that the company is not fully exploiting its brand power. Denver’s production managers are also concerned because their plants are not operating at near full capacity. Management is currently considering a proposal to offer a new line of affordable furniture.

The following data are available:

(In thousands)

Current Results

Proposed Results without Cannibalization

Proposed Results with Cannibalization

Sales Revenue

$45,000

$60,000

$50,000

Net Income

$12,000

$13,000

$12,000

Average total assets

$100,000

$100,000

$100,000

Those in favor of the proposal (including the vice president of production) believe that, by offering these new products, the company could attract a clientele that it is not currently servicing. Also, it could operate its plants at full capacity, thus taking better advantage of its assets.

The vice president of marketing, however, believes that the lower-priced (and lower-margin) product would have a negative impact on the sales of existing products. The vice president believes that $10,000,000 of the sales of the new product will be from customers that would have purchased the more expensive product but switched to the lower-margin product because it was available. (This is often referred to as cannibalization of existing sales.) Top management feels, however, that even with cannibalization, the company’s sales will increase and the company will be better off.
Instructions:

  1. Compute Denver’s return on assets, profit margin, and asset turnover; both with and without the new product line.
  2. Discuss the implications that your findings in part (a) have Denver’s decision.
  3. Are there any other options that Denver should consider? What impact would each of these have on the above ratios?

Show your work and use Excel or Word for your submission. The written portion of your assignment should be four to six pages in length with document and citation formatting conformity with the CSU-Global Guide to Writing and APA Requirements.

Tutor Answer

(Top Tutor) PhDjack
School: UC Berkeley
PREMIUM TUTOR

Attached, please review.

Running head: FINANCIAL ANALYSIS

1

Financial analysis (case study)
Student Name:
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FINANCIAL ANALYSIS

2

Financial ratios are used to predict financial muscle of the company. They are derived
from financial statements including the statement of compressive income, statement of financial
position (balance sheet) and statement of owners’ equity among others. Financial ratios compare
figures in the financial statements to indicate whether the financial condition is favorably
unfavorable (P e n m a n , 2 0 1 5 ). Denver Furniture Corp. is concerned that it is not exploiting
full potential in its production. The company’s management resolves to offer a new line of
furniture. However, the process of introduction of the new product into the market brings change
in total sales and net income. Ideally, introduction of new product lead to reduction in sales
volume of the product of the same producer. This is called cannibalization.
Using the calculations of financial ratios, based on the proposal of the new product, the
sales volume decreases from $60,000 thousands to 50,000 thousand. Also, net income is
projected to decrease from $13,000 thousand to $12,000 thousands. This is mainly influenced by
the change in customer demand. Moreover, the average total assets remain constant when and
after cannibalization is applied. By introduction of new products in Denver's operations, the vice
president of the company is optimistic that the company will gain the increase in profits as well
unitize its plants and resources maximally. According to the vice president, the new product
could also attract new clients into purchasing of the new product. Using decisions of the vice
president and his team, the findings...

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