Part A Supplier Conundrum You work in the procurement unit of Spin Cycle Corp. (

ID: 2532149 • Letter: P

Question

Part A Supplier Conundrum You work in the procurement unit of Spin Cycle Corp. (SCC), a washing machine manufacturer in the upper Midwest. Your role on the procurement team is to provide financial analysis of potential suppliers of wiring and other components that are required to manufacture washing machines. The main criteria for selection of a vendor are price, quality, financial stability, and the extent to which the supplier can be collaborative with SCC to ensure a mutually agreeable strategic vendor relationship. With respect to the current wiring and components sourcing project, your team has identified two companies that are the finalists, Marre Supplies N.A. (based in Brazil) and UBI Co. (based in Chicago, IL). These two companies' products are comparable in terms of product quality and price (including potential shipping costs, as SCC has operations in Brazil and the Midwest.) The primary remaining points of contention in selecting one of these companies as the exclusive supplier for wiring and other components concern (1) the companies' relative financial stability and (2) the extent to which SCC management can “work with" the supplier company management. You have gathered the following financial information for your financial analysis. Mare's financial statements are reported in Brazilian reals (RS), while UBI's are reported in US dollars. (in millions) Marre Supplies N.A. |UBI Co. RS 6,676 S 3,268 41,61821,481 1,396 Total revenues Average total assets Net income 1,960 1. Compute the following ratios for Marre and UBI (show your work) (1) Return on assets (round to 1 decimal); (2) Profit margin on sales (round to 1 decimal); and (3) Asset turnover (round to 2 decimals)

Explanation / Answer

in millions (in $)

Marre supplies

UBI Co

Total Revenues (A)

6,676

3,268

Avg total assets (B)

41,618

21,481

Net Income (C)

1,960

1,396

Return on assets (C/B)

0.05

0.06

Marre supplies has a better RoA

Profit margin on sales (C/A)

0.29

0.43

UBI CO has a better margin of sales

Asset turnover (A/B)

0.16

0.15

Marre supplies has a better turnover on assets

Asset turnover ratio : The asset turnover ratio is categorised as an efficiency ratio which measures company’s ability to generate sales from assets i.e. this ratio shows how efficiently a company can use its assets to generate sales. It is measured by comparing net sales with average total assets.

Profit margin on sales: This ration is also referred to as Return on Sales ratio. It is categorised as a profitability ratio which measures the amount of net income earned with each dollar of sales effected by comparing the net income and revenues generated by the company. Simply said it shows what percentage of sales are left over after all expenses are paid by the business.

Return on assets: Return on assets measures the amount of profit the company generates as a percentage of the value of its total assets. It is an important ratio as the profit percentage of assets varies with industry, but generally the higher the ROA it is better. And thus it is often more effective to compare a company's ROA to that of other companies in the same industry or against its own ROA figures.

Difference in currency has a major impact on the businesses financial ratio in case the business has operations across the national boundaries. Currency risk refers to risk arising from changes in price of one currency in comparison to another. Whenever companies possess assets or operations across nation, they experience currency risk in a case their positions are not secured/ hedged. Currency risk is also referred to as exchange rate risk. Simply said, currency risk can be defined as possibility that currency depreciation will show negative effect on the value of assets, investments, and their related interest and dividend payments made, specifically in relation to those securities/ assets which are denominated in foreign currency.

In case the business has only operations within nation than such currency risk does not materially effect. However, since the economy does not function in isolation, hence the currency fluctuation has an impact on businesses, in direct or indirect manner, one way or the other.