Homework SourseYou are the operations manager for a small kayak and canoe m
You are the operations manager for a small kayak and canoe manufacturer (Valley Kayaks) locate on the Pacific Northwest (Oregon). Lately your company has experience product quality problems. Simply put, the kayaks that you produce occasionally have defects and require rework. Consequently, you have decided to assess the impact of introducing a quality management (TQM) program. After discussing the potential effects with representatives from marketing, finance, accounting, and quality, you arrive at a set of estimates (contained in the following table). Top management has told you that it will accept any proposal that you come up with, provided that it improves the return on assets measure by at least 30%. Show your calculations and then determine if you would go forward with this proposal?
| Category | Current Values | Estimated Impact of TQM |
| Sales | $2,000,000 | 5% + (improvement) |
| Cost of goods sold | $1,500,000 | 0% |
| Variable expenses | $300,000 | 8.25% - (reduction) |
| IFixed expenses | $100,000 | 0% |
| Inventory | $300,000 | 25% - |
| Accounts receviable | $100,000 | 0% |
| Other current assets | $500,000 | 0% |
| Fixed assets | $400,000 | 0% |
Solution
In order to find out the solution to this question, Return on Asset (ROA) needs to be calculated for which we must go step by step:
Step 1: First step is to note down the formula for ROA
ROA = Net Profit Margin * Asset Turnover
In order to find the value of ROA, we need to find out the values for Net profit margin & Asset turnover one by one
Step 2: Then we start calculating the value of Net Profit Margin by using the formula
Net profit margin = (Net Profit / Sales)*100
(where Net Profit = Gross margin - Total expenses)
Step 3: Find out Net Profit using the formula as given in step 2
Net profit = (2,000,000 - 1,500,000) - (300,000 + 100,000)
= 500,000 - 400,000
= 100,000 $
Step 4: Now calculate Net profit margin using the formula as given in step 2
Net profit margin = (100,000 / 2,000,000 )* 100
= 5 %
Step 5: Now start finding out the value of Assets Turnover, by using the formula
Assets Turnover = Sales / Total assets
(where Total Assets = Current Assets + Fixed Assets)
Step 6: Find the value of Total Assets using the formula given in step 5, to reach out to Assets Turnover
Total Asset = (300,000 + 100,000 + 500,000) + 400,000
= 900,000 + 400,000
= 1,300,000 $
Step 7: Now find Assets Turnover by applying the formula given in step 5
Assets Turnover = 2,000,000 / 1,300,000
= 1.538
= 1.54 (rounded off)
Now after calculating the values for Net profit margin and Assets turnover, the next step would be to find out the value of ROA, by applying the formula as given in step 1
Step 8: Calculate the value of ROA by using the values of Net Profit Margin (from step 4) and Assets Turnover (from step 7)
ROA = 5 * 1.54
= 7.7 %
Return on Assets (ROA) = 7.7 %
The Return on Assets is calculated as 7.7 %, which reflects that accepting the proposal would lead to the improvement in ROA by only 7.7%. But the expected improvement in ROA is at- least 30%. Therefore it is not advisable to go ahead with the proposal. Although steps can be taken to improve ROI, as it is seen the largest asset which the company have control over is \'other current assets\' and ROI can be increased by reducing the \'other current assets\'.
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