Custom Snowboards Inc. Analysis Essay

europiuman Expansion historic AnalysisTo make a decision close elaboration to Europe, we essential first conk out past performance as an indicator about future performance. A historical wisdom psychology was completed on the phoners past balance sheets. form S nowadaysboards Inc. has had multifariousness magnitude net egregious gross revenue in the past three familys. Net gross revenue went up .23% in class 13 and .93% in division 14. Cost of goods change (consisting of contend material, labor, and everyplacehead) and in relation Gross Profit, excessively change magnituded by the aforesaid(prenominal) percentages. development the historical data, we use the trend analysis to de landmarkine what gross sales ordain be like in future divisions. The friendships trend analysis shows this attach in net sales and gross profit bequeath continue swell up into year 17. Using keister year 12, historical data shows an addition to degree Celsius.2% in year 13 a nd an another(prenominal) .7% increase to 100.9% in year 14. Then to further refreshen the upcoming years hazardions, wont Snowboards uses year 14 as the abode year at $6,955,200. course of study 15 increases to $7,163,856, a 3% increase. Year 16 slows slightly to $7,094,304, down a percent from year 15 yet stable an increase of 2% from the base year. Year 17 shows net sales at 103.7% of the base year 14 earnings. This demonstrates the caller has worthy live underwrite in revenue.When reviewing European sales forecast for years 15-19, we see the same trend as with usage Snowboards Inc. trend analysis. European net sales volition increase from $1,391,040 to $2,423,748, or 74% during the 4 years. Using year 15 as the base year, in year 16, net sales argon predicted to be great hundred%,144% in year 17, 158% in year 18, and 174% in year 19.Operating Expenses. The sell expenses that include transportation out, sales commissions, and advertising increased at the same rate as revenue. The related increase fluctuates with units sold as it should. This is another indication the telephoner so-and-so manage its verges control. The future operating expenses in the European Sales forecast indicate that advertising expenses eitherow for return and sales commissions, transportation out, factory manager/ staff expenses volition increase as expected with an amplification. The boilers suit selling and admin expenses touch on from $215,048 in year 15 to $251,480 in year 19. Using year 15 as the base, there is expected 7% increase by year 16, 15% increase by year 17, 11% in year 18 and ending with a 17% increase by year 19. Coupled with the increasing net sales, this continues to show appointed circumstances control.General and admin expenses increased disproportionately. In year 13, the expenses increased an everyplaceall 7.24% and another 6.50% in year 14. The hardest hit atomic number 18as in this atomic number 18a be the other general and admin expenses in year 13 and compensation in year 14 bringing the meat operating expenses to an increase alone over four percent each year. Since compensation increased, this could mean superfluous employees. More blenders would explain why an increase in utilities. Since sales went up, it would be justified in the employee increase stock-still, the percentages should be more(prenominal) similar. Expenses should have bypast up a smaller percentage, one closer to the .23% and .93% numbers shown in net sales. Expenses exploitation at a faster rate than sales is poor cost control.Net earnings shows a trend of declining over the past a couple of(prenominal) years by 25-30%. This decrease and another fatal cost control is approximatelyly re due to the worsening in busy income. Interest went down 28% in year 13 and 90.63% in year 14. The elicit income could be influenced by the fact that short considerationinal ratements as well as declined in year 14 by 83.3%. Inter est expenses change magnitude as well indicating that impost Snowboards Inc. is birthing(a) the minimum defrayal on the amortization schedule instead of paying on the principle.As nocks. Cash and bills equivalents increased for Custom Snowboards Inc. 114.2% in year 13 and another 30.6% in year 14. Consistent increase shows well for the caller barely since sales went up 23% in year 13 and .93% in year 14, the cash should have increased more in year 14 however, furniture, fixtures, and equipment went up 200,000 which means the come with acquired more assets for the company. Custom Snowboards is putting the specie back into the company without taking on more debt which indicates a toler able cost control. Custom Snowboards around likely took upper-case letter from their short term investments to pay for the furniture. The short term investments dropped signifi dissolvetly in year 14 by more than 80%. This caused a decrease in total current assets but the overall total asse ts remained healthily increasing, partly due to increase in finished goods and raw materials scroll. Overall, Custom Snowboards uses respectable cost control in assets.Liabilities. Accounts and notes payable increased proportionately to the net sales increasing total current liabilities by the same proportions. Mortgage payable decreased consistently over the three years as did other long term liabilities. Overall, liabilities continued to decrease over the three year period.Stockholders Equity increased over the three year period. Common pains remained steady at $200,000 ($1 par) and so did paid in corking. carry earnings increased every year, a plus for the bank. Return on total assets, return on greens equity, and price/ earnings proportionality ar significantly higher than the competition, Winter Sports. Overall the company mud stead and the bank can deduct from reviewing the financial statements that the company pass on continue to make strong decisions and increase n et worth over the next few years.Cost Control Im take the standmentsCustom Snowboards has good cost controls in place however some betterments can be made. The company currently uses Traditional Cost Base (TBC) method by development a predetermined overhead rate and then cost are dissever evenlyamong the products regardless of what is actually used. This does not give a true picture of cost. For the most part this is fetching well but the company could use snap off cost control by implementing the action at law Based Costing method. In this method, overhead manufacturing costs are divided in a more rational and deliberate manner. Costs are allocated by how ofttimes it actually costs to make a particularised product group. Each product would be rigid in a group with other items with the same costs, stiff vs change snowboards for example. This includes labor hours, railcar costs, etceteraAlthough the ABC method is more complex and time consuming, it lead be worth it to Cu stom Snowboards. The company allow be able to better assess how and where money is spent and drive down expenses and increase net earnings. In the particular(prenominal) case of Custom Snowboards two types of boards, unvarying and personalized, the ABC method service of processs the company manage its money. In traditional costing, the unremitting bikes are $119 per unit. The personalized snowboards are $162. However, using activity based costing, the timed bikes are only $105 per unit and the personalized units are $218 each. In total production costs, the company is spending $522119 more on regular bikes than it would using ABC, and $522119 less than it should on personalized bikes. This shows that in TBC, too much money is allocated for the regular snowboards, and not enough for the personalized units. The company needs to improve its cost controls with the ABC method to decrease expenses and increase profits. some other means the company can control more of its costs are to itemize and cipher ore unique(predicate)ally. Line items like other general and admin expenses should be much smaller and contain items that are tracked. Having a more specific budget can as well allow the company the opportunity to seasonalize its budget as well. Utilities may go up in the wintertime because of heat, or up in the summer due to air conditioning. Snowboard sales are more likely to be higher in the months leading into winter than the summer months. Identifying seasonal caudexing requirements could save Custom Snowboards a muddle of money and increase net profits.Custom Snowboards can control costs by using aggressive funding strategies versus conservative ones. The cost of long term financing is more expensivethan the cost of short term financing. Being aggressive in its borrowing, the company can lower interest expenses and raise net earnings. Short term investments are assayier because of the fluctuation in interest rates, but coupled with the tighter bu dget, the company should be able to predict when the best time to finance is.Day to day activities can process control costs for Custom Snowboards. Collecting account receivable as apace as possible but not losing customers from high-pressure collections, better customer service, faster and more efficient mail, processing, and clearing time reduction when collecting from customers (collection and disbursement floats), and controlled disbursing, paying accounts payable slowly (but still on time to avoid credit damage) are all appearances to hit better cost control.Inventories should be classified into three categories raw materials, work in progress, and finished goods. Proper worry should be strictly implement to promise funds are used wisely by tutelage inventory low, but having enough inventory on hand to quickly fill orders and prevent production delays. This is in direct relation to sharp the seasonal demands of the products and predicted sales. If the company uses the ABC method, it can use the calculation tally Cost=(OxS/Q) + (Cx Q/2) where O = order cost per order, S = usage in units per period, and Q = order quantity in units. A re-order point (including lead time) should be set by solicitude to determine when more materials should be purchased so as to not upset the balance.The just in time (JIT) management system is ordering materials so they arrive at exactly the scrap they are needed for production. This minimizes inventory investment but also takes enormous coordination with near perfect quality and consistency to be achievementful. The company essential work with suppliers and shipping companies to ensure correct arrival times in addition to inbred controls to make sure the correct items are arranged on time. Both Custom Snowboards raw materials inventory and finished goods inventory increased over the past three years. The JIT method testament attention the company keep these numbers under control.RisksCustom Snowboards is co nsidering intricacy into Europe either through merging with or acquiring European SnowFun, or by simply building a novel facility. Mergers happen to improve a companys share value, expand externally, diversify turn lines, reduce imposees, and increase owner liquidity. With the get aheads of a nuclear fusion reaction, there are fortunes. The chief operating officer of Custom Snowboards is concerned about internal operations stakes associated with an involution to Europe. She is also concerned about Custom Snowboards reaction to external risks encountered by the involution as well.Internal risks Custom Snowboards faces could have a negative sham on the daily operations of the company. These are the risks from circumstances the company has control over. For this merger, Custom Snowboards will need to consider internal loss of localize on current operations, cultural differences including the language barrier, divergent financial coverage systems, different customers, nat ural monetary system, and new management.Although the culture is an external factor, the way the company handles the risk is internal. The culture of the new market is vastly different and will need new strategies to continue sales regardless if the blowup is a merger or not. If Custom Snowboards does not understand its new customer base, it could lose sales quickly plummeting the company into bankruptcy. To rationalise this risk, query and development will need to do some work to alleviate management communicate with a new market associates, suppliers, shipping companies, etc.Some gestures and nuances we use in the United States may not be used in Europe or vice versa. Something we think rude, may be engageable there. They could be offended by something innocent to us resulting in sales loss. The marketing department will also need to adjust the way it relates to customers. What sells in American, may not see in Europe. The use of multiple new languages will also need to be a ddressed. Bilingual employees, particularly the customer service representatives would be well(p) and cooperate mitigate the risk of losing customers to a language barrier. It will also help the employees communicate with each other asmany current employees will have to go to setup the expanded portion of the company. A facial expression into the competition will assist the company quite a function as well.Increased costs in everyday business. Translators, new paperwork in different languages etc. essential be mitigated with pre-planning and research. The company will need to complete new reports using International Financial report Standards (IFSR) which could also be a costly change for the company. Even worse, the change in accounting standards could prove to be more costly if report incorrectly. Proper training and understanding of the new system will mitigate this risk. All monies will need to be converted to the current system in that surface area as well. All costs sho uld be pre-budgeted to ensure the company has enough cash flow for find-up costs as well as an operating budget. Realistic business plans should be in place. Hiring an out of doors local agency to assist in the accounting the first few years may be a smart way to invest into the company and mitigate the cost risk associated with an international expansion.With all the center on on getting the new part of the company up and political campaign smoothly, there is a tendency to let the current operations mint behind. Oftentimes companies will send their best people to assist with the expansion leaving behind employees who can barely keep the current operations afloat. This leads to missed deadlines, mismanagement of operations, and quality control issues. To mitigate this risk, the company should pay off a balance of more experienced employees as well as less seasoned ones for the project team.The new management team can also be a risk to the company as impertinent markets have d ifferent business practices. Business mistakes could cost the company money or its composition. Inexperienced in how the company works, the new team will need lots of training. Custom Snowboards can mitigate this risk by ensuring an extensive training program is lendable as well as hiring qualified individuals in European business practices as well as those of the US. Offering some current employees benefits to work in Europe until the expansion portion of the company is up and running will also benefit thecompany. Keeping in mind of course, the balance of current operations and those of the expansion. The new management team may also have different management styles. This could be good for the company as it tries to adopt the European market business culture.In addition to cultural barriers, another external risk is the local laws and regulations of the expansion country. In addition to the IFSR, there are specific laws that must be followed. This includes local labor, wage laws. Without knowing these laws, the company could unknowingly break them, leading to large fines, legal action against them, or cosmos disallowed from doing business there. The best way to mitigate these risks are to educate, educate, educate. Custom Snowboards must learn the new laws and ensure everyone is trained on following them. A quality team should be in place to follow up on compliance as well as a advisor to get things going.External market plays a role in the success of the expansion. GDP growth rate, interest rates, consumer growth rate, the unemployment rate, etc. can all notion business for the company whether it is in the form of shipping costs or sales. To mitigate this risk, the company should do a thorough analysis of the market and benchmarks set prior to do the commitment to expand.The company should also take into consideration any political issues in the new country as this could cause instability and effect the market. So do brass regulations and tariffs so Cu stom Snowboards should research, analyze, and be prepared.Potential ReturnsTo make the most certain decision about expanding to Europe, we must look at the potential returns for the investment. The company will fund the expansion through increasing capital structure. To analyze potential returns, we look at net present value (NPV) and internal rate of returns (IRR).The NPV standards profitability which is the main goal of any business. It identifies the dollar issue forth the company will make from the project, using the current rate. An in depth look at Custom Snowboards capital budget reveals the NPV for the expansion via a new facility is $167,479. A positive NPV is an indication the company should imprint forward with the expansion. Had the NPV been zero, or less, the supposition should have been rejected. An analysis of NPV for the merger has not been conducted.The IRR, also known as the expected rate of return, is the point in which the projects cash flow equals cost. Thi s too will grade Custom Snowboards if the venture will be profitable. The hurdle rate set by Custom Snowboards is 10%. Which means if the IRR falls below that, the company does not feel the investment is worthwhile. If the IRR is above 10%, the company should move forward. The IRR for Custom Snowboards was analyzed for years 15 through 19 with $1,000,000 investment, the IRR is 14.4%. This indicates the company should move forward with the expansion.Both potential returns indicators demonstrate Custom Snowboards the expansion is a viable picking and should be moved on. The company should accept the project as the expected return on investment would prove a significant asset.Merger vs AcquisitionSince the company knows now that an expansion is the way to go, it must then decide if a merger is appropriate. The growing percentage of total sales is expected to continue rising. The company can opt to expand to Europe by way of building a new manufacturing facility with a shoot pickax or by merging with SnowFun, a European company. Custom Snowboards can also don SnowFun. SnowFuns product is less durable but offers a personalized paintjob that increases sales. Custom Snowboards Inc. uses 10% hurdle rate for capital budgeting and expansion decisions. Merge. The IRR discussed primarily indicates the merger will be a profitable decision for the company at 14.4%. The NPV for the merger was launch at $167,479, both indicating the merger will be profitable. Merging with SnowFun meansshareholders of SnowFun would demarcation swap three of their living shares for one share of the combined company.The stock purchase price for the company after merger would be $2.40 per share. SnowFun has 300,000 currently outstanding. Which would mean 100,000 shares of Custom Snowboards would now be owned by former SnowFun shareholders, diluting the shares owned by Custom Snowboards stockholders. Expected earnings per share (EPS) after a merger would decrease .06 to .92. The EPS for E uropean SnowFun is currently at a low .27 but will increase dramatically to .92. The company would have to decide if the value decline in EPS for Custom Snowboards is worth the increase from European SnowFun stocks. Positively, the merge would issue the company with pre-established workforce, facilities, and customers. As discussed, this can also be a risk to the company.Build.Building a new facility means spending $800,000 on building and equipment and, $200,000 working capital is required for startup. The build survival will increase assets for the company while simultaneously return profits. The build alternative will cause the company to incur debt. Custom Snowboards has decided that if this survival is chosen, the company will fund the expansion through increasing capital structure. The company would raise capital by issuing long term debt, sale of common stock, or a combination of both. All of these options effect the companys financial leverage. It is recommended that bot h be done to increase the value of the company for shareholders.Custom Snowboards could enter into a sale-leaseback at 6%, or purchase a preexisting facility over time, also at 6%. The shorter term lease would be the most beneficial to the company. The annual loan payment would be $189,917.12 versus the annual lease payment would be $195,000. The $5,082.88 yearly difference is an acceptable risk in this venture as the lease option preserves more working capital. The lease option requires cash outflows of $653,355 while the purchasing option requires outflows of $809,409, a $156,054 difference. Custom Snowboards Inc. can reinvest that money back into the company. This option provides tax advantages rather than paying property taxes. The purchasing option will have the company pay property taxes but will also provide advantages by way of depreciation.Acquire.The total present value for an acquisition is $732,522. After a $720,000 purchase price, this would put the NPV for acquisition as $12,522. This makes an acquisition a profitable measure as well. This option is less expensive up front and still increases the companys assets. Acquiring SnowFun would also mean a stock purchase price of $2.40 per share. With 300,000 outstanding shares, that means $720,000. This option also provides the benefits of an established workforce, facilities, and customers, and the risk that comes with that.RecommendationBased on the analysis above, it is my recommendation that Custom Snowboards expand to Europe using the build with leasing option building the most working capital than the other options. The NPV indicates the investment will have a positive return on investment as does the IRR. A merger or acquisition would eliminate SnowFun as a threat however their inferior product and outstanding stocks would decline business for Custom Snowboards. The risk of the preexisting structures and products is greater than the company should accept. The tax advantages would contribute to t he working capital of the company. The excess working capital the company gains from the expansion, can be placed back into the company, covering the startup costs. As the company builds its own reputation in Europe, a future acquisition may be more feasible. Custom Snowboards product is higher quality therefore, it may force SnowFun into a position of being acquired at a lower rate in the future.In selecting this option, the company must lastly choose how to fund the decision. at that place are a few ways to finance the build. The capital structures are 100% long term debt, 30% long term debt and 70% common stock, 80% long term debt and 20% common stock, and 100% common stock with no long term debt. The long term debt will exit an average .47 earnings per common stock (EPCSS). The least(prenominal) beneficial to the stakeholders. In year 15, the earnings before interest and tax (EBIT) is $81,912, the income available for common stock is $10,809, bringing the EPCSS to .054. In ye ar 16, the EBIT is $134,544, the income available for common stock is $50,283, and the EPCSS is .251. In year 16, this option yields the best results. In year 17 with an EBIT of $198,116, the income available for common stock is $97,962, and the EPCSS is .490, .703 in year 18 with EBIT $254,959 and $140,594 income available for common stock, and with an EBIT of $295,639 and $171,104 income available for common stock in year 19, a yield of .856. Using the long term debt option will look the least beneficial to the stakeholders in the first year, but then maintains the best return for all subsequent years.The 30/70 option will yield in year 15, an EPCSS of .084, .156 in year 16, .243 in year 17, .320 in year 18, and .376 in year 19. This is the flake best option in year 15 but in the middle for the other years. On average, this option will yield .236 EPCSS, making this the second worst option. The 80/20 option will yield an EPCSS of .070 in year 15, .201 in year 16, .360 in year 17, .502 in year 18, and .604 in year 19. This option isnt bad in year 18 but not the best for the other years. This option will yield .347 on average. The no debt option will yield an EPCSS of .088, the most beneficial in year 15. In year 16, the EPCSS is .144, .212 in year 17, .273 in year 18, and .317 in year 19 making this the least beneficial of all the options the rest of the years. Over the course of the 5 years, this option will yield .207 EPCSS, the least return of all options.Although the benefits start slow with a lower EPCSS in year 15, my recommendation is to fund the build with the long term debt option. Although the 100% common stock option produces more income available for common stock, the long term debt option will yield the highest returns at an average EPCSS of .477. Longevity will prove to work best in this scenario. Over time, this option will yield the most benefits to the stakeholders. Securing capital in this way will ensure the highest earnings, producing more income for common stock money for future investment into the company.