Question

Canadian Solar (NASDAQ: CSIQ) and other solar panel manufacturers are facing a shortage of a key raw material used in the production of solar panels, polysilicon. Environmental regulators in China shut down several factories, triggering the shortage. The cost of polysilicon has risen by as much as 35% in the past several months. A kilogram of polysilicon went from $14 to $19 near the end of 2017.

In addition to the rise in the cost of polysilicon, the selling price of solar panels has been falling throughout the world.

Assignment:

You are a financial officer of Canadian Solar. The company president has asked you for information on the three specific topics below. In a memo format the questions that were asked and at least one more financial ratio/tool that would be impacted by these changes.

Begin you memo by briefly restating the request that was made. This will help define the scope of the assignment. Your one additional ratio should come after you have covered the requested material.

1. What would be the impact of the increase in the cost of the polysilicon on Canadian Solar’s gross profit? Explain.

2. What would be the impact of the decrease in the selling price of solar panels on Canadian Solar’s gross margin? Explain.

3. Assume that Canadian Solar uses a standard costing system for tracking the production of its solar panels. What variance(s), if any, have been impacted by the increase in the cost of polysilicon? Explain

Answer 1

MEMORANDUM

TO: The President

FROM: Financial officer

DATE:

SUBJECT: Arising problems with the increase in cost of the key component

As of Nov. 2017, Canadian Solar is facing huge shortage of the key component of the manufacturing product. The key component here is Polysilicon. Considering the trends in past months, it is been identified that the cost of Polysilicon has been increased by a margin of 35%. The cost per kg is increased by $5 from $14 to $19. Due to the rising demands and low supply many factories which are increasing this shortage are closed down by the environment regulators. With the sudden drift in the availability of the component sales are highly affected not only in Canadian Solar but throughout the world.

This will impact the overall financial position of the company.

1. Our gross profit margin is calculated by total sales - cost of goods sold. With the increase in cost of the Polysilicon the overall cost of the panel tends to increase which will decrease the amount of gross profits. With lower profits the dividends of the shareholders will be at stake and the production run will tends to reduce if the company will earn low profits or will work at breakeven.

2. The gross margin of the company is calculated by (sales per unit - cost per unit) / sales per unit * 100. With the decreasing costs the gross margin will also get affected. According to the past trends the margin is been decreasing at a high pace. With lower profits the growth of the company will hamper and will affect the market position of the company aswell.

With the increase in costs the selling price will automatically increase because even if we reduce the gross margin to some extent still there is increase in the selling price. With high rates the customers are not willing enough to purchase the product decreasing the sales even if the product is available in the market.

3. As far as accounting is done in the company, we use standard costing system for tracting the production. Under this system a budget is been prepared for the no of units to be produced and the cost for that unit. This standard is further compared to actual results in terms of quantity and price of the product. This comparison will provide details regarding where the actual results are severve and where the cost is under control.

With such discrepancies a few variances are affected which are:

• Direct material cost variance
• Direct material price variance
• Variable manufacturing overhead variance and a few other variances.

These variances are having unfavorable balances which means the actual output is and as per the standard.

Along with all such problems a serious fluctuation is seen in 1 more financial tool i.e. cash flow analysis. It is a statement which records the inflow and outflow of cash in the company. The company is facing more outflows as compared to the inflows which is affecting the cash management in the business. Though with management efforts situation is not that worse for us but if serious actions weren't taken the company can face huge financial losses.

A serious action should be taken to consider this effect to stay in the business. A committee should be formed to take decision on the concerned matter.

Yours truly

Financial Officer