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ACC311 CS 2 - Case Study Part 2
Strategic and Sustainable Accounting (ACC311)
Charles Sturt University
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ACC311 – Case Study Part 2 Hannah Vittorio 11533892 Executive Summary This report has been prepared to identify and discuss the key environmental and social concern’s relating to Under Armour’s operations. Potential performance measures have been recommended, to assess the progress towards sustainability goals identified by Under Armour. Implementation of the recommended performance measures will assist Under Armour to establish the effectiveness of their objectives over time. Resulting in reducing their environmental footprint and contributing to achieving sustainable processes. Table of Contents Executive Summary........................................................................................................................................................ Introduction.................................................................................................................................................................... 1 Environmental Concerns................................................................................................................................................ Social Concerns.............................................................................................................................................................. Sustainability Objectives................................................................................................................................................ Objective 1................................................................................................................................................................. Objective 2................................................................................................................................................................. Objective 3................................................................................................................................................................. Conclusion....................................................................................................................................................................... 4 References...................................................................................................................................................................... 5 Introduction With this growing pressure from stakeholders to be accountable for their sustainability, it is pivotal that information is provided on Under Armour’s environmental and social performance (Langfield-Smith, 2015, p). The establishment of environmental and social performance measures, assist managers in gaining a better understanding of the environmental and social impacts of their business, right across their supply chain. Conducting an environmental cost analysis including conventional costs, hidden costs, contingent costs, relationship/image costs and societal costs, can identify ways in which such costs can be managed more effectively (Langfield-Smith, 2015, p). Good supply chain management can reduce the risk of disruption and reputational damage. Environmentally conscious practices can lead to direct cost savings by using less raw materials and reducing energy and waste use. A business that manages social and environmental issues together is likely to have lower risk associated with its business (Bain, 2015). Environmental Concerns The key environmental concerns relating to Under Armour's operations include: Materials used: percentage of responsibly sourced materials used in products, packaging material used. Energy efficiency: total energy consumed on production line, transportation energy used, idle energy losses, percentage of renewable energy used. Water use: total amount of water used on production line, percentage of recycled water used. Waste and Emissions: amount of waste generated in production, greenhouse emissions, percentage of waste recovered to be reused, recycled or remanufactured. 1 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 Supply chain partners: involvement of suppliers towards sustainable practices is essential. As this is an area, where the most damage to the environment can occur and therefore has the greatest opportunity for improvement. Social Concerns The key social concerns relating to operations include: Supply chain transparency: ethical risks, exploitative labour practices, focus on cheap labour increase risks to quality, productivity and lead times. Health and safety of workers in Supply Chain: exposure to harmful chemicals, high temperatures, high voltage electricity, and dangerous machinery. Labour and Work Practices: assessment of internal and external (supplier) work practices, OH&S issues. Employee diversity and development: employee satisfaction, employee turnover, training opportunities. Sustainability Objectives The following table summarises the sustainability objectives identified by Under Armour and the recommended performance measures to assess progress towards achieving these objectives. Dimension Business Sustainability Objective 1. Engaging with suppliers to support the factories that, and workers who, make our products. Possible Performance Measures 1. Staff training regarding sustainability practices and OH&S, measuring attendance rates and evaluating feedback. 2. Audit of suppliers work practices. 3. Staff turnover rates. 2. Improving our materials and design, which determine a significant share of our impacts from our vision to products’ end of life – and is an area where we have more control to promote cleaner and healthier environments. 1. Water usage (total litres and litres per unit of product). 2. Percentage of responsibly sourced materials used in products. 3. Energy use (total kWh and per unit of product). 3. Enhancing sustainable practices in our corporate, retail, logistics, and owned manufacturing operations. 1. Reduction of waste 2. Direct and indirect greenhouse gas emissions by weight. 3. Transportation energy use Objective 1 Collaboration with suppliers is essential to address the challenges of the apparel industry. Working closely with suppliers will help to build their capabilities to manage social and environmental issues effectively (Chin et al, 2015, p). 2 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 Under Armour can reduce transportation emissions by streamlining logistic practices. These efforts will reduce the environmental impact and will also reduce costs (Environmental Protection Agency, 2010). By measuring the green house gas emissions associated with the transportation of goods, Under Armour will be able to work towards reducing these emissions over time and reduce their environmental footprint. Conclusion Under Armour has identified areas within their business to address environmental and social impacts regarding sustainability. By implementing the recommended performance measures outlined above will allow them to establish the effectiveness of their objectives over time in reducing their environmental footprint and contribute to achieving sustainable products and processes. 4 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 References Are Under Armour's Sustainability Claims Green or Greenwashing. (2017) The Green Market Oracle. Retrieved from: thegreenmarketoracle/2017/11/are-under-armours-sustainability.html Bain, M. (2015) Nike proves that cleaning up your act is smart business. Quartz. Retrieved from: qz/485333/nike-north-americas-most-sustainable-big-brand-proves-that-cleaning-up-your-act-is-smartbusiness/ Carlsson-Sweeny, M. (2012). How sustainable are Australian retailers’ new sourcing strategies?. The Journal of Superannuation Management. 4(3) 22-26. Retrieved from: abc.net/cm/lb/4796280/data/amp-report-data.pdf Chin, T., Tat, H. & Sulaiman, Z. (2015). Green supply chain management, environmental collaboration and sustainability performance. Procedia CIRP. 26 695-699. Retrieved from: ac.els-cdn/S2212827114008488/1-s2.0-S2212827114008488-main.pdf?_tid=7b3911c5-546f-4922-b26c3b372a865f67&acdnat=1525227516_0b06027dcc9da0c2fb3aaf66833a4452 Environmental Protection Agency. (2010). Managing Supply Chain Greenhouse Gas Emissions. Retrieved from: epa/sites/production/files/2015-07/documents/managing_supplychain_ghg.pdf Epstein, M. & Roy, M. (2001). Sustainability in Action: Identifying and Measuring the Key Performance Drivers. Long Range Planning. 34 585-604. Retrieved from: citeseerx.ist.psu/viewdoc/download&rep=rep1&type=pdf Global Reporting Initiative. (2015). GA Sustainability Reporting Guidelines. Retrieved from: globalreporting/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf Hermes, J. (2014) 18 Ways to Raise Employee Awareness About Sustainability. Environmental Leader. Retrieved from: environmentalleader/2014/01/18-ways-to-raise-employee-awareness-about-sustainability/ Huang, A. (2017) A framework and metrics for sustainable manufacturing performance evaluation at the production line, plant and enterprise levels. University of Kentucky. Doi: 10.13023/ETD.2017. Retrieved from: uknowledge.uky/cgi/viewcontent.cgi?referer=google/ &httpsredir=1&article=1097&context=me_etds Kozlowski, A., Bardecki, M. & Searcy, C. (2012). Environmental Impacts in the Fashion Industry. Journal of Corporate Citizenship. Doi: 10.9774/GLEAF.4700.2012.sp. Langfield-Smith, K., Thorne, H. & Hilton, R. (2015). Management Accounting: Information for Managing and Creating Value (7th ed.). McGraw-Hill. Liu, M. (2017). For a true war on waste, the fashion industry must spend more on research. The Conversation. Retrieved from: theconversation/for-a-true-war-on-waste-the-fashion-industry-must-spend-more-on-research-78673 Macchion, L., Moretto, A., Caniato, F. Caridi, M., Danese, P., Spina, G. & Vinelli, A. (2016) Improving innovation performance through environmental practices in the fashion industry: the moderating effect of internationalisation and the influence of collaboration. Production, Planning and Control. 28(3) 190-201. Doi: 10.1080/09537287.2016 5 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 Question 2 - Transfer Pricing Q2 If the transfer price was established through negotiation between managers the range of possible transfer prices would be between $12 and $20 per sq/m. The Fabric Department has variable costs per sq/m of $12, this is the minimum transfer price amount they will sell the goods for. The Stitching Department will not pay more than $20 per sq/m as this is the market price for fabric that could be purchased externally. With a transfer price of $20 per sq/m the contribution margin per sq/m in the Fabric Department would be $8 per sq/m. If we assume the sale price per unit of a stitched item of apparel sells for $75 and variable costs total $30, the contribution margin per unit for the Stitching Department is $25. Under Armour Transfer of fabric at market price of $20 per sq/m Fabric Department Transfer price Variable costs $20 $12 Stitching Department Sales price Transfer price Variable Costs Contribution margin per sq/m $8 Contribution margin per of fabric stitched item * Assumption made on sales price and variable costs per unit in Stitching Department. $75* $20 $30* $25 Other pricing techniques available to establish transfer price include market-based pricing, cost-plus pricing and the general price rule. An important factor when deciding the appropriate level of transfer price in a situation is whether the supplying unit has spare capacity (Langfield-Smith, 2015, p. 871). We will assume in this scenario that the Fabric Department does have spare capacity. As the company is operating in an existing market with established prices for an intermediate product the use of market-based pricing is ideal. Using negotiation to finalise the transfer price is appropriate in this scenario as the Fabric Department will yield a profit if the fabric is sold to the Stitching Department for more than $12 per sq/m and the Stitching Department will find any amount under the market price of $20 per sq/m attractive. 7 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 Q2 Cost-plus pricing based on absorption cost with 20% mark-up Absorption cost = 12 + 1 = 13 With 20% mark-up = 13 + 2 = 15 Transfer price = variable cost + fixed cost + (20%)(variable cost + fixed cost) = 12 + 1 + (20%)(12+1) = 13 + 2 = 15 Q2 Cost-plus pricing based on variable cost with 30% mark-up Variable cost = 12 With 30% mark-up = 12 + 3 = 15 Transfer price Q2 Transfer price = variable cost + (30%)(variable cost) = 12 + (30%)(12) = 12 + 3 = 15 = outlay cost + opportunity cost = $12 + $8 = $20 Opportunity cost = forgone contribution margin = $20 - $12 = $8 Q2 If the Fabric Department has spare capacity, there is no opportunity cost associated with a transfer. Therefore: Transfer price = outlay cost + opportunity cost = $12 + $0* = $12 *Opportunity cost is $0 as the fabric department has spare capacity. 8 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 3. Discounted cash flow analysis - Net present value and internal rate of return Yea r 0 1 2 3 4 5 6 7 8 Yearly Cash Flows -18,000,000 18,000,000 18,720,000 19,468,800 20,247,552 21,057,454 21,899,752 22,775,742 23,686,772 Incremental expense operating costs -2,500,000 -2,700,000 -2,916,000 -3,149,280 -3,401,222 -3,673,320 -3,967,186 -4,284,561 Incremental expense Cost of sales -11,700,000 -12,168,000 -12,654,720 -13,160,909 -13,687,345 -14,234,839 -14,804,233 -15,396,402 Marketing expense -100,000 Incremental cash flows -18,000,000 3,800,000 3,852,000 3,898,080 3,837,363 3,968,887 3,991,593 4,004,324 4,005,810 Present value of $1 at 12% Present value 0 0 0 0 0 0 0 0 3,393,400 3,070,044 2,775,433 2,440,563 2,250,359 2,023,738 1,809,954 1,618,347 Present value of incremental cash flows 19,381,838 Initial investment -18,000,000 Net present value 1,381,838 The internal rate of return is calculated to be 14% using the IRR function in Excel. The correct internal rate of return is the rate for which the net present value is $0 (Langfield-Smith, 2015, p. 949). The table below shows the effect of using 14% for the discount rate on the NPV. Yea r 0 1 2 3 4 5 6 7 8 Yearly Cash Flows -18,000,000 18,000,000 18,720,000 19,468,800 20,247,552 21,057,454 21,899,752 22,775,742 23,686,772 Incremental expense operating costs -2,500,000 -2,700,000 -2,916,000 -3,149,280 -3,401,222 -3,673,320 -3,967,186 -4,284,561 Present value of incremental cash flows Initial investment Net present value Incremental expense Cost of sales -11,700,000 -12,168,000 -12,654,720 -13,160,909 -13,687,345 -14,234,839 -14,804,233 -15,396,402 Incremental Marketing expense -100,000 cash flows -18,000,000 3,800,000 3,852,000 3,898,080 3,837,363 3,968,887 3,991,593 4,004,324 4,005,810 Present value of $1 at 14% Present value 0 0 0 0 0 0 0 0 3,332,600 2,962,188 2,631,204 2,271,719 2,059,852 1,820,166 1,601,730 1,406,039 18,085,498 -18,000,000 85,498 10 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 4. Real-option analysis – Accounting rate of return Incremental Revenue Year 1 2 3 4 5 6 7 8 Tota l 18,000,000 18,720,000 19,468,800 20,247,552 21,057,454 21,899,752 22,775,742 23,686,772 Incremental expense Cost of sales -11,700,000 -12,168,000 -12,654,720 -13,160,909 -13,687,345 -14,234,839 -14,804,233 -15,396,402 Incremental expense operating costs -2,500,000 -2,700,000 -2,916,000 -3,149,280 -3,401,222 -3,673,320 -3,967,186 -4,284,561 Marketing expense Incremental depreciation -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -2,250,000 -100,000 Incremental net profit Average annual incremental net profit 1,550,000 1,602,000 1,648,080 1,587,363 1,718,887 1,741,593 1,754,324 1,755,810 13,358,056 1,669,757 ARR using initial investment (18,000,000) 9% ARR using average investment (18,000,000/2=9,000,000) Initial investment = 18,000,000 Average investment = 18,000,000/2 = 9,000,000 Average annual incremental net profit = 13,358,056 / 8 = 1,669,757 Accounting rate of return (initial investment) = average annual incremental net profit / initial investment = 1,669,757 / 18,000,000 = 9% 18% Accounting rate of return (average investment) = average annual incremental net profit / average investment = 1,669,757 / 9,000,000 = 18% Q3 Key environmental and social impacts that should be considered when evaluating the proposal include: Environmental impacts: 1. Land use and biodiversity 2. Increase in overall energy use and emissions 3. Increased waste output 4. Increase in materials and packaging 5. Increased water consumption Social impacts: 1. Employment opportunities 2. Work training qualifications 3. Labour practices 4. Human rights 11 ACC311 – Case Study Part 2 Hannah Vittorio 11533892 Q3 The net present value analysis indicates that the establishment of a flagship store in Adelaide ($18,000,000) would yield additional revenue (with a present value of $19,381,838), which exceeds the acquisition cost. The net present value of the cash inflows exceeds the cash outflows by $1,381,838. Therefore, the Net Present Value analysis favours the establishment of the flagship store in Adelaide. An investment proposal is acceptable on financial grounds if the internal rate of return in greater than the required rate of return (Langfield-Smith, 2015, p). Under Armour’s required rate of return is 12%, the internal rate of return of the proposal is 14%, this amount exceeds the required rate. Therefore, the discounted cash flows analysis supports the establishment of the flagship store in Adelaide. The payback method and accounting rate of return are real-option analysis methods used as a simple way to screen investment proposals. They provide a way of clearly recognising uncertainties (Langfield-Smith, 2015, p). According to the payback method, the initial investment pay back will occur within year 5. When calculating the average rate of return the following relationships will generally be observed: accounting rate of return (initial investment) < internal rate of return < accounting rate of return (average investment) This is true in the above analysis with 9% < 14% < 18%. As discussed above the net present value and internal rate of return have indicated this investment is viable. However, if the projected revues and expenses were to change this would affect the viability of this investment. For example if the projected revenues were accurate however projected operating costs and costs of sales were increased by 1% the following would result: Net present value: -$116,835 Internal rate of return: 11% The result of these changes would illustrate this is not a favourable investment as the net present value of cash inflows is less that the initial cash outflow and the internal rate of return is lower than the required rate of return. If project revenues were to decrease by 1% the net present value and internal rate of return would still result in favouring the establishment of the flagship store. Although if operating costs increased by 1%, the financial results would indicate an unfavourable investment. Refer to excel calculation sheet for reults. The above demonstrates the importance of accurate projections when making investment decisions as the sensitivity of data can affect the ultimate outcome of determining if an investment proposal is favourable. Based on the financial analysis above it is recommended Under Armour should proceed with the proposal. 13
ACC311 CS 2 - Case Study Part 2
Course: Strategic and Sustainable Accounting (ACC311)
University: Charles Sturt University
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