Question

Sun Devil, Inc., a consumer products firm, is considering adding a data analytics program in which it can evaluate its customers shopping transactions along with other relevant customer data to craft individualized promotions and recommend additional product offerings.

      Currently Sun Devil has $385.0 million in annual sales generating a profit margin of 4.0 percent on sales and an asset turnover of 5.0. Sun Devil’s marketing group believes the data analytics program would increase annual sales by $40.0 million with an additional investment in working capital of $4.0 million to support the increased sales. Costs to run the data analytics program would reduce firm-wide profit margin to 3.9 percent.

      Based solely on the above financial consideration, explain whether you would recommend management consider adding this new program. [Hint: RNOA Analysis]

Answer 1

Solution:

Asset turnover = 5

Sales / Average Assets = 5

$385 / 5 = $77 million

Current profit margin = $385 * 4% = $15.40 million

Current return on operating assets (RNOA) = Profit margin / Average operating assets = $15.40 / $77 = 20%

Proposed sales after adding data analytics program = $385 + $40 = $425 Million

Proposed margin = $425 *3.9% = $16.575 million

Proposed average assets after investment in working capital = $77 +$4 = $81 million

Proposed return on operating assets (RNOA) = $16.575 / $81 = 20.46%

As adding data analytical program resulting in increase of return on net operating assets, therefore we will recommend management to consider adding this program.