Managerial Accounting Triton Corporation

Question: Discuss about the case study Managerial Accounting for Triton Corporation. Answer: Introduction The following report evaluates the financial state of Triton Corporation in bringing business sustainability to the enterprise. As such, the product divisions as well as the required capital investments that would be needed to ensure smoother flow of operations is stated. Besides this, the assignment states the implications for the usage of low-value added items for achieving greater financial returns and profitability. Necessary strategic decisions shall be made regarding the selling of the bathroom accessories as well as the pipe divisions. This can be determined by examining the market share and the profitability of these segments. A decentralized market program shall be established to aid decision making and reduction in headcount of the staff. It is expected that these procedures shall enable a business organization to increase the financial strength of the organization and reduce the cost of production. The financial ratio analysis as well as the budgetary controls shall be est ablished to assess the financial condition of the business enterprise and respond appropriately. Evaluating six division of the company Identifying the product division that are producing low value added items and require high working capital investment: The overall profitability of Triton Corporation is mainly generated from Industrial Services, which employs low cost of materials and produces the highest profits from other divisions. Furthermore, the Electrical products could be identified as the low profit producing division, which needs huge investment. In this context, Phillips (2012) suggested that identifying the manufacturing process with low return could help the company in making adequate investment decisions. On the contrary, Weygandt et al. (2015) argued that due to intense competition sometimes companies use low pricing methods , which in turn reduces its overall profitability. Electrical Products Floor Boards Car Accessories Industrial services Bathroom services Pipes Revenue 40 25.4 17.1 33.7 7 6 Expenses 37.8 24 14.1 25.7 6.5 5.9 Income 2.2 1.4 3 8 0.5 0.1 Return on investment 5.50% 5.51% 17.54% 23.74% 7.14% 1.67% Table 1: Showing income generated from different divisions (Source: as per case study) The above depicted table mainly represents the overall revenue, expenses and income that are generated by the different divisions of Triton Corporation. Moreover, the pipes division is identified as the lowest income generating process that is being used by the company. However, the overall investment that is used by pipes division is relatively lower than other manufacturing process used by the company. Maher et al. (2012) mentioned that evaluation of the manufacturing process mainly help companies to identify the excess expenditure, which is reducing the overall return from investment. On the other hand, Warren et al. (2013) criticises that high investment conducted in products with low demand could result in inventory and investment blockage, which might increase overall cost of production. In addition, with the help of table 1, Electrical products division of Triton Corporation is identified as the manufacturing process having low return on investment compared to its other processes. Moreover, Electrical division mainly uses $37.8 million in investment and produces $2.2 million in profits. In this context, Zimmerman and Yahya-Zadeh (2011) stated that manufacturing process with low return could reduce capacity of the company in generating enough revenue to attain suitable growth. In addition, Triton Corporation has the highest market share in Electrical products, which enables the company to generate higher revenue from all its divisions. However, the company could input new technologies to reduce cost of production and attain more return from its investment. On the contrary, Ahmed and Duellman (2013) mentioned that increasing expenditure on new equipments could reduce the overall cash reserves and working capital of the company and in turn negatively affect its product ivity. Moreover, Floor board division is also identified as one of the manufacturing processes that employees investment of $25.4 million but generate return as Electrical Product. However, the reduced return on investment is mainly hinders capability of the company to attain suitable profitability and growth. According to Kaplan (2011), some companies uses zero based budgeting method to reduce the overall expenditure conducted by their manufacturing process and in turn increase their profit generation capacity. However, WeiBenberger and Angelkort (2011) argued that zero based budgeting mainly reduces the overall working capital of the manufacturing process, which might increase the overall completion time finished products. Evaluating the implications of low value added items for financial return and profitability of the company: The identified low value added manufacturing process mainly helps Triton Corporation to evaluate its financial return. Moreover, the low return on investment is mainly affecting the overall growth prospects of the company. In this context Bargate (2012) argued that some companies to achieve higher market share uses low pricing strategy, which in turn reduces the overall return from investment. These low returns on investment mainly have certain implications on profitability and future growth of the company. These implications are as follows: Reduced investment capacity: The low return on investment mainly blocks capital of the company and reduces its capability to make sound investment decisions. In addition, low return on investment mainly reduces profits of the company, which in turn affects its decision making process. Chiarini (2012) mentioned that some companies effectively use activity based budgeting to reduce the overall expenditure on their manufacturing process and increase their cash reserves. In addition, Triton Corporation could effectively use Zero based budgeting to reduce the overall cost of production. Moreover, with the help of effective marketing tools the company could also increase its market share and in turn increase its return on investment. On the other hand, Phillips (2012) criticises that without higher product quality products, investment in marketing activities could only increase expenditure of the company and hamper its overall profitability. Reduction in cash reserves: Reduced return on investment could also affect cash reserves of the company, which in turn might negatively affect its future investment decisions. Nevertheless, Maher et al. (2012) criticises that reduced cash reserves could also indicates a higher interest payment conducted by the company due to accumulation of high interest loans. In addition, low cash reserves mainly reduce capacity of Triton Corporation to make adequate investment decisions. Zimmerman and Yahya-Zadeh (2011) mentioned that during recession overall cash reserves and capital employed by the company is negatively affected, which in turn affects its profit generation capacity. Low profits projected on financial report: The low return on investment could also be projected on the overall financial report of the company. This reduced profitability from investment could negatively affect the decision making process of its investors and affects its overall share price. In this context, Weygandt et al. (2015) mentioned that some companies to maintain high share price mainly uses unethical measure and inflate their balance sheet. Moreover, low return on investment could result in low dividend, which might reduce interest of investors in the company. Thus, it could be evaluated that low return on investment mainly affects growth prospects and future investment decision of the company. Critical Evaluation of the arguments for selling the two divisions The bathroom accessories as well as the pipes have been essential constituents of the Triton Corporation. These divisions have been a profitable part of the business enterprise and have contributing positively towards the sales revenue. However, it has been decided that both of these departments have to be sold, since substantial capital expenditure to retain its efficiency. In addition, it can be said that the selling of these two divisions, shall contribute positively to the business sustainability of the business enterprise. As per the financial reports of the company, the bathroom accessories and the pipe divisions has been occupying a 8% market share and 3% market share respectively. 0.5% profitability has been achieved on the sales of the bathroom accessories when compared to a 3% profitability on the sales of the pipes. Thus, the bathroom accessories have been facilitating greater profitability than the pipe division. Besides this, the market share occupied by the bathroom acc essories has been far greater than the pipe division. Thus, it would be essential to sell the bathroom accessories segment for consolidating the existing market position of the brand. As such, the bathroom accessories have been a profitable market segment for the brand.. In the case of the pipe division, the Triton Corporation has to incur a considerable capital investment to enhance the operational policies of the business entity. Besides this, the pipe divisions have been showing lesser profits when compared to the six divisions in the business enterprise. The brand shall increase its financial strength if the pipe division has to be sold to assess the financial strength of the business enterprise. The ratio analysis of the company has shown that the company has been finding difficult to pay-off the short term as well as the long-term loans of the company. According to Brigham and Ehrhardt (2013), it shall be better to consolidate the market position of the company than to pursue the expansion opportunities. Thus, the selling of the pipe division shall assist the firm to reduce the operational expenses of the business entity. Besides this, the capital expenses that would be required to run the pipe division shall also be significantly reduced. In this regard, it can be said that the organization has been competing in an extremely competitive market environment. Therefore, to ensure survival in an extremely competitive market environment the brand has to take certain pertinent measures. Therefore, it shall be effective to sell these divisions to achieve the market sustainability. However, it shall be necessary to analyze the financial viability of these two divisions in the long term basis. The bathroom accessories shall have a positive market position when compared to the pipe division in the company. As such, it can be said that the year ended financial statement of the company reveals that the bathroom accessories shall facilitate greater profitability and financial revenue. Thus, the long term viability of the bathroom accessories can be decided by the potential market performance of the brand. Several economic factors have to be considered in making a strategic decision, regarding the selling of bathroom accessories and the pipe division. According to Healy and Palepu (2012), the several economic factors that includes are inflation, the nature of the product and the service line as well as the existing financial condition of the business enterprise. Thus, these factors have to be assessed in a proper manner to evaluate the selling of the brands. The recent trends in the sales revenue has also been a determinate factor in assessing the sales viability of the bathroom accessories and the pipe division. As such, both these divisions have been achieving profitability as well as sales revenue in the existing market conditions. However, it is a necessary that a distinction has to be made in evaluating the sales procedures of these two divisions. In this regard, it can be said that the operational policies of the business enterprise. The debt asset ratio of 0.6 reflects the prese nce of assets in the business enterprise. This indicates that a there is a substantial presence of assets in the organization. As such, the selling of these divisions in the business enterprise shall not affect the level of assets present in the business organization. The debt to equity ratio of 1.5 in the business enterprise reflects the adequate presence of equity in the business enterprise. According to Delen et al. (2013), an adequate debt equity ratio shall refer to the substantial amount of debt that is greater than the equity of the firm. In this regard, it can be said that the Triton Corporation has adequate equity in the business enterprise. Thus, the selling of these two divisions shall have an impact on the operational policies of the business entity, thereby, assisting the business organization to achieve further growth. Analysis of Reduction of the financial gearing and investment in development projects The company intends to spend huge amount of capital for equipment replacements and modernisation programmes, investment in new projects as well as new product developments. The company therefore can check the feasibility of the investments using capital budgeting techniques. Payback period is a traditional investment appraisal method of capital budgeting that can assess the investment proposals. Bekaert and Hodrick (2012) opines that Payback period is essentially defined as the total number of years required to recover the amount invested initially by means of the stream of annual cash flows generated by different investment projects. The payback period is calculated using the formula: Payback Period = Initial Investment/ Cash Inflow per period (Bhimani 2012). The company can accept the equipment replacement and new development programmes only if the payback period of the particular project is less than the target payback period (Drury 2012). Therefore it is necessary to ascertain the target payback period for the new development programmes. The target payback period for different projects with uneven cash flows is generally the point at which the cumulative cash flows from the investment project alter from being negative to positive (Epstein and Lee 2012). The management of Triton Corporation can also select the projects that have the payback within the specific time period and choose alternatives based on the fastest payback period. The factors that affect the length of the payback period for the equipment replacements programmes and new development projects primarily include the cash flow of the business and the requirement of the initial outlay (Epstein and Lee 2012). The cash flows per period for the new investment projects can affect the length of the payback period. Therefore, the management of Triton Corporation can take into consideration the factors that affect the cash flows. The factors include the taxes, debt, core capital and distributions (Grieve 2013). Furthermore, the assets and the liabilities of the business concern can also affect the cash flow from the project. Therefore, the management of Triton Corporation can take into consideration the alterations in the account receivables, inventory, prepaid expenses, depreciation and the operating liabilities for assessment of the cash flows per period from the project (Grieve 2013). The accounts receivables express the amount of money the company owes for the products sold in credit. This asset is therefore a promise of cash but does not increase the cash flow until the business receives the money (Hampton 2011). The increase in the overall inventory also affects the flow of cash adversely and the decrease in the inventory increases the cash flow. The increase in the prepaid expenses for the development programmes can also affect the cash flow unfavorably and a decrease might possibly favorably affect the cash flow. In addition to this, the operational liability is an important factor that can affect the cash flow per period for the investment projects and the payback period. The increase in the operational liability can help the cash flow and decrease the payback period (Madura 2012). However, the decrease in the operational liability can hurt the cash flow and thereby increase the overall payback period. The loan capital that the company can use for funding the new investment projects can also affect the payback period of the p rojects. The total loan capital for the year 2014 was recorded to be $48m. Therefore, the increase in the borrowed fund for financing the projects can increase the overall leverage of the company and raise the riskiness of investment. The financial gearing concentrates on the capital framework of the business concern (Seal, Garrison and Noreen 2012). This refers to the proportion of funds provided by debt capital in comparison to the finance provided by the equity capital. The gearing ratio also focuses on the liquidity and the long term financial stability of the business. The financial gearing also known as leverage enumerates the total proportion of assets invested in a business concern that are funded by long-term borrowing (Seal, Garrison and Noreen 2012). Therefore, the financial gearing can also be calculated by the formula: Gearing Ratio = Debt/ Equity. The company Triton Corporation needs to diminish the financial gearing that is currently too high. As per the financial reports of 2014, the financial gearing ratio of Triton Corporation stands at (48/32=1.5) that is 150% that is very high. Hence, it can be hereby ascertained that Triton Corporation has a higher level of borrowed funds in comparison to the equity funds. The greater proportion of the borrowed funds therefore imposes higher risk of operation as the payment of interest as well as debt pay offs are not optional (Madura 2012). The management of Triton can therefore aim at reducing the gearing ratio by concentrating on profit maximization as well as cost minimization. The gearing ratio can also be reduced by repayment of long-term loans, retention of greater proportion of profit, issuance of shares and conversion of loans into equity (Bhimani 2012). The strategic aim of reduction of the gearing is significant as it is indicative of high leverage where the corporation Triton Corporation uses debt capital for financing and continuing its daily operations. Therefore, during business downturn, the company Triton Corporation might possibly face difficulties in their debt repayment schedules and face the risk of insolvency (Epstein and Lee 2012). Again, the circumstances generated out of the high leverage can be dangerous at the time when the company has engages in acquirement of debt at variable rate of interest. An unexpected rise in the rates therefore can pose serious interest payment problems. Furthermore, t he lenders are mostly apprehensive about the firms gearing ratio, as an extremely high gearing ratio can put the loans at risk of not getting repaid (Bhimani 2012). Probable requirements of the lenders to offset this difficulty are the application of restricted covenants that rule out the disbursement of dividends, affects the cash flow and debt repayment, limitations on other alternative applications of cash, and a prerequisite for financiers to inject more equity into the corporation. Again, the creditors also face similar kind of difficulties but are not capable of bringing in changes on the overall performance and actions of the company. Therefore, the decision of reduction of the gearing ratio can help in reduction of the overall risk of the operation. The company can achieve the strategic aim of reduction of the gearing ratio by selling shares to pay off the debt obligations of the corporation, reduction of the working capital, levels of inventory along with increase in the length of the period of the accounts payable. In addition to this, the company can also concentrate on increasing the overall profit of the business concern. Therefore, the aim of investment in the different profitable development projects can help the company to increase the profitability. The management can therefore examine the capital budgeting techniques such as the payback period for investment appraisal. Financial Ratio Analysis and Budgetary Control The financial ratio analysis helps an analyst to understand the financial condition of an organization. It also guides an organization for its future operation and regulation as the various types of ratios indicate different aspects of an organization. In this report, the financial analysis of an organization named Triton Corporation has been highlighted. It has been found that the particular organization aims to reduce its expenses by reducing its total numbers of head office employees from 48 to just 20. However, the managing director of the firm Triton Corporation finds that the particular organization might face various risks and difficulties due to the implementation of decentralization program within Triton. The management of the organization can overcome these challenges by having a regular reporting system by using financial ratios and budgets. The reasons behind this are firstly, the financial ratio analysis helps the management of an organization to understand and analyze all the financial statements (Weaver 2012). This analysis of the financial statements helps to understand the financial position of the firm at the present situation (Seal, Garrison and Noreen 2012). In addition to this, the various users like management, investors, creditors and bankers can use the financial ratios in order to analyze the financial condition of the firm for their decision-making. Secondly, the financial ratios are also useful for judging the efficiency of the company in terms of its management and operations. This financial analysis also helps to determine whether the firm is able to utilize its earned profits and assets in a proper way (Robinson 2012). Moreover, the financial ratio analysis also helps to analyze the past performance of the firm and on this basis, the future plans of the company are formulated. In addition to these, the ratio analysis also helps to compare the performance of an organization to another of the similar field. On the basis of the data provided for the company Triton Corporation, the ratio analysis has been performed. All the four types of ratio i.e. Liquidity ratio, Solvency ratio, Profitability ratio and Efficiency ratio have been calculated in order to understand the financial condition of the firm on the basis of its liquidity, solvency, efficiency and profitability (Groot and Selto 2013). The calculations of the ratio are provided below: Types of Ratios Formulae Constituents Values Ratio Liquidity Ratio: Current Ratio (Current assets/ Current Liabilities) Current Assets 35 1.75 Current Liabilities 20 Net Working Capital Ratio (Current Assets - Current Liabilities)/ Total assets Current assets - Current Liabilities 15 0.1875 Total Assets 80 Solvency Ratios: Debt to Assets Ratio (Debt/ Total Assets) Debt 48 0.6 Total Assets 80 Debt to Equity (Debt/ Total Equity) Debt 48 1.5 Total Equity 32 Efficiency Ratio: Asset Turnover Ratio (Sales/ Total Assets) Sales 129.2 1.615 Total Assets 80 Fixed Asset Ratio (Sales/ Total fixed asset) Sales 129.2 1.987692308 Total fixed asset 65 Profitability Ratio: Return on Equity (ROE) (Net income/ Shareholders' Equity) Net Income 15.2 1.52 Shareholders' Equity 10 Profit Margin ratio (Net Income/ Revenue) Net Income 15.2 0.117647059 Revenue 129.2 From the above calculation, it can be said that the financial condition of the firm is healthy as the current ratio is 1.75, having higher current assets. However, the solvency or gearing ratio implies the weak financial condition of the firm Triton as it has a high debt to equity ratio i.e. 1.5. On the other hand, the firm has high efficiency ratios. Thus, it indicates that the firm has the ability to run effectively and efficiently in future. In addition to this, the high profitability ratios of the firm also indicate that Triton Corporation will run successfully and profitably in future. Therefore, the firm is running profitably and efficiently, having a high liquidity ratio but the high gearing ratio indicates that the firm should lower its total debt amount in order to strengthen its financial position in the competitive market (Drury 2013). In order to reduce the total debt, the firm should reduce its expenses and thus it has decided to reduce its numbers of staffs in the head office. Similarly, it has been found that the budgetary control helps to control the expenses of an organization and also aims the firm to earn more in future by reducing its costs. The preparation of budget helps to identify the forecasted costs of the firm and also the revenue it might earn in future. Thus, it can be said that the budgetary control helps in planning the future of an organization (Epstein and Lee 2012). Triton Corporation aims to reduce all its costs including the salary expenses. Thus, it decided to reduce its total numbers of staffs in order to reduce its expenses and accordingly a budget has been prepared as follows: Triton Corporation Budget ($, million) Actual ($, million) Variance ($, million) REVENUE Sales 135 129 5.80 Salaries and Wages 12 12 0.50 Materials 81 84 (3) Other Costs 14 19 (5) Cost of Goods Sold 107 114 (7) Profit Before Interest and Tax 28 15 12.80 EXPENSES General Administrative Expenses 3 4 (1) Employment Expenses 3 7 (4) Occupancy Costs 1 2 (1) TOTAL EXPENSES 7 13 (6) NET PROFIT 21 2 18.80 It has been found that the company Triton Corporation has intended to expand its business and operations to a number of various low-cost countries. However, Bhimani (2012) stated that this will lead to decrease in the cost and various expenses of the organization. The reason behind this is that in the low-cost countries, the expenses of the company regarding the raw materials, labor, and even the occupancy costs, employment expenses and all the general and administrative expenses of the firm will get reduced. The economic condition of the low-cost countries will help the firm to manufacture products at lower cost but here ethical issues might take place if the firm plans to manufacture their products at low-cost countries and sell them in high-cost countries. The reason behind this is that the particular company will be able to reduce their manufacturing cost or cost of production by manufacturing their products in low-cost countries and by selling them in high-cost areas as this wil l increase their selling price as well as their profit percentages (Drury 2012). Therefore, it can be said that this situation will have a positive impact on the management accounting function of the firm. 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