Step 7:3 products by Cochlear

Nucleus 7 processor® $30,000.00 Per unit (1 per unit) = $9000.00 VC (30,000.00- $9000.00) = $21,000 contribution Margin.

Cost per unit Variable cost Contribution Margin$30,000.00 $9000.00 $21,000.0

CM ratio (CM/S*100) = 70%

Profile Plus with Slim 20 Electrode $40,000.00 Per unit (1 per unit) = 12,000 VC (40,000.00 – 12,000.00) = $28,000.00 contribution Margin

Cost per unit Variable cost Contribution Margin$40,000.00 $12,000.00 $28,000.0

CM ratio (CM/S*100) = 70%

CochlearTM Nucleus® Kanso® 2 Sound Processor $34,000.00 Per unit (1 per unit) (34,000.00- 10,200.00) = $23,800.00 contribution Margin CM ratio (CM/S*100) =

Cost per unit Variable cost Contribution Margin$34,000.00 $10,200.00 $23,800.0

CM ratio (CM/S*100) = 70%

30% of cost for variable Contribution margin per unit = selling price p/u (per unit)– variable cost p/u (per unit)

The reason I chose these three products is because they are they newest technology that cochlear has released (within their last FY20 annual report). These devices are extremely expense by themselves and can only really seem affordable because Medicare and Private health insurances pay portions or the whole amount. I chose the variable cost of 30% because they are such high costing products (meaning could be limiting to lots of people without payment support).

Constraints that can occur for Cochlear’s processing was/is the Covid-19 outbreak, this caused a global wide shortage/outage of product materials to produce a lot of goods. It also caused the simple shipping of goods that used to be, no longer, and the business had too source materials from within their own country (or wait long lengths of time to receive them from overseas). Another constraint could be the customers, I will use the Covid-19 factor again, as cochlear is based all around the world, the larger countries that completely shut down were unable to do the surgeries to implant the device. Which then of course reduced the number of orders for the products.

Cochlear wouldn’t just produce the one product with the highest margin as it would then limit the customer base, all these products offer similar but also different specs. Some are produced with higher level technology, and others not so much and have more of a basic range. Some

are for people with worse hearing than others. So, it wouldn’t be smart to just produce the one product.

Though my contribution margin doesn’t differ all too dramatically for the products I chose. With other products in the business such as accessories it will have quite a large difference in the contribution margin, because the prices of the Cochlear’s implant products and the accessories offered are dramatically different.

Cochlear would have discussed during covid-19 the statistics to decide which products they can continue to produce at a reasonable price, by calculating the number of surgeries and implant devices that were required. They would have also considered the accessories that would be paired with the said devices. In Cochlear’s 2020 Annual report, they did state that due to COVID-19 their sales dropped dramatically, and they were required to cut back on producing these goods.

Step 8 – Ratio Analysis & Economic ProfitI was a bit worried at first looking at this step of the assignment, but once I was watching Maria’s video on Ratio’s I knew it wouldn’t be as daunting as I thought. When I was going through my annual statement looking for the number of issued ordinary shares, I was shocked about how high the figure was and wanted to confirm with other people in the unit if it was correct or if I had picked up the wrong information, it was the correct figure which I was happy about. Then when I was finding the market share price, this one really shocked me… their share price is so high? I looked in my company’s annual statement and on the ASX website just to confirm that again these were correct, currently as of 27 May 21 Cochlear’s share price is $225.120, for one share?! Seems crazy high, maybe I’m reading it wrong. Surely this would reduce the amount of people that could purchase this share, right? I was unable to locate the Weighted average cost of capital for my business in their annual reports, so I used the 10% as maria suggested in the video.

Looking at the ratios for my business you can clearly see how much Covid-19 affected the business overall. As all the previous 3 years have been in the positive percentage for Net Profit Margin and Return of assests. This honestly didn’t surprise me as I know that Cochlear took a huge hit due to the virus, as they stated in their annual report and all their figures in their most

recent statement can reflect

. The next step of calculating the days of inventory, this one I was surprised with, I think that they are holding their inventory for a huge number of days, last two years were over 200days? But I believe that its appropriate considering that the cochlear implants and accessories are very specific, and their market pool is limited.

TATOWhen I calculated the Total Asset Turnover Ratio (TATO) it showed that the company was making just over a $1 of sales on $1 of assets, which isn’t the greatest turnover, would almost say they are breaking even and then you can see as it goes down in the year 2020, this would be due to thedrop of sales. In the year 2020 Cochlear was making a loss of about 49cents per dollar of assests. The liquidity ratio (current ratio) shows that my business had more than enough of $ assests to pay for a $ of liabilities. Overall, the ratio is increasing showing that the assests are strong.

Financial structure ratios show that for every $ that an investor/equity put into Cochlear, they then borrow a % from the bank. Over the last 4 years, I can see that the borrow rate was high in the year 2020 and was low years 18-19 and then 2017 there was another high percentage amount borrowed from the bank. Equity Ratio is the % of the company which is funded by the owners it’s sitting just over 50% of the business, it has increased over the last 4 years for cochlear, this shows that there may be more shareholders investing in cochlear.

When I was calculating the Market ratios, I realised that I had picked up the wrong figures that I thought I got right above, I corrected these to make sure that the next steps were correct. As I did the calculations, I kept getting the sum of 0% which was extremely confusing to me. Eventually I figured out that Martin explained in one of the lectures that due to the different amounts the sums weren’t calculating correctly. I had to time my figures by 10,000 to get at least get some sort of figure in my cells so they weren’t just showing zero. At first I thought that my ratios were extremely low, but after having a look at what other students businesses’ have for these ratios they aren’t all that different. I know that they are extremely low for the year 2020 due to COVID-19 and their dividends dropped over 50% as per below graph from their annual report.

Ratios Based on Reformulated Financial StatementsCochlear’s return on equity was averaging around 38% for the last 3 years, and had another dramatic drop in the year 2020, once again I would say this is due to covid and that the company lost a lot of equity.

RNOA is quite high ratio’s, it differs dramatically to the ROA. The actual return of operations or the RNOA is a roughly about 20% higher than the ROA (return of assets), this is because we have only included the operating income rather than the operating and financial like we did in ROA. This shows that we have better operating profitability and it increased 4% from 2018-2019 but then again dropped dramatically in the year of 2020.

Net borrowing cost shows that their borrowing interest rate was low from 2017-2019 this is due to my business’ obligations being very high but then they go into net assests in the year of 2020, which causes the borrowing rate to drop into the negatives, I believe that the interest rates go into the negatives because their assests were higher than the obligations. Their cash and cash equivalents and term deposit’s increased immensely causing them to have increased assests.Profit Margin shows that the operating % is slightly higher than the net profit margin (operating and financial) % that was calculated above, not hugely different, however but still shows that only including the operating indeed reflects more profitability. Asset turnover ratio (ATO) shows an increase by roughly 1 $ more than the TATO calculated above, this is because we have isolated the operating figures only and can see that the company is making a minimum of $2 on every sale for $1 of assests, these figures are fairly on par with the patterns of TATO until the year 2020, which reflects a huge 1.50 more than the .51 cent in the TATO calculations. I believe that it is showing such a bigger figure is due to extremely high revenue value in the year 2020.

Economic Profit

Over the past four years Cochlear’s economic profit has been quite interesting to look at. From the years 2017 to 2018 you can see that there was a slight gradual increase and then it jumped

up quite a lot in the year 2019. I believe that there was such a large jump in economic profit in the year 2019 because the business’s assests increased, our intangible assests and trade and other receivables were extremely high in this year causing the profit amount to be at the highest in the last four years. In the year 2020 the economic profit fell deep into the negatives. This, again, is due to the impact of COVID-19 pandemic. Our sales went down, and the company took a massive hit with a 503.7mill patent litigation expense.

This wasn’t in any of the other years. As our sales were reduced due to impacts of the pandemic (shipments/ production/ ordering issues) and lockdowns and shutdowns world-wide, this caused our usual income flow to be interrupted. Even though our shareholders increased it still wasn’t quite enough for the business to be able to come out on top with that huge 503.7mil expense. When I was following Maria’s video to calculate the economic profit ratio. She had noted for WACC (weighted average cost of capital) to use 10% however martin stated in the assignment step to use 8%. When I flick between using the 8% or the 10% there isn’t much of a difference in the overall amount of the economic profit. It is more profitable for the business to use the 8% WACC as the overall economic profit changes from -$252.46miil to -$264.97mil. I decided to leave the WACC as 8% as instructed by martin to show a better reflection on my business’s profit.

Step 9 NPV & IRRIRR- the internal rate of return uses the future cash flow rate to determine if the investment is financially beneficial. I chose to give cochlear capital investments of two new warehouses, another one in Sydney separate to the head office (overflow of processing) and a new large one in Brisbane. There is a $100,000 difference between the two investments, though they would both provide huge benefits to the business.

Investment Cost “Break even” PeriodBrisbane Warehouse $150,000 7 YEARS 350 DAYS

Sydney Warehouse $100,000 4 YEARS 73 DAYS

I have decided that the company should invest in the larger Brisbane warehouse, even though the payback period is longer, the warehouse would provide the business with the opportunity to be able to produce/ship a lot more inventory than the other warehouse in Sydney and would also have less shipping costs for places around QLD. It would also provide the business with a greater income rate in the long run with all the benefits that the larger space would provide.

The IRR for the Brisbane warehouse is significantly larger than the Sydney warehouse which also assisted in me choosing the investmentSome weaknesses that my business might encounter with this investment is that the property market fluctuates a lot and in 7 years the warehouse price might depreciate. That would be if the company were to sell it, although this can also be a strength for the business because the warehouse price may fluctuate in a good way that the price rises rather than lowers. Another weakness that can be linked would be that the larger warehouse space would mean that the insurance on the space would be higher than the smaller one. Strengths that this investment has is as stated above, the larger warehouse space would provide abilities to produce more stock and would have greater income return. Another strength is that it would provide the company with the ability to quickly ship out orders to Queensland customers.

Step 10Feedback receivedKaytlyn Smith , Amanda Kavanagh,

Feedback given:Holly Emslie Isabella Reiss , Amanda Kavanagh