Question

Steven Black and Christopher Green are seeking funds to support the programmed growth of their deluxe Hot Dog menu-restricted restaurant. First year (2019) Sales were $705,000. Sales are projected to increase to $1,320,000 in 2020. The business operating financial model indicates that each hot dog “meal” will sell for $3; and the variable cost of producing the “meal” (CGS) will be $1.50. The company needed $400,000 in assets to support its 2019 operations and expects to need $100,000 MORE (a total of $ 500,000) to support projected 2020 Sales.

      2019                      2020 (projected)

            Sales                                                   $ 705,000 _________

            COGS (Meals x CGS)                              352,500                    __________    

            Gross Profit                                             352,500 ________

            Fixed Operating Costs (ignore taxes)        200,000                    __________

            Net Profit                                           $152,500                     $ ______

Prepare (fill in) the 2020 projected Income Statement above.

Calculate the company’s Return on Assets (ROA), its asset intensity (asset turnover ratio), and its Gross Profit and Net Profit Ratios for each year

                                                                        2019                                           2020

Return on Assets __________ ____________

Asset Turnover ____________ ________________

Gross Profit Margin _______________ _________________________   

Net Profit Margin ______________ _____________________

Given the 2019 calculations above, and the 2020 projections, use the VOS screening model standards below for profitability and pricing to evaluate the attractiveness of an investment in Steven and Christopher’s business.

                                    High                            Average                                    Low

Gross Margin                >50%                           10%--50%                                 <20%

AT margin                     >20%                           10%--20%                                 <10%

Asset Intensity         3.0+ Turnover                    1.0—3.0 Turnover                    <1.0 Turnover

Return on Assets           >25%                           10%--25%                                 <10%

COMMENTS/EVALUATION (You should include comments about what the company could do to make the investment more attractive to investors)

Margins:

Use of Assets:

How would your EVALUATION change if the 2019 Asset level will support Annual Sales growth of 50% per year in 2020? (That means the company had excess capacity in 2019 and more assets would not be required to support shortterm projected growth.)

PLEASE HELP ME. THANK YOU.

           

  

Answer 1

Solution - A

Income statements
Particular	2019	2020
Sales	$ 705000	$1320000
Less COGS	$352500	$660000
Gross Profit	$352500	$660000
Less Fixed operating costs	$200000	$200000
Net income	$152500	$460000

Calculation notes

COGS calculation in 2020

= Sales amount / units per price

1320000/3 = 440000 units sold

Variable cost per unit = 1.5 × 440000 = 660000

Solution -B

Return on asset ratio (ROA)

Formula – (Net income ÷ Total Asset) × 100

2019 – (152500 ÷ 400000) × 100 = 38.12

2020 – (460000 ÷ 500000) × 100 = 92

Asset turnover ratio

Formula – (Sales ÷ total asset)

2019 – (705000 ÷ 400000) = 1.76

2020 – (1320000 ÷ 500000) = 2.64

Gross profit margin

Formula – (Gross profit ÷ Sales) × 100

2019 – (352500 ÷ 705000) × 100 = 50

2020 – (660000 ÷ 1320000) × 100 = 50

Net profit margin

Formula – (Net income ÷ Sales) × 100

2019 – (152500 ÷ 705000) × 100 = 21.63

2020 – (460000 ÷ 1320000) × 100 = 34.85

Analysis

Ratio	2019		2020
ROA	38.12	High	92	High
Asset turnover	1.76	Average	2.64	Average
Gross profit margin	50	High	50	High
Net profit margin	21.63	High	34.85	High

Findings – The calculation give a good result to attract new investors to invest their new project start at 2020.