Highland Malt Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Highland Malt Case Solution

Key Assumptions

In the annual log; transactions are recorded in the general ledger. It summarizes all debits and credits to each account and calculates the changes within one year. With the exception of the 10 barrels; all the sales are considered cash as revenue sales, which are paid in cash.

All costs listed in Exhibit 4, such as: the administrations, salaries and wages, etc.,are considered as selling, general and administrative (SG&A) costs.

The cost of goods sold (COGS) is calculated on a first-in first-out basis, which means that the batch 1 barrels were sold before batch 2 barrels could be sold.

Analysis

Highland Malt started its business in 2018, with issuing shares and receiving a total cash injection of $750,000 with an inclusion of the two years’ bank loan of $50,000. In the year 2019, Highland Malt-leased PP&E for $50,000 annually. In the year 2018; the Highland Malt significantly increased its assets by producing inventory at almost $625,000. In addition to this, in the year 2019;the ending inventory was $375,000 with an increase of $100,000 in accounts receivable and in total cash of around $370,000. This increase was balanced with an increase in the liabilities of $80,000 and insignificant retained earnings of $15,000.

In the year 2018; a large part of the inventory could be sold off and the liabilities could be decreased. Looking at the income statement alone, one could say that 2019 was a highly successful year for the company, while in 2018;the company incurred the loss of $5,000. However, the Cash Flow statement shows that majority of the cash was tied up in inventory during 2018. The total cash flow of 2019 was much better than the year 2018.

To analyze the ROE of the company, we can simply calculate for both years:

ROE 2018: net income / equity = - 5,000 / 750,000 = - 0.0067

ROE 2019: net income / equity = 15,000 / 750,000 = 0.02

Recommendations

Looking at the cost structure of Highland Malt; it becomes obvious that the company is facing a significant issue there. This business carries both fixed costs and variable costs. To analyze the costs further; it is necessary to take a deep dive and identify the individual costs and find out if there is an opportunity available for cost-cutting.

Every batch carries a variable cost that needs to be calculated as per barrel cost.The difference in variable costs is due to the fluctuation of prices for barrels. The limited supply of input and the surge of demand for barrels create a major shortage and price increase. This scenario increases the variable costs of around 25% between the company’s first batch and its 4^th batch

Highland Malt has fixed costs that are slightly higher in the first year due to the incorporation, which carry a Marketing expense of $75,000 for the creating of the corporate branding and logo. Next to this extraordinary expense; the Highland Malt has seven different expense categories,which include: Advertising & Promotion.

There is a need to categorize the expenses clearly, and the variable and fixed cost must be separated along with the number of units sold and produced during the year. Doing sowill provide better representation of the profit and loss statement of the company, which can be very beneficial and helpful for the company’s financial analysis in future.................................

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Highland Malt Harvard Case Solution & Analysis