Logitech is a global consumer electronics manufacturing company which mainly works on producing advanced solutions like wireless mice, keyboards and others. Logitech has presence in more than 100 countries with partnerships with major PC manufacturers across the globe. Continuous product innovation is the major strength where Logitech always maintains its leadership position in bringing advanced technologies. Due to the increase in the domestic applications of geo-spatial positioning, the navigation satellite systems are gaining importance. There is a huge market potential for Satellite navigation systems where in applications can facilitate optimisation in various industries. Sat Nav (Satellite Navigation) devices, the new expansion in the Logitechs business where it is planning to develop consumer applications for the UK market. With an initial investment of 2,000,000 the project is going to be implemented. The cash flows are expected for four years. The project is giving a positive NPV and an IRR of 48 which says the profitability of the project.
Business Overview
Consumer electronics is the electronic equipment intended for everyday use like personal computers, telephones, MP3 players, audio equipment. Navigation system is the equipment designed for automobiles. Using the database these systems can give directions to other locations. Based on the data, these systems give directions to the users which will help them to optimise their systems. They provide the best possible, the shortest, low traffic routes at various times of the day based on the data available in the database. These systems generate maps in various views and give the shortest routes and the real time data about the traffic congestion and alternate routes. In UK market which has a high potential for latest consumer electronics where in people always want fully automated equipment there is a huge potential for these devices. All automobile manufacturers are the major customers for this equipment.
Business Description
Logitech which is a leader in the consumer electronics, in order to maintain its leadership in the navigation systems has to foray into this new project. The project initial cost would 2,000,000 and an additional investment of 400,000 would be required for a specialist software development firm to develop a bespoke application for the proposed system. The acceptable market price is estimated as 200 which will give a contribution of 43 in the first year. Due to huge contribution, the breakeven point is easily achievable and the market potential for these products is estimated as 55,593 units in the first year and the sales are expected to double in four years. All automobile manufacturers are the major customers and hence Logitech is planning to have partnerships with all the automobile manufacturers to supply these systems. The equipment is going to be a major part in the navigation systems that are integrated into the automobiles.
Business Strategy
Audi, BMW, Ford, Land Rover, Mini, Nissan, Opel, Renault, Rolls-Royce, Rove, SAAB, Volkswagen are the major vehicle manufacturers in the UK market. Hence, Logitech has to sign in partnership with these people so that the first mover advantage can be used to a great extent and hence this will help to maintain the longevity of the project. Siemens, Pioneer, Philips, Microsoft, Panasonic are the competitors who are working on similar systems and who will roll out the similar product in the short span. The continuous GPS support and connectivity has to be purchased. The material cost of the equipment is 80 which is 40 of the selling price. Hence, the partnerships are going to save huge marketing expenses in the long run.
Business Concept (Product and Target Market)
The product is a major component which will give suggestions based on real time data like the traffic congestion on the roads, the alternate roads and the shorted possible route between two places by using GPS maps and provides various views of the road maps. This will be integrated with the automobile to direct the user. Hence , the target market is going to be automobile manufacturers who will be partners to Logitech and the second channel is the automobile owners who already own a car which is a high end one. Hence, Logitech is going into the market with its retail base. Pricing is going to be a major concern as the competitors also have me too kind of products. The life span of the product is very short as the technology keeps upgraded with in short intervals of time. Hence, the major concentration is going to be partnerships with the automobile giants which will help to maintain a consistent sale. The initial product offering price is estimated as 200 which will give a contribution of 43 in the first year.
Financial Analysis
Part 1 Business Review of Logitech
Part A Financial Statement Analysis
Logitech is witnessing a decrease in the gross margin ratio from 2007 to 2009. This is due to the increase in the prices of the raw material and subsequently a rise in the cost of goods sold. There is a decline in the top lines sales from 2008 to 2009. There is a significant decrease in the operating margin and the net margin from 2008 to 2009. Hence, Logitech has to concentrate on the sources of business inefficiency that led to the decrease in the business performance. Due to the inefficiencies in the business performance the Return on capital employed (ROCE) has decreased significantly which is due to decrease in profit before tax and also increase in the long-term capital borrowed. There is an increase in the long term capital borrowed and invested in the operations of the company in the year 2009. Due to the increase in the long term borrowing and increase in the interest burden the performance margins of the company got affected and the return on capital has also declined significantly. Huge investment happened during 2008. The long term borrowings increased from 17,874 to 111,484 in 2008. Hence there is a decrease in ROCE in spite of increase in the gross and operating margins. Due to the increase in the long-term borrowings the interest burden increased and the profits that are left to the shareholders of the company decreased which led to a decrease in the ROE. Because of the decline in the PBT the return on the total assets also decreased. Overall, the performance of Logitech witnessed a decline in the year 2009.
The various sources of inefficiency in the business performance of Logitech in the year 2009 are as follows the cost efficiency ratio is greater than 100 which notify that the actual cost of sales is greater than the predicted cost of sales in 2009. Hence the operating margin got affected due to high cost of sales figure. Similarly, the net operating expenses are higher than the predicted figures. There is an increase in the actual operating expenses than the predicted figures in the current year. Inventory turnover ratio is almost consistent across the years. The debtor age has decreased which implies that the debtor collection has been made more efficient and at the same time the creditor age also has decreased in the current year which has nullified the impact of debtor clearing efficiency on the total current assets. Due to the investment in the current year the fixed asset turnover ratio has decreased significantly in the current year.
Due to the change in the debtor collection period the current asset ratio increased to a considerable amount. Logitech is maintaining good cash reserves in the current year and hence the acid test ratio also increased in the year 2009.
Overall, the financial performance of Logitech has declined in the year 2009 compared to the year 2008 due to the increase in the cost of goods sold and the increase in the operating expenses from the projected figures. The cash position of the company improved and the organisation is strong on current assets in the current year
Part B SWOT Analysis
Strengths
Product Innovation
Leader in the Market
Deep penetration in the retail
Excellent design and price performance
Broad Product Offering
Product bundling with supplementary devicesWeaknesses
Heavy dependence on the supply chain partners
Opportunities
Era of technology and huge demand for advanced products
Trend among the customers to have cordless desktops and fully featured PCs
Threats
Very short product life cycles
Continuous Imitation by the followers
Continuous change in technology
Very small segment is technology savvy
Logitech Co in the UK market has got too many competitors and the products will be accepted by the public when the marketing mix can bring a behavioural change in the consumers attitude. Consumers still feel that the conventional practices are better than the advanced products of the company. But the broad product offering and the price performance of the company with a good presence in the retail are the major strengths for the company.
Part 2 Logitech Resource and Cost Estimation
The cost estimation has been done with the following assumptions
The sales will double in 4 years i.e. the fourth year sale will be twice the first year sale. The sales forecast has been done based on that taking 33 increase in the first year and 25 increase in the second year and 20 increase in the third year.
The unit cost is taken as constant for the four years at 200.
The cost of raw material is taken constant without considering the inflation factor at 80
The fixed costs are taken constant throughout the evaluation period
The total sales figures for the four years are 55,593 , 74,124 , 92,655 , 111,186 respectively
Materials cost, Direct labour, Electricity, Packaging, Shipping and consumables are the variable costs
Rent, Salaries, Marketing, Insurance and site maintenance are the variable costs
The results of the breakeven analysis are in Appendix I
Due to the increase in the sales the return on sales increased consistently throughout the period. The variable cost per unit is the same and due to the increase in sales over years the fixed cost per unit decreased and hence the profit per unit increased from year 1 to year 4. The margin safety increased consistently over the years.
Part 3 Xgage Financial Analysis.
For the financial statement analysis of the xage the following assumptions are made
35 of the production has been outsourced i.e. 19457 units of production has been outsourced to xage technologies at a selling price of 100.
Rent, Marketing and property taxes are the fixed costs and Material, Machining, Production labour, packaging are identified as the variable costs
To project the variable costs the of sales of each component have been identified and then the figures are projected.
Material cost goes to 30 of sales Machining cost goes to 10 of sales, Variable selling goes to 3 of sales, Production labour goes to 20 of sales and finally packaging goes to 1.5 of sales.
Part A Financial Accounting
For and outsourcing quantity of 19457 units at a selling price of 100 the total sales goes to 1,945,755 and the cost of goods sold consists of material cost of 583,727 and production labour cost of 389,151. The total cost of goods sold is 972,878. The operating expenses include Machining cost of 58,372, variable selling of 58,372, packaging of 29,186, rent of 5000, marketing of 2000 and property taxes of 1600. With total operating expenses of 154,532 the profitloss goes to 818,346.
Sales1,945,755Cost of goods sold Material Cost583,727 Production Labour389,151.00Gross Profit972,878Operating ExpensesMachining Cost58,372.65Variable Selling58,372.65Packaging29,186.33Rent5000Marketing2000Property Taxes1600Total Operating Expenses154,532 Profit Loss (or Income)818,346
Part B Management Accounting
With total variable costs of 1,118,809 out of sales of 1,945,755 the total contribution margin goes to 826,946 and the total fixed costs are 8600. The profit goes to 818,346
Sales1,945,755Variable costsMaterial Cost583,727Machining Cost58,373 Variable Selling58,373 Production Labor389,151 Packaging29,186 Total variable costs1,118,809Total contribution margin826,946Fixed costsRent5000Marketing2000Property taxes1600Total fixed costs8,600 Profit Loss (or Income)818,346
Part 4 Logitech Business Case
Prepare profit and loss projections
As 19,457 units have been outsourced to xage the sales production of Logitech Co are as follows
Year 1Year 2Year 3Year 4Unit Sales (Thousand)389155188764,85977,831Unit Price ()200Total Sales (Thousand)77830001037740012,971,80015,566,200
As part of production has been outsourced the financial statements of Logitech will be as follows
Financial Accounting Year 1Year 2Year 3Year 4
Sales 7,783,000 10,377,400 12,971,800 15,566,200
Cost of Goods Sold 3,113,200 4,150,960 5,188,720 6,226,480
Gross Profit 4,669,800 6,226,440 7,783,080 9,339,720
Operating ExpensesDirect Labor 389,150 518,870 648,590 778,310
Electricity 38,915 51,887 64,859 77,831
Packaging 77,830 103,774 129,718 155,662
Shiping 38,915 51,887 64,859 77,831
Consumables 15,566 20,755 25,944 31,132
Rent 600,000 600,000 600,000 600,000
Marketing 275,000 275,000 275,000 275,000
Office Staff Salaries 107,850 107,850 107,850 107,850
Insurance 53,925 53,925 53,925 53,925
Site Maintenance 22,237 22,237 22,237 22,237
Total Operating Expenses1,619,388 1,806,185 1,992,982 2,179,778
Conduct a capital investment appraisal
The discounted cash flow analysis can be seen in Appendix 2. With a total capital investment of 2,000,000 the NPV value at 10 discount rate comes to 13,666,369 and for a discounting factor of 15 the NPV value comes to 11,895,837. Both the NPVs are positive. Hence, the proposed investment is a profitable one to the company. The IRR value goes to 48.59. Hence if the new project is funded with a cost of capital less than 48.59 then the project is a feasible one and can be taken forward. Looking at the asset position of the company and the financial status the company can raise fund the required capital at the PLR of UK and hence the project can be taken forward by Logitech Co. Without considering the time value of money the actual value of the project is 18,420,707
Conduct a capital investment appraisal
For an additional 400,000 investment cost, Logitech decide to pay a specialist software development firm to produce a bespoke software solution for the proposed Sat Nav product, the NPV figures would be 13,266,369 at a discount rate of 10 and the NPV is 11,495,837 at a discount rate of 15. As the NPVs are positive the project is still feasible by paying an additional 400,000 to a specialist software development firm for this project. The IRR with the additional investment turns out to be 47.46, means Logitech has to fund this particular project with a cost of capital less than 47.76. As the interest rates in UK are much lesser than this the project can be funded and it is a feasible and profitable project.
Appendix I
ANALYSISYear 1Year 2Year 3Year 4
Profit 4,811,609.00 6,768,482.00 8,725,356.00 10,682,229.00
Profit per Unit 87.00 91.31 94.17 96.08
Return On Sales ()43464748
Average Cost Per Unit 113.45 108105.83103.92
Variable Cost Per Unit 94.40 94.494.494.4
Contribution per Unit 105.60 105.6105.6105.5
Contribution Margin ()53535353
Break Even Point 10,029.00 100291002910029
Margin of Safety ( Unit) 45,564.00 6409582626101157
Margin of Safety ( )82868991
Appendix II
b)
FV10 discount rateDiscounted15 discount rateDiscountedYear Net Cash FlowsDiscount FactorCash Flows (PV)Discount FactorCash Flows (PV)0-2,000,0001-2,000,0001-2,000,00013,050,4120.90912,773,1300.86962,652,63824,420,2550.82643,652,8990.75613,342,15535,790,0980.75134,350,1010.65753,806,98947,159,9420.6834,890,2400.57184,094,055NPV13,666,369NPV11,895,837
c)
FV10 discount rateDiscounted15 discount rateDiscountedYear Net Cash FlowsDiscount FactorCash Flows (PV)Discount FactorCash Flows (PV)0-2,400,0001-2,400,0001-2,400,00013,050,4120.90912,773,1300.86962,652,63824,420,2550.82643,652,8990.75613,342,15535,790,0980.75134,350,1010.65753,806,98947,159,9420.6834,890,2400.57184,094,055NPV13,266,369NPV11,495,837
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