step 7-10 in one leap

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RESTATED FINANCIAL STATEMENTS & RATIOS

Step 7-10

Step 7: (4 marks)

Identifying three products or services of your firm and estimating/guessing their selling price and variable cost. You will also comment on the contribution margins you calculate as well as identify constraints and briefly comment on them. Try to make your assumptions reasonably realistic. Identify (or guess) one or more resource constraints your firm may face.

My company RPM Global is a provider of IT products and consulting to mining companies as a complete process from simulation, accounting and process management of product and waste. The service products they have very little in regards to marginal contribution other than labour and travel cost associated with having employees on site with their mining clients. This is due to the IT service product have already been developed. Also service products are industry specific business to business delivery of products and are high ticket services.

While RPM Global has a revenue of over 70 million, they have a very clear target of service delivery. In the past 2 years they have changed their pricing model inline with other software companies moving to licences rather than packaged software. RPM Global provide consulting in conjunction with these products. My pervious knowledge of mining is these costs are usually costed per project. They still currently provide their original packaged IT software. This will likely change as they move their software into licencing. They also provide software maintenance this is likely to be call centres and lower level consulting of trouble shooting to personalise the software.

The three products I have chosen are licence subscriptions, project consulting specifically Australia and packaged It software specifically Mine Enterprise Planning in Australia.

Licence Subscriptions

Single cost

10,000 per month paid annually

120,000

Variable Cost

Setup costs

Travel expenses and accommodation for staff $300 a day this is difficult to know as mining locations are remote and accommodation is usually expensive due to scarcity or provided by the mine on site

I have chosen to cost a daily allowance rather than a varied cost assumed mine provided onsite accommodation.

$300

@ 12days

3,600

Initial training and support for client

2 weeks employee trainer @ $ 90,000 pa

2,340

Commission of sales

0.01%

1,200

Contribution Margin

5.95%

7,140

As the licencing will be a pre-packaged product all contribution margins would be the initial setup of the product and use for the client. Also it is likely that consulting during the feasibility stage will have allowed for additional training and expectations of the servicing of the licence. The renewal of sale will have very little to no margin costs. In the directors’ report much of the commissions and incentives are in relation to KPI performance for staff. However, in 2018 there were no cash incentives paid to directors stating the short-term incentives are at risk. Therefore the $3 960 000 is more likely to be commissions paid to staff. Also the commissions and incentives has only been in the income statement in the last 2 years with the introduction of the licencing changes. The assumption is commissions are paid for product sales, more specifically licencing. I have added a very small percentage to commissions of sales to account for this change in the income statement.

Consulting

Single cost

$1000 per hour per person

8,000

Variable Cost

Consulting staff cost @$ 90000 pa

$346 a day

346

Travel expenses and accommodation for staff $300 a day this is difficult to know as mining locations are remote and accommodation is usually expensive due to scarcity or provided by the mine on site

I have chosen to cost a daily allowance rather than a varied cost assumed mine provided onsite accommodation.

300

Flights to site per person

800

Contribution Margin

18%

1,446

Consulting fees in mining industry are charged per project specifically based off what the project is consulting on it requires a number of staff involvement providing specific development of each component of expertise. These contracts are in the $100 000’s and at times millions the annual report states one client of over 6 million dollars. Plus the recommendation of software purchases would be additional. I have given the cost of one staff of one day with flights included and travel expenses each day under the expectation that consulting would happen on site.

Packaged IT software specifically mine enterprise planning in Australia

Single cost

850,000

Variable Cost

Setup costs

Travel and accommodation for staff

5,000

Initial training and support for client

4 weeks employee trainer @ $ 90,000 pa

3,461

Commissions and incentives for staff

0.01%

Contribution margin

13,086

The figures for mines in Australia have been taken from http://www.australianminesatlas.gov.au/mapping/files/major_projects.xlsx

Of the 130 current mine in various stages of development. The number of mines in feasibility stage is 30 in 2018 of these sites 17 are new projects. None of the principle companies are the large major 5 mine companies (Els, 2017). This means the number of potential clients are very limited however each sales project is of very high cost in the

Therefore the assumption is the Packaged IT software for enterprise planning to be of high market share and of high sale item. 17 potential projects in the feasibility planning stage to sell within 2018.

Restraints on the RPM Global are the limits on the complexities needed in producing software for differing mine sites and styles such as open cut and refining. Also the legal implications that are differing in each country and how they manage the restrictions within the software programming and simulations. Restraints are also limited in whether or not the projects continue or stall at different parts of the feasibility and committed, build and producing stages.

Step 8: (17 marks)

Step 8 involves you calculating some ratios for your firm (and its economic profit) and assessing its business performance.

Ratio Analysis

The Ratio analysis, shows that RMP Global struggled significantly 3 and 4 years ago. In researching the reasons as to why they struggled led to investing the mining industry as a whole for 2014 and 2015 a report by Mining Staff International (2014) states the roller-coaster ride of the global economy and its unfavorable effects particularly on mining, this is linked back to the GFC of 2007. The report is a survey of 90 mining companies and the business projections of company focus, conditions and projected expectations. IT was very unfavourable and unfavourable conditions in 2014 and the continued projection for the following year 2015. However with an expectation of favourable and very favourable within the following 5 years. This would be achieved through growth planning of mergers & acquisitions and short term issues in securing financing. A article on 2015 outlook of mining procurement and supply by Austmine Ltd (2015) states cost optimisation and ‘A greater focus on cost saving strategies in all processes’ to be of high significance when evaluating the figures for RPM Global. As a product service to mining RPM Global strategies included significate restructuring including redundancies in 2016 and 2017. The acquisition of other mining software companies such as AMT Intelligent Asset Management and the changing focus to licencing of products in 2017. The change to licencing has decreased 2018 overall profitability with a projection of increased profitability in future years. This justification is written within the annual report. It is of particular note to see that no dividends have been paid in the past 4 years either due to these conditions. These decisions have seen a strong return in profitability over a 3 year period having 2017 the first year of slight positive return in Net profit margin with a 2 cent earning share and a 11 cent earning share for 2018. RPM Global has no debt outside of its obligations provisions and to share holders. Given that RPM Global is an entirely service based company maintaining having strong positive Liquidity Ratios and showed gains in earning per share in 2017 shows its strength of leadership over an difficult time in the industry. The return to positive growth is in line or even earlier than projected expectations with the prospects of the favourable market return identified in the reports in 2014 and 2015. Finally the profit margin for the restated financial statements show as positive increase to 0.19% a climb back into positive profitability.

Days of inventory, there is not inventory in this business, I did however use the work in progress amount to make the calculation for the repetition of it.

Total asset turnover Ratio, does show a decrease in the numbers from 2016-2017. There has been a rather large acquisition over that time. Significantly increasing sales and overall assets, in particular intangible assets.

The liquidity Ratios don’t seem balanced given the strong position of no significant liabilities. In the annual report under the current liabilities is other liabilities, this number consists of unearned income of 13 million and contingent consideration at 2.7 million. The unearned income is in fact deferred income this maybe how the company is calculating future licence sales. As the number is has almost doubled in 2 years. The contingent consideration is the cost put aside if the business needed to liquidate. The truth of the numbers are much lower. Even in the provisions figures of the current liabilities the annual report states it is the fix contributions from the group companies for legal and construction constraints and are at a fixed amount. The current liabilities in real terms are much lower and this number is inflated.

Debit/Equity Ratio calculating the outside debt obligations against the shareholders contribution. These numbers are not indicative of the true picture as the debt is predominately deferred income and considerations.

The market Ratios

While RPM Global is in a strong position, their earnings per share has been in the negative in 2015 & 2016. There was an approximate 20% increase in the number of shares from 2016-2017. This hid the growth of the business a little. In 2017-2018 was negligible increase about 2% which is rather solid growth in 1 year. The years before 2015-2016 was a slight decrease in the number of shares. Even though there was a positive gain in 2018 there were no dividend released, neither on any of the past 3 previous years.

Economic profit

I followed the process of calculating economic profit from the videos using the 10% of the firms cost of capital when calculating economic profit for the benefit of the process. It became confusing for a little while as I back tracked to make sure that the WACC was not necessary because RPM Global doesn’t have debt requiring weighting. The only debt they carry is provisions which is there short term accounts or accounts payable which is not considered in weighted capital. The firm’s economic changes in profit have been because of significate market instability resulting from the impact of the GFC in 2007 having large impacts on mining development and financing in 2014-2015. That mining sector over all took towards cost cutting. The restructuring has put RPM Global in a strong position for 2019. It should be noted a significate increase to growth in intanglable assets in 2017 of more than 50% this is likely due to the acquisitions. This number would also contribute to the jump in Net operating assets and not necessarily just profit. In 2017 the overall sale increased in line with this change.

Step 9: (5 marks)

Step 9 involves you developing a capital investment decision for your firm and completing a simple analysis of this decision using Payback Period, NPV and IRR.

RPM Global provides IT software to mining companies this is a specific niche that they are predominate industry leaders within. They provide high price ticket mining IT solutions on all 6 continents. They provide a whole package of IT solutions from simulations, planning, accounting including asset management and management of product and waste. In the past several years they have made changes in products 2 years ago changing to licencing. Due to the GFC in 2007, it is clear being industry specific has its weakness and the Capital invest options provided are to diversify into another industry that requires similar IT frameworks that can be adapted for the current software RPM provide. While the individual sale would be lower in dollar sales the amount of clientele increases in these sectors suggested. Both options have been chosen as there are comparative components that are complimentary to the mining industry. They are both high growth industries transportation and construction (Vashistha, 2019: Australian Construction Industry Forum 2018). To diversify protects the business from having the full impact of the mining sectors ebbs and flows.

Specifically with transportation the repurpose of AMT Intelligent Asset Management for trucks and vehicles and scheduling and accounting.

Construction for simulation of project management of build including planning and accounting.

Capital out lay

Includes project team of IT within company and industry specific consultants to troubleshoot licencing software. 12 month project with 6 internal IT specialists @ $120000 each person ( $720000) the cost of providing resources such as computers and leasing, travel and accommodation ($ 750000) and 4 consultants projects of mean price of $ 600000 ($ 2,400,000) total capital cost of 3.87 million.

Potential Construction income has been calculated from

Benham (2015) states that construction industry allots 1% of revenue to their IT budgets. Therefore I have calculated 1% of the over all industry for the IT budget of the whole industry. 1% of share market over 5 years of overall construction industry value in Australia, specifically non-residential. Construction figures were taken from Australia Bureau of Statistics (2018) $10532 million.

Transportation income has been calculated from

I have use the same allotment of IT budget of 1% for the transport industry too. 1% of overall transportation industry value in Australia, specifically road transport for over the first 5 years. Figure were taken from Australia Bureau of Statistics (2012) $19754 million

Option 1 construction doesn’t meet the payback period of 3 years. Option 2 Transportation does. This is because the overall dollar value of the industry in transportation is a bigger industry. The Internal rate of return % is very high as well.

I understand that the ideas are similar in their presentation, even though RMP Global is a significate business, they are really particular in their customer focus and overall business goal of industry experts in the mining industry regarding Information Technology.

Step 10 Feedback

Feedback From: Sharne Roby

Feedback To: Jessica Small

Step 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

Your margins cost on the iphone would be whole sale price for the phone which would be around 50% of the RRP the they would be making money from Iphone for every phone they sell. You have said contribution market in you assignment it should write contribution margins. The Margin can also consist of the cost of time for the sale assistant to do the paperwork and sign up of the phone and the commissions that they would be paid.

The second product the calculations you have used are not suitable here. The contribution margin would be the cost in providing the phone plan. This is the wholesale cost of the calls which are fix costs the $29.99 is an additional cost to add another phone to the plan. The margin here is negligible it would be the commission on sale and the cost of the phone if it was purchased with the plan. The call cost and data cost are fixed cost as they are purchased whole sale.

The 3rd product your CM calculation here doesn’t have a clear way of how you arrive at the numbers. Again data is a fixed whole sale cost and this product would have very low to no CM

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Your Ratio for net profit margin should be cell D80 not D91 this is where the confusion has been made

It will read 9.8%, 11.5%

Days of Inventory if you look at the numbers for

79

94

3

14

This increase in stock is the reason for the jump in number this means they have 79 million dollars’ worth of inventories or phones. You may fine they have moved into a different product market in 2017. So the jump is right But you have linked it to financial expense re-check this cell.

Current Ratio

Current assets/current liabilities

0.24

0.23

0.20

0.21

You have link total asset and total liability and not the current ones

You have D50/D63

It should read

D43/D51

Your ratios about the shares don’t make sense, there is a mistake there but I cant find it, I would contact your tutor about that.

You have stated your business is making a loss.it is not if you look at the revenue gains it is increasing. I think what has happen is your comprehensive income is on different lines

Net earnings for the year

(140)

(142)

370

375

Other comprehensive income

385

418

This is giving you the wrong data information.

This clearly shows an increase in revenue to 385 million dollars.

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

The capital investment is sound in the writing.

Your NPV calculation is doubled up it should read

=NPV(0.1,C9:L9)+B9

Not

=NPV(0.1,C9:L9)+B9+NPV(B4,C9,D9,E9,F9,G9,H9,I9,J9,K9,L9)

Same with the sydney option too.

Overall ASS#2 Steps 7-9

Lastly always put a separate title page and 2 point spacing.

I can see you have worked really hard at the assignment I hop you can follow the information about your ratios.

If you want clarification it would be best to email me

Sharne.roby@cqumail.com

Feedback From: Sharne Roby

Feedback To: Georgia https://acct11059withgeorgia.wordpress.com/2019/05/23/step-8-discussion/ .

Step 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

You have down well to find products to show case your company.

My understanding is that variable cost are not calculated as a percentage and that each product would have differing variable cost. It is the cost of making the product. The way you have calculated it is from a mark up cost. Is kind of like a mark up. in the 1st item the table you would be the costs of producing the item. Such as materials. Cost of the wood cost of the glass for each item. The fixed cost would be such like like factory costs, electricity, leasing cost and labour.

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

I would make sure you put the blog post into your assignment. Don’t assume your marker will go to your blog.

Your assumptions on your Net profit should be they haven’t sold any products as yet. All revenue is from other revenue and has no real value and $0 from operating activities.

This would affect all ratios moving forward.

Liquidity ratio again very affected by nil revenue in sales.

Again you have spoken about the share price dropping, your company is still in its infancy and it is a normal expectation of investment to have the value decrease as the business builds its product. You would expect no dividends due to no income.

The drop in The Return on Equity (ROE) as you can see the firm is using the equity to pay off the liabity for the non-current liabilities. The business is yet to make a return on equity. In fact for a factory and the slow changes in the Return on Equity, this business is very healthy. This is shown in 2018 changes in equity of the share options being expanded.

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

You have 2 great ideas with your investment decision. I would put in some justification for the numbers you have chosen essecially seeing as you have chosen to vary them significantly most business would have jumps in revenue like that with out explanation.

Overall ASS#2 Steps 7-9

You have a great presentation your blog is great too. Always do your cover page as a separate page and number your pages in the footer.

2 line spacing and 12 pt font. While your financials are rather ordinary you have a really innovative business.

Reference

Austmine Limited (2015) 2015 Outlook: Trends, challenges and opportunities in mining procurement and supply. Retrieved from http://www.austmine.com.au/News/category/articles-editorials/2015-outlook-trends-challenges-and-opportunities-in-mining-procurement-and-supply-1

Australian Bureau of Statistics (2012), Transport, postal and warehousing Industry. Retrieved from https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Features~Transport,%20postal%20and%20warehousing%20industry~186

Australian Bureau of Statistics (2018) Construction Activity: Chain Volume Measures, Australia. Retrieved from https://www.abs.gov.au/ausstats/abs@.nsf/0/EDD60A6A5408DD1BCA2576B00014308C?Opendocument

Australian Construction Industry Forum (2018) Latest Summary. Retrieved from https://www.acif.com.au/forecasts/summary

Benham, J. (2015) Information Technology Trends in the Construction Industry, JBKnowledge. Retrieved from https://jbknowledge.com/information-technology-trends-construction-industry

Els, F. (2017) Top 50 Biggest mining companies, Mining.com, retrieved from http://www.mining.com/top-50-biggest-mining-companies/

Miningstaffing.com (2014) Mining Industry Outlook 2014 Outlook & Survey Results. Retrieved from http://minestaffing.com/wp-content/uploads/2013/12/Mining-Industry-Outlook-Report-2014.pdf

Vashistha, P. (2019) Future and Growth of Transportation Market by 2020, Enterpirse India. Retrieved from https://www.entrepreneur.com/article/326552