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Assessment Task 2 - Steps 1-5 - Draft for Feedback

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


 Step 1: KCQS Chapters 6 – 8

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

 

 

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.

 


 

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 

Comments