Polar Sports, Inc.: Case Study
Polar Sports, Inc.
Fall 2014
BA 615 Polar Sports
Question 1
1. Which factors should Mr. Weir consider in deciding whether to adopt level production?
Mr. Weir must analyze both business and financial risks of adopting level production. As a for profit firm, the first thing that Mr. Weir should consider is whether level production will increase net income and provide more value for the shareholders. The pro forma statements show that Polar Sports will be more profitable. Polar Sports will make $406,000 more in net income under level production. The difference in net income overall is due to the decrease in
COGS of $1,080,000 offset by increases in operating expenses, interest paid, and taxes and a decrease in interest earned. If Mr. Weir determines that Polar Sports can be more profitable, then he must consider the risks involved in moving to level production. The pro forma financial statements show that more financing will be needed for level production. A higher level of risk is inherent in a higher level of financing. In analyzing whether to take the risk of higher financing he must consider the firms current level of leverage and how certain the company is of making the level of sales estimated in the pro forma. Polar Sports will need enough money coming in in sales to be assured that they can meet their financial obligations. If Mr. Weir accepts the sales estimates as reasonable, then he can analyze the current and acid ratios as a measure of liquidity, which are better under level production
S easonal
Level
Production
Production
Current ratio
3.7
4.5
0.8 Even with bank note, company is more able to pay its current liabilities with level
Acid test
3.1
3.8
0.7 production: higher current and acid ratios.
Financial measure
Difference
Note
Mr. Weir should also consider what effect level production has on the efficiency of operations. He can do this by analyzing the operating margin, and the ROE and ROIC ratios. The pro forma statements show that key
Fall 2014
BA 615 Polar Sports
Question 1
1. Which factors should Mr. Weir consider in deciding whether to adopt level production?
Mr. Weir must analyze both business and financial risks of adopting level production. As a for profit firm, the first thing that Mr. Weir should consider is whether level production will increase net income and provide more value for the shareholders. The pro forma statements show that Polar Sports will be more profitable. Polar Sports will make $406,000 more in net income under level production. The difference in net income overall is due to the decrease in
COGS of $1,080,000 offset by increases in operating expenses, interest paid, and taxes and a decrease in interest earned. If Mr. Weir determines that Polar Sports can be more profitable, then he must consider the risks involved in moving to level production. The pro forma financial statements show that more financing will be needed for level production. A higher level of risk is inherent in a higher level of financing. In analyzing whether to take the risk of higher financing he must consider the firms current level of leverage and how certain the company is of making the level of sales estimated in the pro forma. Polar Sports will need enough money coming in in sales to be assured that they can meet their financial obligations. If Mr. Weir accepts the sales estimates as reasonable, then he can analyze the current and acid ratios as a measure of liquidity, which are better under level production
S easonal
Level
Production
Production
Current ratio
3.7
4.5
0.8 Even with bank note, company is more able to pay its current liabilities with level
Acid test
3.1
3.8
0.7 production: higher current and acid ratios.
Financial measure
Difference
Note
Mr. Weir should also consider what effect level production has on the efficiency of operations. He can do this by analyzing the operating margin, and the ROE and ROIC ratios. The pro forma statements show that key