Red River Optical Case Study
Instructions:-
Describe the value proposition from each of market and operations’ perspectives (6)
Describe the venture’s life-cycle and development stage. (8)
Discuss appropriate financiers for this project in the context of the lifecycle stage/s.
Justify the consideration of debt and equity financiers.
For the base case scenario in (a)-(d), calculate (show calculations) , interpret, and comment using the 3 year forecasts (36)
(a) Profitability ratios
(b) Liquidity ratios
(c) Gearing ratios
(d) Efficiency ratios
(e) Calculate the break-even production quantity.
(f) Comment on the ability to generate Cash and the ability to pay dividends
Solution
Red River Optical Case Study
Value Proposition
The value proposition of the urban market is to have affordable quality reading spectacle. River optical will be innovative to have attractive and stylish frames for urban target market and they should be affordable still. The existing experience among the company’s employees will enable Red River to produce quality spectacles. The application of new technologies in making lens and spectacle frames will ensure quality production, warranting the quality of the end product. The ready-made glasses will offer value for money to consumers with impaired vision. A larger part of the population requires reading glasses and glasses that enable them to perform their daily activities efficiently. The integration of new technologies in the manufacturing process guarantees the users quality and durable glasses. The production efficiency ensured by the technologies will produce better and higher-quality glasses as compared to the glasses in the market. Additionally, the new technologies will ensure the consideration of local preferences and tastes in production of glasses. The company focuses on producing quality glasses that match the tastes of the Vietnamese.
The production efficiency and consideration of other cost-effective business strategies will ensure the affordability of the glasses in the Vietnam market. The company targets both low and high-income earners in urban and rural areas in the country. The market segments in terms of income and geographical areas will allow the distribution and sale of the products differently (Niebuhr, 2016). For instance, the company estimates that efficient production will make it possible to sell the products to its end-users at about $2.50 and $5 – $6 for rural and urban consumers respectively.
Red River Optical Company targets three markets which are urban market, peri- urban and rural market. Optipreneurs distributions model is suitable to reach and convince the urban market. Most importantly, the establishment of effective distribution channels integrated into effective marketing strategy will promise the success of Red River Optical Ltd. in Vietnam. Distribution will place emphasis on the distribution of ready-made prescription and non-prescription glasses through mass-market outlets. Additionally, the distribution strategy will ensure that consumers from the three target markets have easy access to the glasses. The company will invest on a team of sales agents in urban areas to promote and sell ready-made products to the non-optical retailing stores. The strategy outlines the use of mobile units for the distribution of the glasses to local factories. Additionally, the subsidizing distribution to rural areas using the profits generated from urban areas will enhance the effectiveness of the distribution.
The value proposition of the peri-urban and rural markets include moderately-priced and cheap but quality spectacles respectively. Red River will source cheap quality frames and lens from recycled materials. Additionally, the value proposition of the rural market is having cheap but quality reading spectacles. To increase the affordability of this market segment the Red River optical company is partnering with micro-credit organizations where customers can get spectacles on credit. The micro-credit organizations distribute the product hence reaching members of the rural market.
Venture’s Life-Cycle and Development Stage
Red River Optical Company life –cycle and development stages include introduction, growth, and maturity and decline stage. The introduction stage is the first stage and will be the most expensive for the venture since the company has inadequate finances. Red River is also exposed to risk of having little sales since the target markets are not acquainted with the new products. However, extensive marketing and promotion of the products will make the target consumers aware (Osterwalder, Pigneur, Bernarda, & Smith, 2016). During this initial stage, a lot of capital is required. Debt and equity financing will offer the required capital for business operations.
The growth stage of Red River Optical Ltd. will include increased sales and improving profit efficiency. The company will increase the cumulative spectacles production and sales to 114 090 pairs from 19 830 between the first and the second years of operation. This stage records increased production, increase in sales, and profitability. The company also used establish product promotions methods. Additionally Red River uses diversified distribution methods like distribution to non-optical retailers and special MIS marketing program. Financing is critical during this stage. The Red River Optical Ltd. will need to bring in investors, equity partners, and include debt financing. These allow the collection of sufficient financing with minimal risks. Significant financing is required for all operations. Equity investment and debt financing such as government funding and commercial loans offer certainty in funding with low risks (Ginsburg, 2016).
Maturity stage is the third stage where Red River Company has established the reading spectacles brand. At this stage the company is competing fairly with the other competitors that is the optical and manufacturing demand on the spectacles dealers. The profits are at climax during the third year at production of 257,460, highest sales, and profitability. At this stage Red River Optical will be modifying the different types of spectacles to remain competitive in the market. The company makes significant profits at this stage and requires minimal financing. Financiers may include commercial banks (Asquith & Weiss, 2016).
The fourth stage is the decline stage which is also the last stage. Red River Optical will be at this stage after the third year. The company expects the market to be saturated. There will be competitors producing ready-made spectacles hence posing competition in the market. If Red River optical company fails to be creative and innovative it will have reduced profits and hence poor performance. At this stage the company can finance itself through retained profits and debt financiers (Ginsburg, 2016).
The different stages of the company offer various challenges. However, financing for continuous improvement in company operations to guarantee quality, constant efficiency enhancement, and profitability. Debt and equity financing allow the company to maintain control over the company. For instance, debt financing ensures that the company maintains its ownership, allows time for repayment, the interest and principal amounts are known and can be forecasted in exception of variable rate loans. The process of debt financing is convenient and offers low risks. On the other hand, equity financing does not require repayment like the debt financing, offers less restrictions, and ascertains the contribution of the equity partners (often experts) in running the company (Niebuhr, 2016).
Ratio Calculations
i) Profitability Ratios
Gross Margin Ratio
Year 1: the values are in AUD
(gross margin)⁄(net sales) g
94,181/136,316=0.69
Year 2
376,124/573,662=0.66
Year 3
458,539/755,562 = = 0.61
(Rao, 2009)
ii) Profit Margin Ratio
Profit margin ratio = (net income )/(net sales) (( 77,655))/(94 181) = -0.82
A ratio of -0.82 indicates that during the first year Red River Optical Ltd. company expenditure was too high compared to the sales of the company. Therefore, the company should reduce its expenses (Rao, 2009).
Year 2
86,486/376,124 = 0.23
This ratio shows that the sales slightly exceed the Red River expenses in year 2. The Company should increase its sales and reduce expenses to have high returns.
Year 3
104,801/458,539= 0.23
Red River Company expenses are slightly less than sales hence 0.23 ratio. The company should increase the sales volume to increase the income and lower the expenses.
iii) Return on Assets Ratio
Year 1
(net income)/(average total assets)
((77,655))/(211,519÷2)= – 0.73
The – 0.73 ROA indicates that the company deed poorly during the first year that the expense were high and the earnings from assets were insufficient to pay the expenses. The company should the sales.
Year 2
86,486/(298 006÷2)= 0.6
This is a moderately high ratio that indicates Red River Optical generated significant income from the assets during the second year.
Year 3
104,801/(402,806÷2 )=0.5
Red River made 50% profit from the assets during the third year.
2) Liquidity Ratios
i) The quick acid, current ratios and working capital ratios are not calculated since the current liabilities for the three 3 years is zero. Current liabilities is the dividing factor in the above ratios.
EIBT/(interst expense)
ii) Times interest earned ratio =
Year 1
74,591/0
This ratio for the 3 years would be calculated since the interest expense is 0.
C) Gearing ratios
( long-term liabilities)/( capital employed ) x 100 =
Year 1
289,175/211,519 x 100= 136.71%
The gearing ratio is 36.71% shows that the company had high above normal gearing during the first year.
Year 2
289,175/298,006 x 100=97%
this ratio show that Red River Company had an excellent gearing during year 2 (Gibson, 2016).
Year 3
(289 175)/(402 806) x 100=71.8%
This ratio is normal and shows proper finance management of the debts. This is a stable –established organization during the third year.
d) Efficiency Ratios
= ( sales )/inventory
Year 1
The ratio indicates that sales have a higher value compared to the inventory in year 1 which is progress to the company.
Year 2
32.9 During the second year the sales inventory was ratio such that sales would comfortably the cost of inventory.
Year 3
The ratio is less than year 2 but the sales value was high than inventory value.
ii) Asset Turnover Ratio
= revenues /total assets
Year 1
136,316/211,519=0.6
Red River performance is moderate and income is being generated from the company’s assets.
Year 2
573,662/298,006 =1.9573,662/298,006 =1.9
Ratio of 1.9 indicates that Red River sales generated from the over 100% yields from the total assets.
Year 3
3755,562/402,806= 1.9
This ratio indicates is higher than year 2 hence more sales from assets that show Red River progress (Gibson, 2016).
e) Break-Even Production Quantity
Red River Optical
Company has a high to generate cash and pay dividends is high during the year 1
and 2 as indicated in the ratio (Gibson, 2016).
References
Asquith, P., & Weiss, L. A. (2016). Lessons in corporate finance : a case studies approach to financial tools, financial policies, and valuation. Hoboken, New Jersey: Wiley.
Gibson, C. H. (2016). Financial Reporting and Analysis. New York: Cengage Learning.
Ginsburg, M. D. (2016). Mergers, acquisitions, and buyouts : five-volume print set, march 2016. New York: Wolters Kluwer Law & Bus.
Niebuhr, D. (2016). Making global value chains : geographies of market-oriented development in Ghana and Peru. Wiesbaden: Springer Gabler.
Osterwalder, A., Pigneur, Y., Bernarda, G., & Smith, A. (2016). Value Proposition Design: How to Create Products and Services Customers Want. New York: John Wiley & Sons.
Rao, M. V. (2009). Management Accounting. New Delhi: New Age.