Working Capital Management Project
The Reliant Electrical Systems is in its final planning stages for FY2013 and Management is concerned about low profitability. RES management would like to increase NPM to 6 percent or more next year. There are several proposals being suggested that will be computer-generated in order to assess the results on operating cash flows and profitability. The goal is to determine which options will improve profitability, and furthermore, which mixture or stack of suggestions will maximize profitability. I am part of a management task team assigned to analyze the following suggestions from various members of the firm to obtain the goal of maximizing profitability and obtaining a NPM above 6 percent for next year. (A1) The sales staff’s decision to increase FOB price by $125.00 per unit, which resulted in a decrease in sales by 2.5%, had a positive effect on NPM, OI, and NI. NPM increased to 6.52%, OI increased by $3,322,201, and NI increased by $2,202,070, which is a significant benefit for the company. Though sales went down, the increase in NPM is what caused the overall increase in both OI and NI. (A2) The ad agency’s decision to decrease the FOB price by $75.00, resulting in a %5 increase in sales had a substantially negative effect on NPM, OI, and NI. NPM decreased to 2.97%, OI increased by $3,322,201, and NI increased by $2,202,070 which is a significant loss for the company. Though sales went up, the decrease in NPM from the result of decreased FOB price is what caused the overall decrease in both OI and NI. (B) The engineer’s decision to redesign the base product to reduce the assembly time to 11.0 hours had a fairly positive impact on OI and NI. The OI was increased by $705,870 and NI increased by $467,865, but NPM was only increased to 4.65% which would not make this option alone beneficial for the company. (C) The CFO’s decision to operate with 0.5 times next month’s level resulted in very insignificant savings for the...
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