- 15 Marks
MA – L2 – Q69 – Performance Analysis
Question
It is now the end of Year 2. XYZ Group has three divisions, each producing and selling a different group of products. Information about the financial performance of each division/product group is as follows.
| Segment A | Year 1 | Year 2 | Year 3 (forecast) |
|---|---|---|---|
| GH¢000 | GH¢000 | GH¢000 | |
| Sales | 8,000 | 8,323 | 8,741 |
| Cost of sales | 4,400 | 4,520 | 4,610 |
| Gross profit | 3,600 | 3,803 | 4,131 |
| Transport costs | 400 | 415 | 430 |
| R&D expenditure | low | low | Low |
| Market share | 11% | 10% | 8% |
| Sales volume index | 100 | 102 | 104 |
| Segment B | Year 1 | Year 2 | Year 3 (forecast) |
|---|---|---|---|
| GH¢000 | GH¢000 | GH¢000 | |
| Sales | 10,000 | 11,220 | 12,600 |
| Cost of sales | 6,000 | 6,480 | 7,000 |
| Gross profit | 4,000 | 4,740 | 5,600 |
| Transport costs | 350 | 390 | 450 |
| R&D expenditure | high | high | high |
| Market share | 27% | 27% | 27% |
| Sales volume index | 100 | 110 | 121 |
| Segment C | Year 1 | Year 2 | Year 3 (forecast) |
|---|---|---|---|
| GH¢000 | GH¢000 | GH¢000 | |
| Sales | 6,000 | 5,600 | 5,400 |
| Cost of sales | 3,900 | 4,080 | 4,210 |
| Gross profit | 2,100 | 1,520 | 1,190 |
| Transport costs | 360 | 476 | 540 |
| R&D expenditure | medium | medium | medium |
| Market share | 20% | 20% | 20% |
| Sales volume index | 100 | 107 | 114 |
Required:
Use this information to evaluate the performance of the three product groups. You should try to use an analytical model to support your financial analysis.
Answer
Segment A
Good financial performance, but market share falling in spite of a small increase in volume.
R&D spending low.
This product group may well be reaching the maturity stage of its life cycle, and is a ‘cash cow’ for the group.
Segment B
Strong growth in volume and sales prices.
Cost of sales as a percentage of sales revenue is falling, presumably because of the effect of fixed costs in the cost structure.
R&D spending high.
Market share unchanged in a fast-growing market.
This product group may well be a ‘star’ for the group, and the high R&D spending would therefore be justified.
Segment C
Still profitable, but sales revenue is falling.
Costs are rising as a percentage of sales revenue.
R&D spending is moderate.
Market share still fairly high.
However, this product group may well be a ‘dog’ in the terminology of the BCG matrix. The group should beware of investing heavily in risky attempts to restructure.
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