Case Study 3
Lafarge-Aget Heracles Case
a. Use Exhibits H and I, estimate and evaluate ratios for ROI, Profitability, liquidity, and financial strength.
ROI is 5.18 in 2003 and 5.42 in 2004. It is slightly increase. The investment gains high profit to investment cost. Compared to 2003, the net income also growth 4.6 percent in 2004 since the mainly part is interest deduction. The sale revenue decreases 3,344 EURO, but the cost has a higher reduction by 4,400 EURO. Thus, its profitability essentially unchanged but still strong. Aget’s quick ratio is 2.4 in 2004 and 1.64 in 2003. Current ratio is 2.97 in 2004 and 2.07 in 2003. From the quick ratio and current ratio, Aget’s liquidity is very good. In 2003, it is nearly the ideal, but in …show more content…
d. In case Aget reduced price by 10%:
1. What effect would such price reduction have on gross margin?
Capacity utilization will increase, resulting in an increase in market share and a reduction in unit costs. Thus, with the larger market share and lower cost, even though the price decrease, it may also generate more net income. Therefore, its gross margin may also increase. 2. By how much must sales increase to avoid a loss in gross profit?
If unit costs do not change, sales need to increase at least 11 percent to make up price reduced. However, the unit cost would be reduced due to capacity utilization augment. Thus, sales may increased no more than 11 percent to avoid a loss in gross profit.
3. What can you say about the potential implications of such price reductions, upon the industry and the market?
Aget’s competitors had better position to compete on price since they offered fewer support services and they employed a transactional approach. So when Aget reduced price, its competitors could also