Below is my first draft for Assessment Task 2. I am yet to complete Step 5 - giving feedback and will update this post once this step is completed. I look forward to receiving your feedback
When
I read Chapter 6, "Understanding Key Cost Relationships," I quickly learned
about several types of cost behaviours, including fixed, variable, and mixed
costs. The chapter emphasised the importance of understanding
cost-volume-profit analysis and how it may help organisations make
well-informed decisions about sales, production, and pricing. It was especially
fascinating to investigate the complex relationships between the volume of
production and the total cost and profit of a good or service.
KCQs
from Chapter 6:
1.
What kinds of cost behaviours
were covered in Chapter Six?
Chapter
six covers key ideas including fixed costs, variable costs, and mixed costs as
it examines various cost behaviours. It is an essential tool for anyone trying
to understand the complexities of cost dynamics. The chapter emphasises how
crucial it is to understand cost-volume-profit analysis, which is a vital tool
for companies to use when making well-informed decisions about sales,
production, and pricing. It also clarifies how variations in production volume
can have a big effect on the total cost and profit of a good or service. A
thorough reading of Chapter six can provide you with important insights into
cost behaviours and lay the groundwork for your organisation to make wise
financial decisions.
2.
Are there possibilities in
business that are worth pursuing and those that are better left unexplored? Do
these opportunities happen often?
In
my opinion, the most important takeaway from this chapter was the importance of
understanding both fixed and variable costs as well as the break-even point.
Managers must be able to identify these numbers since they are crucial in
determining whether a company succeeds or fails. This understanding transcends
the business world and is relevant to our daily lives as consumers. It helps
with budgeting and financial planning by helping to distinguish between fixed
expenditures (such as rent, mortgages, and repayments) and variable costs (such
as food, energy bills, and medical expenses).
As
I considered my participation in multiple fundraising events for my kids'
sports, I immediately considered the following strategic factors: What may be
sold for very little money and make a big profit? Which items are likely to
resonate more with the community we are targeting? I now have a basic idea of
how businesses divide their expenses between fixed and variable categories
thanks to this personal experience. Even while I know that my fundraising
efforts are simpler than those of a company, the idea is still the same. I enjoyed
reading this chapter since it showed me how many good things may originate from
such a simple structure. Still, there's one unanswered question: How much data
does a company need to determine a fair price? Even in my fundraising
activities, selecting the correct pricing plan was a priority. This got me
thinking about all the expenses and complicated variables that go into
determining a product's price in a company.
3.
What effect do changes in
production volume have on a product or service's overall cost and profit?
Variations
in the amount produced can have a significant impact on the total cost and
profit of a good or service. Because of economies of scale, the cost per unit
tends to go down as manufacturing volume increases. It follows that a lower
cost per unit can be achieved by spreading fixed expenses such as rent,
salaries, and equipment over a larger number of units. As a result, the profit
margin usually increases as production volume increases, reaching a point at
which adding more units stops saving money. However, it is important to
recognise that increasing production volume requires more labour, raw
materials, and energy, which could raise variable costs and reduce some of the
economies of scale benefits.
Chapter
8, "We Have Got to Make Some Decisions," provided me with an important
new understanding of the decision-making process. This chapter focused on how
crucial it is to identify pertinent costs and avoid sunk costs while making
decisions. I also explored the idea of incremental analysis and how it can be
used to compare different options. The chapter also covered a variety of choice
kinds, including buy or make decisions, special order decisions, and segment or
product discontinuation decisions.
KCQs
from Chapter 8:
4. Why is it that understanding relevant
expenses is crucial to the process of making decisions?
The significance of comprehending
relevant costs resides in the ability it provides to discern between costs
changed by a decision and those that remain constant. By keeping pertinent
expenses in mind, decision-makers can make better decisions and raise the
chance of achieving their objectives. This tactic makes it easier to avoid
needless spending and choose actions that maximise gains or reduce losses.
Additionally, focusing just on pertinent expenses helps decision-makers make
better judgements about possible outcomes from a range of options, making it
easier to choose the best one.
5. What does incremental analysis involve
and how does it help with alternative comparison?
Businesses find that incremental
analysis is a useful tool for comparing and evaluating the financial effects of
different options. It involves a careful analysis of the changes in costs and
income associated with each option. By carefully examining the relevant costs
and advantages linked to each option, decision-makers can make well-informed
decisions that maximise gains or minimise losses. With the help of this
strategy, firms may assess their options and make financially smart decisions
that support their aims and objectives.
Step 2: Products or Services
Recce
Pharmaceuticals has gained recognition for creating an innovative range of
synthetic antibiotics. With a distinct mode of action, Recce's anti-infectives
aim to provide doctors with a therapeutic tool that works against a variety of
germs and may be used time and time again. The focus was on their lead drug,
RECCE 327, a broad-spectrum antibiotic with a quick half-life that works
against Gram-positive and Gram-negative bacteria, including superbugs resistant
to antibiotics. The company's primary source of revenue is through government
funding announcing on January 15, 2023, that it had been paid A$6,219,241 in
cash via the Australian Government's Research and Development Tax Incentive.
Radium Capital also provides advances to the company regularly during the
financial year.
Recce®
327, intended for bacterial infections, and RECCE® 529, targeted for viral
infections, are the two primary therapeutic candidates developed by Recce
Pharmaceuticals. To find cures for difficult bacterial and viral illnesses, the
company is committed to improving and expanding its product pipeline. Recce
Pharmaceuticals is actively filling this void in antibiotic medication
development, given the historical dearth of innovation in this field and the
urgent need for potent antibiotics. Among the first classes of anti-infectives
to be developed in more than 30 years, R327's compounds have a universal
mechanism of action that allows them to reliably eradicate germs and fight
superbugs that are resistant to several drugs.
Several
factors, including production costs, market demand, competitive dynamics, and
regulatory constraints, influence the pricing of pharmaceutical products.
Pricing strategies can differ depending on the specific product and its unique
features. In addition, factors including production expenses, regulatory
compliance, and research and development expenditures influence the
decision-making process.
Variable
costs are a crucial factor in the pharmaceutical sector, as they vary based on
the scale of manufacturing. These expenses can include:
a. The costs associated with acquiring
active pharmaceutical ingredients (APIs) and other items required for
manufacturing are referred to as raw materials.
b. Manufacturing costs: Expenses related to
the real production process, such as labour, supplies, and maintenance for the
machinery.
c. Expenses associated with pharmaceutical
product packaging are referred to as packaging costs.
Owing
to significant progress in pre-clinical and clinical phases for its
anti-infective asset portfolio, Recce Pharmaceuticals' stock price outperformed
by 3.5% and 36% (measured in AUD) respectively, outpacing the Australian ASX
Biotech Index and the US XBI Index from June 2021 to June 2022. The Company's
main priorities for the 2021–2022 financial year were the advancement of its
clinical studies, and the accomplishment of its overarching aims and objectives
by making the most of its advantageous financial position. The company's
continuing human clinical trials have advanced significantly, as well as in its
preliminary research. Clinical trials
involving human subjects are presently underway. Based on encouraging initial
results and significant advancements achieved, the Company is in a strong
position to sustain its clinical progress.
The
company anticipates adding several new Phase II trials to their clinical
therapy programmes in the upcoming year. They anticipate growing their
manufacturing capacity and being able to supply our continuing clinical studies
from their Sydney production plant. The
company's executive, Charman, was happy to report in the 2023 Financial Report
that Recce is well-positioned to fund its progress towards the achievement of
several important clinical milestones over the upcoming quarters due to their
operational successes and the favourable Australian tax incentive on research
and development activities. Recce is gaining speed and recognition as a leader
in the anti-infective industry because of its expanding global operations. This
has led to the company opening new doors with potential partners, including
pharmaceutical corporations and both domestic and foreign organisations.
Market
constraints that Recce Pharmaceuticals can encounter may include:
1. Regulatory acceptance: The medicine
cannot be promoted or sold until regulatory bodies have given their approval.
2. Competition: Recce Pharmaceuticals will
have to contend with other businesses creating comparable medications because
the pharmaceutical sector is quite cutthroat.
3. Intellectual property: Rivals may
contest the company's patents and rights.
4. Funding: As the business develops and
tests its medication, it may run into financial difficulties.
Recce
Pharmaceuticals has a robust research pipeline and industry experience, which should
help it get beyond these obstacles and thrive in the market.
Step 3: Ratio Analysis
Ratios
are more important than most people realise. Think of it like the fine art of
cooking, where exact proportions of components are combined to create a
particular flavour. Ratios are the intermediary between financial statements in
the accounting domain, helping to decipher the complex "recipe" that
characterises the financial environment of a company. By using these measures,
managers and stakeholders alike can gain important insights about a company's
profitability, liquidity, and efficiency that help them make well-informed
decisions.
Ratios
demonstrate their value when utilised to analyse and interpret a company's
performance, revealing significant changes. Consider a stakeholder assessing
the debt-to-equity ratio of a company. A lower proportion provides certainty
about the company's capacity to fulfil its responsibilities. On the other hand,
a high ratio could cause concern as it indicates that the company may find it
difficult to pay its debts. However, even though it indicates a company's
obligation coverage, the debt/equity ratio is unable to explain its
fluctuations. Relying only on ratios can
mask the subtle factors that contribute to them and miss important information.
Reducing
the negative effects of relying only on ratios requires integrating the study
with financial statements, understanding industry trends, and relevant company
data. A greater comprehension of a company's financial performance can be
attained by using this all-encompassing strategy. This thorough research makes
it possible to pinpoint advantages and disadvantages across a range of factors,
facilitating better decision-making based on the ratios that are provided.
Reflection on Ratios
Profitability
Ratios
Gross
profit margin: This measure shows how much of a company's revenue is left over
after deducting direct expenses. Increased profitability is indicated by a
higher gross profit margin.
Net
Profit Margin: A desirable high ratio is sought in the net profit margin to
indicate profitability, much as the gross profit margin.
Return
on Assets: This measure assesses how well a company makes money off its assets.
A persistently low ROA highlights issues with the company's capacity to make
money off its asset base.
Efficiency
Ratios
Days
of Inventory: A company's average time on hand before selling its inventory is
gauged by the days of inventory ratio. Because it is less precise in depicting
the relationship between inventory and revenue, the Days of Inventory ratio is
less relevant.
Total
Asset Turnover Ratio: This ratio calculates the income produced for each dollar
of assets used. Looking at the data for
2021, one can see that it was the firm's most successful year out of the prior
four financial years.
Liquidity
Ratios
Quick
Ratios 1 and 2: These rapid ratio modifications provide a more circumspect
evaluation of the company's short-term liquidity status. The assets that are
most "immediately available" to cover current liabilities are
highlighted when inventory, prepayments, and receivables are subtracted from
current assets.
Market
Ratios
Earnings
per share (EPS), which measures a company's profitability per share, is
important for shareholders to consider when determining the value and
profitability of their shares. Increased earnings per outstanding share of
stock are indicated by a higher EPS.
A
higher dividend-per-share (DPS) ratio is advantageous as it indicates a better
cash return to shareholders. DPS measures the portion of earnings delivered to
shareholders on a per-share basis.
Dividend
Yield Ratio: This ratio shows how much of a company's stock price is
distributed as dividends to its shareholders.
The
following link will take you to the company financials for Recce
Pharmaceuticals where you can see the financials for this company with worked
Ratios for the financial year 2020-2023. Company
Spreadsheet 2023 for Recce Pharmaceuticals.xlsx
Step 4: Capital Investment
Recce
Pharmaceuticals is at a pivotal point in its history where it must decide
whether to make a strategic capital expenditure to drive the business into new
frontiers of expansion and innovation. The business is considering two exciting
options: Option 1 is to build a second cutting-edge laboratory, and Option 2 is
to produce an innovative kind of antibiotics. Increasing capacities for
research and development is a wise move for a pharmaceutical company such as
Recce. The corporation may increase the effectiveness of its research, expedite
the creation of new drugs, and possibly expedite the release of life-saving
pharmaceuticals onto the market by investing in a new laboratory. On the other
hand, there are drawbacks to starting a new lab, including higher running
expenses, possible setup delays, and the need to draw and keep top scientists.
Option
2: Effective antibiotics are still in high demand worldwide, and Recce
Pharmaceuticals' commitment to meeting unmet medical needs is supported by this
choice. However, there are risks associated with the antibiotic business,
including potential long research times, regulatory obstacles, and generic
medication competition. The two possible capital investment choices for the
company are outlined here, together with information on the initial cost,
anticipated useful life, discount rate, and projected future cash flow. Amounts
are stated in AUD.
|
|
To Build a new state-of-the-art Laboratory |
Manufacture a new range of antibiotics. |
|
Original Cost |
$110.0m |
$65.0m |
|
Estimated Life |
10 Years |
10 Years |
|
Discount Rate |
8% |
8% |
|
Estimated
Future Cash Flow |
||
|
Year 0 |
-$110.0m |
-$65.0m |
|
Year 1 |
-$10.0m |
-$5.0m |
|
Year 2 |
$2.5m |
$2.0m |
|
Year 3 |
$5.0m |
$8.0m |
|
Year 4 |
$10.0m |
$10.0m |
|
Year 5 |
$12.0m |
$12.0m |
|
Year 6 |
$15.0m |
$12.0m |
|
Year 7 |
$18.0m |
$12.0m |
|
Year 8 |
$18.0m |
$15.0m |
|
Year 9 |
$19.0m |
$15.0m |
|
Year 10 |
$19.0m |
$15.0m |
Considering
that Option One's payback period—building a state-of-the-art laboratory—does
not fit inside the allotted 10-year period, Option Two, which involves creating
a new antibiotic line, seems to be a more feasible option. The payback period
measures how long it takes an investment's generated cash flows to recoup its
initial cost. Unfortunately, this approach does not account for time worth of
money, hence, to assess capital investment choices, Nett Present worth (NPV)
must be used in conjunction with other methods.
The
financial indicator known as Net Present Value (NPV) uses past cash flows to
determine how profitable an investment is. An initiative that yields more value
than its initial cost is indicated by a positive NPV. When evaluating NPV,
Option Two is the better option because Option One's NPV indicates a loss.
Our
third financial statistic, the Initial Rate of Return (IRR), determines the
expected rate of return on the original investment. Option One's IRR is
noticeably inadequate. On the other hand, Option Two has an attractive IRR of 8.4%,
which is higher than the necessary 8% discount rate of return. This indicates
that Option Two has the potential to produce enough cash flow to pay its
startup expenses. In conclusion, Option Two— creating a new antibiotic line —is
the best option for financial investment with a payback period of 7.93 years. A
link to the worked financials is here Company
Spreadsheet 2023 for Recce Pharmaceuticals.xlsx
Strengths and Weaknesses
The
payback period analysis made it clear which investment option was the best
choice, as Option One did not fit inside the 10-year window. It is important to
remember, though, that the payback period does not consider the time worth of
money or the effects of the severe inflation that is currently occurring in
many countries. To overcome these constraints, the time value of money is
specifically addressed by using the net present value (NPV) in conjunction with
the payback period. Given Recce Pharmaceuticals' financial performance and the
substantial flaws in the returns for the first investment choice revealed by
the NPV, it was advised that they avoid it. However, it is important to
recognise that NPV has limitations, including its sensitivity to cash flow
forecasts, which means that small adjustments can have a significant impact on
the net present value.
Both
investment alternatives had an 8% rate of return, with Option Two offering a
more 8.3%. However, even though it's sometimes seen as unreliable, the initial
rate of return (IRR) is predicated on the idea that cash flows will be
reinvested at a rate equal to the IRR. This largely depends on assumptions
regarding cash flow rates, discount rates, and reinvestment rates, which can
provide problems when cash flow dynamics change. Since each metric has its
limitations, it is essential to use them in combination with other metrics or
in addition to one another. The payback time, net present value, and internal
rate of return (IRR) are the three financial instruments that can be used to
provide a complete picture of the profitability, risk, and long-term value
potential of an investment.
Step
5: Feedback
PEER FEEDBACK
SHEET: ASS#2
Feedback From: Sheryn Ruddell - 12191589
Feedback To:
.
|
|
My Comments |
|
Step 1 KCQs – Chapters 6 and 8
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Step 2 Identify three products or services of your firm. Estimate selling price, variable cost & CM. Commentary – contribution margins Constraints – identify &
commentary.
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Step 3 |
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Calculation of ratios |
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Ratios – commentary |
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Step 4 |
|
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Develop capital investment decisions
for your firm |
|
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Calculation of payback period, NPV
& IRR |
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Recommendation & discussion |
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Overall ASS#2 |
|
Note: Please use this sheet as a guide. There is no need to provide
feedback on each step. For example, the person may have completed little or no
draft work for one or more of the steps before asking for your feedback.
PEER FEEDBACK
SHEET: ASS#2
Feedback From: Sheryn Ruddell - 12191589
Feedback To:
.
|
|
My Comments |
|
Step 1 KCQs – Chapters 6 and 8
|
|
|
Step 2 Identify three products or services of your firm. Estimate selling price, variable cost & CM. Commentary – contribution margins Constraints – identify &
commentary.
|
|
|
Step 3 |
|
|
Calculation of ratios |
|
|
Ratios – commentary |
|
|
|
|
|
Step 4 |
|
|
Develop capital investment decisions
for your firm |
|
|
Calculation of payback period, NPV
& IRR |
|
|
Recommendation & discussion |
|
|
Overall ASS#2 |
|
Note: Please use this sheet as a guide. There is no need to provide
feedback on each step. For example, the person may have completed little or no
draft work for one or more of the steps before asking for your feedback.
PEER FEEDBACK
SHEET: ASS#2
Feedback From: Sheryn Ruddell - 12191589
Feedback To:
.
|
|
My Comments |
|
Step 1 KCQs – Chapters 6 and 8
|
|
|
Step 2 Identify three products or services of your firm. Estimate selling price, variable cost & CM. Commentary – contribution margins Constraints – identify &
commentary.
|
|
|
Step 3 |
|
|
Calculation of ratios |
|
|
Ratios – commentary |
|
|
|
|
|
Step 4 |
|
|
Develop capital investment decisions
for your firm |
|
|
Calculation of payback period, NPV
& IRR |
|
|
Recommendation & discussion |
|
|
Overall ASS#2 |
|
Note: Please use this sheet as a guide. There is no need to provide
feedback on each step. For example, the person may have completed little or no
draft work for one or more of the steps before asking for your feedback.
Reflection
on Feedback
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