Question

QUESTION 1: Compute the impact on the key financial metrics of the following situation:

This company adopted a new sales and operations planning process that would result in an inventory reduction of 10% (everything else would remain unchanged).

QUESTION 2: How would you present your analysis for this scenario that focuses on:

(i) Operational Excellence? (ii) Product Innovation?

	Base
	$
Sales	1,028.0
Cost of Sales	621.0
Gross Profit	407.0
Operating Expenses (incl SG&A)	340.0
Operating Profit	67.0
Interest Expense	0.0
Other Income	0.0
Pre-Tax Profit	67.0
Taxes (25%)	16.8
Net Profit	50.3

Answer 1

1.Current ratio and quick ratio will decrease when there is a decrease ininventory (since there is decrease in assets which is the nuerator).  Inventory turnover ratios will increase when inventory decreases. Asset turnover ration will also improve as a result of decrease inassets.

In general all ratios involving inventory directly or using assets term will a see change. If asset or inventory is in the numerator (denominator), because of 10% reduction in inventory, the ratio will decrease (increase).

2. Operational excellence can be analysed using the following ratios:

• Fixed Asset Turnover

• Total Assets turnover

• Operating profit margin

• Accounts receivable turnover

• Inventory turnover ratio

• Operating cycle = Days sale of inventory + Days sales outstanding

Data is insufficient to point out ways to analyse product innovation.