| Current status | Proposed without cannibalization | Proposed with cannibalization | |
| Sales revenue | 45000 | 60000 | 50000 |
| Net income | 12000 | 13000 | 12000 |
| Avg total assets | 100000 | 100000 | 100000 |
Return on Asset = Net income / average assets
Current status = 12000/100000= 0.12
Proposed Without cannibalization = 13000/100000 = 0.13
Proposed with cannibalization = 12,000/100000 = 0.12
Profit margin = net income/net sales
Current status = 12000/45000= 0.267
Proposed Without cannibalization = 13000/60000 = 0.22
Proposed with cannibalization = 12,000/50000 = 0.24
Asset turn over ration = sales /total assets
Current status = 45000/100000= 0.45
Proposed Without cannibalization = 60000/100000 = 0.6
Proposed with cannibalization = 50000/100000 = 0.5
( Balla, 2012; Hart-Fanta, 2011).
Implication of Denver's decision
The return on asset for Denver Furniture is 0.12 if its status remains the same, 0.13 if the proposal is adopted and there is no cannibalization and 0.12 if the plan is approved and the company faces cannibalization. This implies that for every dollar that Denver invested in the year, it receives a return of 0.12, 0.13 and 0.12 in the three scenarios respectively. This indicates that the company is adequately utilizing its assets to generate income. In all the situations, the ratio is above 5% which is the minimum that a company should have ( Balla, 2012; Hart-Fanta, 2011).
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The profit margins for the company are 0.267 under current conditions, 0.22 proposed without cannibalization and 0.24 if the proposal is taken and the company faces cannibalization. This implies that for every dollar of sales by Denver, it earns the indicated net incomes in the different situations. A profit margin of 25% or higher is preferred where low-profit margins shows that the company is not making adequate revenue from its sales after all the expenses are deducted. In this case, Denver is better off maintaining its current status because its profit margin ratio is the highest ( Balla, 2012; Hart-Fanta, 2011).
Asset turns over for the company are 0.45 if the current situation remains, 0.6 if the proposal is taken and there is no cannibalization and 0.5 if the idea is taken and there is cannibalization. The figures indicate the volume of sales that are generated from the company assets ( Balla, 2012; Hart-Fanta, 2011).
Using the above computations, it would be better if Denver retained the current situation because the profit margin is higher than the other two situations. If the proposal is taken and the company does face cannibalism, it will benefit from the return on asset and asset turnover, but its profit margin will be the lowest. If the proposal is taken and there is cannibalism, then the company will be worse off than its current situation because its profit margin will decline while its return on the asset will remain the same. However, the company will have an improved asset turnover ratio ( Balla, 2012; Hart-Fanta, 2011).
Other options
Denver can develop new markets to sell its products. It can employ any one or a combination of the following strategies; entering into new geographical markets. In this case, Denver can trade to an area outside its current market or to a new country or even continent. It can also develop a new sales channel. Denver can also develop a new distribution channel, for example, social media and online shopping to capture new market segments. The company can use differentiated pricing. However, the existing customers should be able to alter their purchases to exploit the new pricing strategy. All these strategies will help increase the volume of sales, therefore, increasing the net income while at the same time utilizing the idle capacity in the company. A successful market development strategy will improve the three ratios making them more favorable ( Barned, 2011).
Denver can reduce its overall cost structure. Such a move will increase its net income increasing the return on assets and the profit margin ratios. The asset turnover ratio will remain the same as long as the sales remain constant. However if a reduction in the overall cost of the company can lead to a change in the sales, then the ration will also be affected.
Denver can initiate an aggressive marketing campaign to increase its sales. The campaign can target its existing as well as new customers. It should focus on creating brand awareness while selling additional products to the existing clients. It should address the unique feature of its products while trying to capture competitors' market. The campaign should consider developing loyal customers while protecting its market from competition.
The company can also increase its sales by playing with three variables; price, volume, and customers. Strategies to increase the company's sales should ensure that the sales volume and the offer price will allow the company to be profitable. The price should be adjusted to cover the total cost and the desired profit margin ( Barned, 2011).
The company should also try to balance the price across the range of products to ensure that less profitable furniture is compensated by the more lucrative. Offering discounts can contribute to increased sales, but care should be taken to avoid eroding the profits. Any price change should include comparisons of the net and gross margins against the previous periods. It should also consider alternatives to discounts ( Barned, 2011).
Similarly, the periodic analysis should be done to determine the progress and to take corrective measures on time. Other ratios should be used to identify key operational issues that are likely to affect sales. The company can compute average stock turnover, gross margin, the cost of goods sold, staff productivity and percentage of stock held ( Barned, 2011).
Volumes of sales can be increased by targeting the existing customers or sourcing for new. The company can train its employees to up sales by looking for present opportunities. Sales target can be set to monitor the performance of the staff, and this will improve the profitability of the company. The company should understand the buying pattern of its current customers. Doing so will help it set marketing strategies that drive sales volume. Denver can come up with loyalty programs to increase the number of sales ( Barned, 2011).
Denver can also decide to sell some of its idle assets or lease it to other companies. Doing so will increase the liquidity of the company by availing additional cash that can be used to increase sales volumes. Similarly, it will reduce the idle capacity that the company is holding. Such a move will positively affect the three ratios. By releasing some of its unused capacity, the company can be able to develop lean operating strategies that will make it possible to reduce its expenses hence increasing its income ( Barned, 2011).
The company can efficiently use its resources. It should leverage on technology and its staff. Denver should improve its business performance by utilizing technology. To achieve this, it needs to understand its vital processes; it can be able to know areas that can be enhanced using technology. The staff should understand the role that technology can play and they should be adequately trained. They should be aware of its advantages and disadvantages. The technology should be reviewed against the business strategy ( Barned, 2011).
Denver should harness the potential of its staff. It should hire people who add value and determined to drive the business to success. Workers that increase productivity should be hired. Similarly, the company should change its culture to encourage teamwork and productivity. Decision making should involve all the staff, and their opinions should be taken seriously ( Barned, 2011).
References
Balla, D. (2012). CLEP financial accounting . Piscataway, NJ.: Research & Education Association.
Barned, J. (2011). Improving business performance - CPA Australia. Retrieved April 30, 2017
Hart-Fanta, L. (2011). Accounting Demystified . New York: McGraw-Hill.
