As per the current case, Denver Furniture Corp has to assess the decision of whether or not to offer new products in their existing portfolio. The decision by the company has a basis from the understanding that the current production is not maximum, a situation that may allow the introduction of other new furniture at low-cost. Some of the top managers have a feeling that the introduction of other low-cost furniture will lead to an increase in the company's production capacity. Also, the new product will attract new customers who are not currently receiving services. However, the Vice-president from the department of marketing has a concern about the negative effects of new products on the existing furniture. The Vice-president thinks that the introduction of low-cost products will negatively affect the market of existing products. Using the data provided and the computation in the Excel sheet accompanying this paper, there is the analysis of the company's return on assets, asset turnover as well as profit margin without and with the new line of production. From the computation, Denver will have a basis to decide on whether or not to introduce low-cost furniture. Advice on the implication of introducing a new of production line on the company's operations as well as the recommendations of other alternatives for the business will aid in not only increase profitability but also increased assets utilization.
The Implications of the Computation Findings
From the calculations done in an excel sheet that accompanies this discussion, there are various factors that Denver Furniture Corp ought to consider before deciding on if to introduce new products or not. The consideration of specific factors following the calculations findings will help in a decision that will increase profitability as well as asset utilization. Of the indicators computed, one of them is the return on assets. As per Yeoman (2012), the return refers to a profitability ration used to check the company's efficiency in the utilization of assets for profit generation. A case of a higher return on assets is an indication of the ability of the business to use its assets for profit generation. Comparatively, a lower return on assets shows that the firm is not utilizing its asset maximally at a given time frame. Importantly, return on assets aids in the management and investment decisions when converting assets into profit generation activities. Following the calculations of Denver present business condition, the company has a return on assets on 12% that is to rise to 13% even when the new production line fails. However, introducing new products through cannibalization will cause a reduction on a return on assets from almost 13% to 12% in a similar timeframe. Basing on the decision on the return of asset as an indicator the firm should not initiate a new line of products through cannibalization because it will lead to a reduced ability for profit generation from the existing assets (Yanzi & Zhang, 2018).
After the return on assets, the profit margin is the second indicator calculated to show the effect of the introduction of a new production line by Denver. As per Yeoman (2012), profit margin refers to the profitability ratio used to measure net income amount a business earns for every dollar of sales. Out of the total sales made by the company, a profit margin will indicate the income amount that remains after the consideration of the costs practices like production and marketing (Yanzi & Zhang, 2018). Profit margin ultimately helps the firm to compare the generated net income in a given period. When the profit margin is higher, the company is in a position to generate high profit from the existing sales. Comparatively, a lower profit margin indicates that the ability of the business to generate profit if low after the consideration of associated costs such as marketing. In the case of Denver, the company ought to decide whether its profit margin will decrease or increase following the new product line introduction through cannibalization. Computation showed that currently, Denver has a profit margin of 26.67%. Without the new product introduction through cannibalization, the profit margin reduces to 21.67%, but cannibalization will likely increase it to 24%. Basing on the profit margin computations the company should introduce new products through cannibalization as it will increase the ability of the business to generate profit from sales (Yeoman, 2012).
Apart from the return on assets and profit margin, the asset turnover is the other calculated indicator. According to Yanzi and Zhang (2018), asset turnover refers to a ration used to indicate the effectiveness of the firm to utilize assets for revenue generation thus showing the firm's financial performance. Total asset turnover calculations provide net sales. When the ration of the asset turnover is high, a business will have a better financial performance because of a higher income generation from assets. Following the calculations of Denver Furniture Corp, its turnover rate is 45% meaning that every dollar used in the investment will generate 45 cents. The current rate will increase to 50% with cannibalization and to 60% without cannibalization. Regarding the two scenarios, it is advisable for Denver not to have a new line of products through cannibalization as it will lead to a reduced asset turn over from 60% to 50%.
Other Options for Consideration and their Impacts
Apart from cannibalization, Denver Furniture Corp can choose from other alternatives for maximum utilization of its assets. One of the options is expanding the existing market by establishing effective marketing strategies (Yanzi & Zhang, 2018). Improved strategic marketing initiatives will impact ratios by causing an increase in the existing products demands leading to the production of more furniture. Also, higher demand will lead to an increased ability for the firm to use its current assets. Ultimately, there will be an increase in the total return on assets and turnover. The outcome will be an increased profit margin because the firm will not operate on additional fixed assets (Yeoman, 2012). Therefore, instead of cannibalization, the company can opt to ensure effective marketing strategies as it will not only increase the utilization of its assets but also improving financial performance.
Conclusively, the analysis of the three indicators will help the company to decide on whether or not to introduce new production line through cannibalization. Information about profit margin, return on assets and asset turnover is of importance to the company to decide on for cannibalization or other options of maximum asset utilization. Introducing new products through cannibalization has generated mixed results. While both turnover on investment and total turnover will reduce in comparison with the proposed results with cannibalization, there is as well an increase in the profit margin. But the comparison of the total outcome after new product introduction requires consideration before deciding on whether to adopt cannibalization or not. Therefore, the Denver Furniture Corp should not decide on introducing a new line of production via cannibalization. Instead, the company can opt for the establishment of effective marketing initiatives.
Yanzi, Z., & Zhang, Z. (2018). Impact of the Cannibalization Effect between New and Remanufactured Products on Supply Chain Design and Operations. IISE Transactions, 1-44. doi: 10.1080/24725854.2018.1486055
Yeoman, I. (2012). Cannibalization. Journal Of Revenue And Pricing Management, 11(4), 353-354. doi: 10.1057/rpm.2012.22
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