ASS#2 Step1-5 Draft

Step 3-6

ASSIGMENT 1 - ACCT11059

The company that I have been assigned is Carbon Revolution

The website link is https://www.carbonrev.com/

My personal blog link is Home | My Site 5 (diemquynhtran1.wixsite.com)

Step 1

KCQ1- “Costs need to be placed where they 'belong' which is connected and linked to the cost generating aspects of the business”

Cost is determined as an important condition used to determine the effective implementation of economic activities, from which it is possible to manage production or commercial enterprises, choosing appropriate methods. The best and beneficial solution, achieving productivity and efficiency at work. Moreover, it is also the waste of resources to achieve a specific goal. Costs can be understood as the amount of money paid to carry out economic activities (transactions, production...) or certain business and trade.

After the chapters I read, I felt that Martin included basic definitions and along with real-life examples that helped the reader better understand the concept. And here is an example of a direct cost is the materials that go into making the items my brother sells and the labor that goes into creating it. If he produces clothes, the amount of fabric and thread he uses will vary in direct proportion to the number of shirts he makes. Even if he retails items that another business produces, the amount of inventory he purchases will vary, proportionally to the number of items he sells. Similarly, he will pay his employees a greater number of hours if they make 200 shirts than if they make 20 shirts.

Finally, I also have a question about the difference between direct and indirect costs and how they affect a business? In my opinion, accurate cost classification will greatly affect the calculation of the cost price of the unit's products. Therefore, we need to pay attention to clearly classifying these two types of costs to serve accounting work effectively.

KCQ2 - “An important idea is that some costs in a business may be fixed while others may vary”

In this chapter, costs play an important role in business. Fixed costs and variable costs are two costs in the business process of an enterprise. Accurately determining these fees will help businesses balance their finances better. So how to distinguish these two types of costs? Fixed costs are amounting a business must pay periodically. This amount does not change and is almost stable over a certain period of time without depending on the scale of production such as insurance fees, premises rent, … Besides, airable costs in a business are fees that change over a certain period of time and are directly related to business activities including taxes, utility bills, and input material costs.

Last Christmas, the church in my area held a children's Christmas festival where we could buy and sell items of our choice. So, my sister and I decided to sell small handmade bags. We went to the fabric store together and bought a large piece of fabric for $20, as well as 3 rolls of thread for $5 and 10 straps for $15. With that number of materials, we were able to make 20 small bags. I priced each bag at $15 and over the course of two days we sold 20 bags. Overall, we made a total sale of $300 and deducted an initial capital of $40. In total in 2 days, we achieved a profit of $260. However, it is only a short-term part of the business, we do not have to pay expenses such as premises, staff, invoices, etc. Therefore, it is easy to make a profit. But after completing this chapter, I feel curious about how large businesses work. They have to calculate all types of costs: are they fixed or change by month or year? and how to manage the business effectively and reasonably, not only investing in raw materials but also bringing high profits to the business? Surely that is a difficult question for anyone to answer because it must rely on many economic market factors. In general, here I remind myself that I must try to learn and expand my knowledge if I want to become a good accountant in the future.

Numbers were always something I loved when I was in high school. I always remember how quickly I used to calculate many mathematical calculations and even draw meaningful conclusions. This interest of mine gradually brought me to the world of finance and I chose to become an accountant in the future. But it's really not as simple as I thought at all, to understand these numbers is a whole process of trying to practice, constantly learning to be worthy of being a solid manager who can handle everything the issue of failure or success in business.

KCQ3 – “The opportunity cost is the maximum or best benefit that could be obtained by any resource available to a firm”

When I was living in Vietnam, I just thought that if I had the opportunity to study and live in an advanced country like Australia, it would truly be a great opportunity for me and fortunately for that opportunity came to me as I wished, at that time I simply thought that I would study and live well to not disappoint my parents. But after 3 months of living and studying here, I encountered many difficulties in language barriers, cultural differences and homesick. Many times, I felt lonely and depressed. However, now I think more maturely because I have been given such a good opportunity, then I must try and try harder to have a more successful future. Just like me, business managers will have many opportunities to work. Regardless of the size of a company or the number of resources it has access to, all managers of all companies face this difficult reality of life and business: they need to make decisions within limits. However, if you know how to seize opportunities costs, making decisions about costs and benefits for the business will be in a better direction. Moreover, in business activities, although financial statements do not show opportunity costs, business owners can still use opportunity costs to make decisions when there are many choices.

In economics, opportunity cost is a cost that represents the benefits that an individual, investor or business misses out on when choosing one alternative over another. For example, investor B plans to invest $200,000. This investor is considering choosing between two options:

+ Option 1: Invest 200,000 USD in the stock market, estimated profit 12%/year. With this option, investor B can earn 24,000 USD.

+ Option 2: Invest in new production equipment (fixed assets). This option helps investor B earn an additional 10% profit, specifically 20,000 USD.

If investor B chooses option 2, the opportunity cost will be calculated as follows:

OC = FO – CO = 24,000 – 20,000 = 4,000 (USD)

Opportunity cost helps you evaluate business decisions and make reasonable choices. It is not included in accounting profits but is very important in shaping strategy and financial management. I feel satisfied with this chapter because it helps me expand my knowledge and I have almost no questions after reading it.

KCQ4 – “Cash flow is the lifeblood of a business. The growth of the value of money and factors affecting it”

When you have money, you will also share the suffering of people in less fortunate circumstances. However, money can also kill you. It is considered a double-edged sword because money is never enough, people with a lot of money will still want more. They will take advantage of their power and money to do wrong things to gain profits for themselves.

Cash flow refers to the net amount of money along with other amounts of cash equivalent value transferred into and out of a business. We know that a company's profitability is often expressed by net income - this is an important investment evaluation indicator. When evaluating a company's overall performance, many people immediately think of net income. However, although accrual accounting provides a basis for matching revenues to expenses, this system does not actually reflect the value the company has received from profits in this system. Moreover, in an August 1995 article in Individual Investor, Jonathan Moreland provided a very succinct assessment of the difference between income and cash. He says that "a company's liquidity is as important as its profitability" because it shows whether the company has enough money to meet its debt obligations. And after all, the company will go bankrupt if it cannot pay its bills, not because it has no profits. Yet many investors still often ignore it. How? By looking only at the income statement rather than the cash flow statement." The term "cash cow" is applied to companies with excess free cash flow not a simple terminology, but it is certainly one of the attractive investment characteristics you need to consider. Once you understand the importance of cash flow generation and reporting, you can use these simple metrics to perform analysis for your own portfolio.

Step 2:

Carbon Revolution Services 

Carbon Revolution is a global technology company and Tier 1 OEM supplier, which has successfully innovated, commercialised, and industrialised the supply of lightweight carbon fibre wheels to the global automotive industry. Carbon Revolution has three main business platforms for which it operates in: 

·       Carbon Revolution wheels – Ford Shelby Mustang

·       Carbon Revolution wheels – Ford GT

·       Carbon Revolution wheels – Ferrari SF90 Stradale

Variable cost estimates for these services are based on industry averages, ranging from 60% to 80%. Because automotive industry trends show large fluctuations in revenue due to market conditions, economics, and competition between different brands.

Variable cost price

                            Ford Shelby Mustang: AUD$1,500 x 0.77 = AUD$1,155

                            Ford GT: AUD$1,600 x 0.625 = AUD$1000

                            Ferrari SF90 Stradale: AUD$1,750 x 0,8 = AUD$1,400

Contribution Margin

                            Ford Shelby Mustang: AUD$1,500 – AUD$1,155 = AUD$345

                            Ford GT: AUD$1,600 – AUD$1000 = AUD$600

                            Ferrari SF90 Strade: AUD$1,750 – AUD$1,400 = AUD$350 

Contribution Margin Similarities and Differences

The main difference is that, when calculating gross margin, cost of goods sold deducted from total revenue can include fixed and variable costs, while contribution margin is calculated by just reduce variable costs from total revenue. However, the contribution margin is different due to different selling prices for each item, but the variable costs for the three services are the same. Besides, the contribution margin is useful when calculating a company's break-even point. Contributions can also be calculated on a per unit basis and will show how much money the company receives with each sale.

Contribution margin and gross profit margin are quite similar and important indicators of a company's profitability. Contributions allow a company to calculate its break-even point. Gross profit helps businesses compare different products, services and to determine which products the company produces are most profitable.

About the Contribution Margins

Contribution margins is considered an important financial metric because it indicates the profitability of a product or service. Moreover, it represents the difference between total revenue and variable costs involved in producing or supplying that product. Besides, contribution margin can vary depending on factors such as pricing strategy, production costs and sales volume. In the context of the Carbon Revolution, higher wheel prices have driven revenue and contribution margin growth.

The positive contribution margin reflects both improved production costs and higher average wheel prices. In the first half of FY23, Carbon Revolution achieved a contribution margin of $1.5 million, an increase significantly 114% compared to the same period before (PCP). Furthermore, in FY23, contribution margin increased 33% to $2.5 million, driven by improved operating performance in Q4. Despite inflationary pressures, the company managed to control expenses operating, sales and management fees. Therefore, Carbon Revolution has a robust plan to further lower production costs and enhance contribution margins.

Constrains for Carbon Revolution

Supply chain constraints: the Carbon Revolution faces the challenges and limitations of global supply chains. Because it has affected their operations, including raw material shortages and increased freight rates. For instance, Corvette wheel sales were delayed by about six months in early to mid-FY23 as General Motors postponed wheel orders due to broader supply chain challenges for the vehicle.

High cost: producing carbon wheels requires complex technology and production processes, resulting in higher costs than conventional aluminum alloy wheels. The likelihood of price increases is higher in a macro environment of inflation, global conflict (such as the Ukraine conflict), and supply chain disruptions related to Covid-19. There are limits on Carbon Revolution’s ability to pass on price increases to its customers, global OEMs. Supplier cost increases may result in higher costs and lower margins and affect Carbon Revolution’s financial performance.

Balance sheet constraints: the company has seen balance sheet constraints, especially ahead of the completion of its New Debt Program in May 2023. Despite these constraints, Carbon Revolution has been managing to significantly increase net cash provided from financing activities by $63.2 million.

Overall, I expect that they need to continue finding innovative solutions for the auto industry as it moves toward electrification. Besides, their lightweight Carbon Fiber Wheels play an important role in solving mass-related issues on vehicles.

Contribution Margins & Decision Making

Contribution margin is a concept in finance for decision making, representing the portion of a product's sales revenue that is not fully utilized by variable costs and contributes to covering the company's fixed costs. This helps companies decide whether to continue providing services, adjust prices, or increase/decrease output. This is one of the basic keys in break-even analysis. Moreover, contribution margin is calculated as the selling price per unit, minus the variable costs per unit. It is also known as dollar contribution per unit, a measure of how much a particular product contributes to a company's overall profits. It offers to show the profit potential of a particular product offered by a company and shows the portion of revenue that helps cover the company's fixed costs. Any remaining revenue after covering fixed costs is the profit generated.

All in all, contribution margin is considered an important measure to evaluate the ability to generate profits in business activities. It reflects the results of the business process. However, it contributes to separating the components of fixed costs and profits that come from product sales. 

 Step 3:

Refer to Excel Spreadsheet for calculation of Carbon Revolution ratios.

Advantages of Ratios

Surely in the field of economics we are familiar with talking about ratios, it has the outstanding advantage of indicating the effectiveness of capital spent. But it also has limitations: it depends on the discount rate chosen for calculation. Moreover, this is a relative evaluation criterion, so it can easily lead to mistakes when choosing projects that can eliminate each other, and you can ignore projects with large NPVs (because usually projects with large NPVs have a small rate). Accordingly, when using ratio criteria, it must be combined with NPV (Net present value) criteria and other criteria. On the other hand, whether the ratio is large or small depends on the evaluator's perception of benefits and costs. Therefore, when using ratio criteria to select projects, one must clearly know the evaluator's concept of financial benefits and costs. 

Overcoming the Disadvantages

Financial ratios are an important part of corporate financial analysis that help evaluate a company's performance and financial position. Solutions to overcome the disadvantages of relying solely on ratios, you must rely on extracting data from business financial reports, understanding industry information to calculate different ratios. Based on that, you can gain more in-depth knowledge about the company's financial performance so that you can apply appropriate strategies to provide practical solutions for your business in the future such as development strategies. Market development, product development, brand positioning, etc. based on the presenters.

Reflection of Ratios

+ Profitability Ratios

Profitability ratios include metrics such as gross profit margin, net profit margin and return on assets. They evaluate a company's business performance.

Gross profit margin is a metric used to evaluate a company's financial business model by revealing the amount remaining from revenue after subtracting the cost of goods sold. Moreover, a business with a higher gross profit margin proves that it is more profitable and controls costs more effectively than its competitors. Carbon Revolution has a deeply negative corporate gross margin of -44.0%, which suggests that the company is spending more on cost of goods sold than it is earning on its products. This is a red flag for investors and could reflect inefficiencies in the manufacturing process or a pricing strategy that is not sustainable over the long term.

Similar to gross profit margin, Net profit margin indicates the percentage of profit a company earns from each unit of revenue. This is an important indicator to evaluate a company's financial performance and profitability. A high ratio shows that the company has the ability to generate high profits from revenue, while a low ratio can indicate fierce competition or problems in cost management. Uncertainties caused by the COVID-19 pandemic have seen Carbon Revolution's net profit margin for the past four fiscal years be low with a loss in fiscal 2020. With this financial strain, along with the weak gross margins, which could hinder the company's ability to take advantage of growing demand for lightweight auto components.

Return on assets (ROA) : Return on assets is the return on total assets, measuring a company's profitability and efficiency in using its assets to generate income. Carbon Revolution had negative profits for the four years from 2020 to 2023, which suggests they are not using their assets to generate revenue for the company.

+ Efficiency Ratios

Days of inventory is the number of days it takes a company to sell out of inventory. This is a metric that analysts use to determine sales performance. Furthermore, the lower the number of days of inventory, the more effective a business is in managing inventory. On the contrary, if the number of days of inventory is too large, it may be a sign that the business is investing too much in inventory. It is clear that Carbon Revolution has returned to its pre-pandemic current margin in FY22 at 64 compared to FY21 at 67. This means inventory days have decreased by 3 from FY21 to 2022. And then increase again to 73 in 2023.

The total asset turnover ratio is the amount of revenue per dollar of assets. The numbers from 2020 to 2023 show that the company generated $0.27, $0.18, $0.28 and $0.24 in revenue for every dollar of assets it owned property. This is a very low number for the company Carbon Revolution, which means they are not using their assets effectively to generate revenue.

+ Liquidity Ratios

Current ratio: it is a fact that Carbon Revolution has not yet been able to return to the current margin in near pandemic 2021 at 4.36 but plummeted in FY2022 at 1.88, compared to FY 2023 at 1.57. When looking at the current ratio, we again want to see some lower numbers to show that the company is having difficulty covering its short-term liabilities.

Quick ratio 1 & 2: is a financial index measuring the short-term solvency of a business. It measures the availability of assets that can be quickly converted into cash to pay short-term liabilities. By removing inventory and receivables from current assets, it therefore allows us to focus on the company's available assets to cover its current liabilities. We can also see that they have introduced some management of these ratios with Carbon Revolution from 2020-2023 although I was surprised to see Carbon Revolution's margins increase sharply from 2020 to 2021 in marginal level of 3.24, but declines sharply from 2021 to 2023, at a marginal level of 0.94 for quick ratio 2.

+Financial Structure Ratios

Debt/ Equity Ratio: The debt/equity ratio can be defined as a measure of a company's financial leverage calculated by dividing long-term debt by equity. A lower debt/equity ratio is preferred as this indicates a lower debt ratio and lower financial risk for a company. The three-year debt/equity carbon revolution reduced the debt/equity ratio from 2020 at 59.3% to 2021 at 30.8%, but then I was surprised because it increased dramatically 2023 peak at 906.5%.

Equity Ratio: Equity ratio: an important indicator in the financial analysis of a business. It measures the ability of a business to generate profit from each unit of equity and the efficiency of asset management. From the ratios, we can see that the numbers were impressive from 2020 to 2022 at 63.7%, but then it plummeted to 9.9% in 2023. And what is the reason? The reduction in Carbon Revolution's equity ratio could be related to various factors such as a decline in the consumption market, fluctuations in input materials or government monetary policy. If you want to return to 2021's figure at 76.4%, it's a long process for Carbon Revolution.

Times interest earned: is an indicator of the financial capacity that a company can make to pay its debts. To put it more simply, the higher this index is, the greater the company's ability to pay its debts and vice versa, if the index is lower, there is a possibility of default. Therefore, Carbon Revolution once again does not have impressive numbers, losing records from 2020 to 2023. Although the minimum is -13.40 in 2023, this is probably the year they reduce their losses debt, and it is considered a step forward for them. I think, they will generate profit margins in the coming years.

+ Market Ratios

Earnings per share: Earnings Per Share (EPS) is a financial ratio calculated by dividing a company's net profit by the total number of shares outstanding. Carbon Revolution lost money in 2021 and 2022 (155.74) and (231.77), but then had a higher minimum profit of (373.91) in fiscal 2023. Specifically, if the ESP is higher than in previous years the which shows the company is earning more per outstanding share.

Dividends per share and Dividend yield Ratio: It was fruitless. Because the business has never issued dividends, so dividends per share and dividend yield ratio cannot be determined.

Price Earnings Ratio: The price-to-earnings ratio (P/E) is an important indicator in valuing a company's stock. It measures the current stock price relative to earnings per share (EPS). A high P/E ratio can mean the company's stock is overvalued or that investors are expecting growth in the future. However, for these calculations, I get 0 or 0.01 all years meaning Carbon Revolution is losing money or has no earnings because the company doesn't have a P/E ratio.

Net Asset Backing per share Ratio: The net asset backing per share ratio is an important indicator in stock investment. This is the ratio between the amount of dividends paid to shareholders and the net income per share if the company's assets cleared all its liabilities. Carbon Revolution's net assets per coupon gradually decrease from 2020 to 2023 to 74.25 in 2023. In general, business directors will base on the net asset support ratio to clearly understand the situation and l

+ Looking to the Future

Carbon Revolution Company must definitely try to come up with strategies, plans, and solutions to increase gross profit margin as well as increase net profit margin in the group's financial structure. In my view, the Carbon Revolution will be well positioned for growth, with a strong focus on innovation, production automation and profitability. Furthermore, analysts predict sales growth this year, which could signal that the market for Carbon Revolution's products remains strong. Their lightweight carbon fiber wheels will continue to gain traction in the auto industry, especially as the demand for electric vehicles (EVs) and sustainability initiatives grows and becomes viable, because because it benefits OEMs looking to meet stringent fuel economy and sustainability targets. I am confident that they will find a solution that will increase rates and be more successful in the future.

Step 4:

Capital Investment Options

To make the capital investment decision for Carbon Revolution, the two capital investment options I chose to open the location were Melbourne and Canberra. Because these two cities not only develop the bowl industry but are also famous cities in Australia, they will attract a lot of customer attention. Currently, they have a few locations in North America and Europe. Carbon Revolution has a wide network worldwide, this is shown through their financial statements. Therefore, opening Carbon Revolution in another location could not only commercialize and industrialize the supply of lightweight carbon fiber wheels to the global auto industry but also be profitable for the company. I will set negative cash flow for the first few years because the estimated cash flow for each year is expected to be the initial cost of obtaining a license and gambling licenses can be expensive. This is also because the company will have to pay an annual fee to continue having a gambling license. However, the negative cash flow gradually becomes less as the company earns more revenue each year. Besides, net present value (NPV) and internal rate of return (IRR). I would discount the required capital expenditure at 8% and use the cash flow over the next year.

	Canberra	Melbourne
Original Cost	$9 million	$10 million
Estimated Life	10 years	10 years
Residual Value	$19 million	$20 million
Discount Rate	8%	8%
Estimated Future Cash Flow
Year 0	-$9 million	-$10 million
Year 1	-$5 million	-$8 million
Year 2	-$3 million	-$5 million
Year 3	-$2 million	$6 million
Year 4	$4 million	$7 million
Year 5	$5 million	$8 million
Year 6	$7 million	$8 million
Year 7	$8 million	$9 million
Year 8	$9 million	$12 million
Year 9	$10 million	$16 million
Year 10	$20 million	$24 million

Recommendation

	Option 1 – Canberra	Option 2 – Melbourne	Recommendation
Payback Period (PP)	6 years and 4.5 months	5 years and 3 months	Option 2
Net Present Value (NPV)	$16.76 million	$29.55 million	Option 2
Internal Rate of Return (IRR)	19.3%	24.6%	Option 2

Wondering between 2 location options Canberra and Melbourne, after using 3 capital budgeting methods: Payback Period, Net Present Value and Internal Rate of Return, Melbourne is the second choice. building site. The payback period is smaller for the second option. This means that the initial investment of $10 million will be returned in 4 years and 15 months. Therefore, the shorter the payback period, the more optimal it is. This option provides greater overall returns in terms of net present value, contributing significantly to the company's long-term revenue finances. However, both options have a shorter payback period of approximately 10 years is acceptable.

Net present value (NPV) is the present value of all future project cash flows discounted to the present. Furthermore, a positive net present value means that the expected income generated by a project or investment exceeds its expected costs. We can see both options are profitable. However, the net present value is higher for option two, building a site in Melbourne. The NPV is $29.55 million, which is the value generated from the investment over a 10-year period. Besides, a positive NPV indicates a project will create more value than the initial cost.

The initial rate of return (IRR) is the percentage of income over the amount of money invested or loaned at the beginning of the period. Looking at the IRR spreadsheet we can see two capital investment options that both exceed the required 8% discount rate. Because both show attractive IRR of 19.3% for option 1 and 24.6% for option 2. This means that both options are expected to generate enough cash flow to recoup the initial cost of them, however with option 2 it has a higher IRR of 24.6%. Therefore, the best capital investment would be option two.

Overall, Carbon Revolution can use both investment accounts as both have PP for the 10 year acceptance period. However, option two is an acceptable capital investment because it has a lower PP and higher NPV and IRR.

Strengths & Weaknesses

The strength of the payback period has a simple calculation so it can be easily applied to calculate the efficiency of the job. From there, it is possible to screen projects that are not feasible to focus on fast profit projects. However, the weakness is that this calculation does not consider the value of money because the value of a certain amount of money in the first year will be lower value after a few years.

The strength of NPV helps optimize profits by calculating the current values of the project. This not only allows investors to compare the feasibility of the options and select the highest NPV plan, but also provide an accurate prediction of the investment place, so it is related to the cash flow and profit level. And whether this investment will increase the value for the company. NPV may also have disadvantages, such as an estimate of difficult discount ratio because NPV depends on the discount ratio to calculate. However, determining the discount rate may be difficult when the capital market fluctuates.