I.

Point of View
The point of view the group will be using in this case will be of Matt Snow, the
vice-president of finance. Since Matt Snow is the vice-president, using his Point of View
in this case will help the group come up on how to efficiently manage the production
level as well as inventory of Superior Outboard Motors.

II. Statement of the Problem

The aim of this group is to develop and come up with the best alternative that would help
minimize the expenses of the company in their short-term debts and the production
output level that produces the highest earnings per share.

III. Objective
● To be able to compare the alternatives of Advanced Outboard Motors’ in order for
them to minimize their expenses in short term debts and for their production
output level yield the highest earnings per share.
● To recommend alternative to Advanced Outboard Motors’ the best alternative to
minimize their short term debt expenses and for them to produce the highest
earnings per share.

IV. Areas of Consideration

● Liquidity level of Advanced Outboard Motors

● Monthly inventory turnover to measure its liquidity
● Production output
● Earnings per Share to measure the current standing of the company
● Company’s Net Working Capital
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V. Alternative Courses of Action

1. Comment on Advanced Outboard Motors’ absolute and relative liquidity positions.

The Degree of Relative Liquidity is a liquidity metric that examines a company’s

ability to support short term expenditures. The following are Advanced Outboard Motor’s
absolute liquidity measures:
● Cash Reserves of $918, 280
● Net working Capital = Current Assets – Current liabilities

= $5,107,880 - $1,680,000

= $3,427,880.

Relative liquidity measures of Advanced Outboard Motors’ are as follows

● Current ratio = CA/CL= 5,107,880/1,680,000= 3.04 times

● Quick ratio = (CA-Inventory)/CL = (5,107,880-4,060,000)/1,680,000= 0.62x
● Cash ratio = $Cash/CL = $918,280/1,680,000 = 55%
● NWC to TA = ( CA –CL)/TA = 3,427,880/18,260,000 =18.77%
​

● Interval measure = CA/Average daily operating costs

= 5,107,880/(Cost of goods sold+Overheads)

= 5,107,880/(24,969,600/365) = 75days

The company’s liquidity appears to be in a good position because majority of the

company’s current assets are tied up with inventory. The company can operate in 75
days if ever it will face a strike.
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2. Examine the company’s monthly inventory turnover ratio. What does it indicate?

The monthly inventory turnover ratio indicates the seasonality of sales. It can be
observed that SEptember has the highest turnover which means that it is liveliest
season of the company when it comes to their sales. However, afterwhich starting
November through April turnover ratio tends to get lower which signifies slack season
for the company.

3. How long are the firm’s operating and cash cycles? Using a suitable diagram show
the breakd own of the firm’s operating cycle into its relevant components. What do your
findings indicate?

Operating Cycle = Inventory period + Accounts receivable period

Inventory Period = 365 days / Inventory Turnover Ratio

365 days/ (20,160,000/4,245,267)

77days

AR Period = 365 days/AR Turnover

365 days/ (Total Credit Sales/ Average AR)

365days/ (28,800,000*60% (Credit Sales)/1,450,000)

31 days

Operating Cycle = 77days + 31 days

108 days

Cash Cycle = Operating Cycle – AP Period

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AP Period = 365 days/ (Cost of Goods Sold/ Average Payables)

365 days/ (20,160,000/ 1,680,000)

31 days

Cash Cycle = 108 days – 31 days

77 days

Explanation

Based on the computation above, it takes 108 days for the payment to be collected for
the sales from the time that inventory was acquired. Moreover, it takes an average of 31
days to collect the company’s receivables and the same number of days for its supplier
payments. Thus on the average there is a 77 days lag between the time that inventory
was paid and the collection of the sales.
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4. How much higher would the firm’s earnings per share have been if it had followed a
policy of aligning the production output with the number of units sold each month?
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5.Calculate the monthly net working capital figures for the company. Comment on your
findings.

VI. Conclusions and Recommendations

VII. Action Plan