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The Value-Added Amount Definition Essay


There are different ways to calculate the valued-added amount. The research scrutinises the various methods of calculating the value-added amount. The research focuses on the significant effects value-added amount, profit, and cash flows on the company’s sales performance. The value-added amount, cash flow, and profit factors influence the company’s sales performance.

There are different ways of computing the value added amount. First, the value-added amount is calculated using the formula approach1. The formula to compute economic value-added (EVA) amount is: EVA =Net operating Profit after tax – (Capital Employed x Cost of Capital) For example: net operating profit after tax is € 25,000. The cost of capital is € 100,000. The cost of capital is 10 percent of the € 100,000 investment. The economic Value-added amount is calculated as follows: EVA = € 25,000 – (€ 100,000 x 10%). The EVA result is € 15,000.

Second, Gary Hamel2 mentioned the valued added figure is calculated as the amount equal to the sales increase brought about by the manager’s coordination of the different contributors to increase sales performance. For example, reducing the production process time contributes to the value added amount. The time reduction increases the production output quantity. The production increase enhances revenue.

Further, Thomas Keil and Tomi Laamanen stated the value-added amount is equal to the synergy created3 between two related companies. With the synergistic combination, Nokia and Siemens capture a bigger market segment. The valued added amount of the combination is calculated as follows:

  • [Nokia + Siemens (before combination)] <[Nokia + Siemens (after combination)]

Ericson is the leader in the telecommunications industry. Ericsson’s competitors, Nokia and Siemens, added value by combining their assets and markets.

In terms of economics, the value-added amount is the result when the total production cost is deducted from the total revenue. Total production cost includes

Further, Japanese companies increase their added value by reducing the list of suppliers4.The reduced time devoted to overseeing several suppliers, including AnyCo’s Company5, can be channeled to other activities. The managers can focus more time on improving the current production process. The supervisors can spend more time attending seminars and management meetings.

Studying the competitor’s products helps increase the Ericsson products’ added value6. Using competitor information, the company can create products that offer better benefits. After spying on the competitor’s products, Ericsson creates added value by implementing a unique marketing strategy7. Consequently, many prospective clients will shift from the competitors’ product to Ericsson8.

Craig Savarese9 proposed the sales or revenue aspect of the value added calculation is equal to all the cash inflows or receivable inflows generated. For example, a client pays for 10 units of Product C at € 100 each. The total revenue or sales is € 1,000. Using another example, the revenue generated from selling 1,000 pieces of the company’s Product D at € 400 each will generate total revenue amounting to € 400,000.

Using another method, Joel Stern10 states the market value-added amount is equal to the difference between the market price and the purchase price, cost of service, or cost of production. Calculating the total purchase price, the amount is equal to the total cost of purchasing the product11. For example, the company purchases 20 units of Product C at € 40 each. The total revenue or sales is € 800. To calculate the value-added amount, the difference between the two sets of computations is done. For product C, the valued added amount is the difference between the € 1,000 revenue and the € 800 purchase cost. Consequently, the calculated value-added amount is € 200 (€ 1,000 – € 8000).

However, there are other cost allocation principles12. For example, the economic purchase cost of the value added calculation should include all instrumental cash outflows leading to the successful sales performance increase13. The cost should include the cost of transportation14. In terms manufactured products, the cost portion is the amount deducted from the revenues15. The result of the deduction represents the total manufacturing cost.

The total manufacturing cost is composed of three elements. The materials expense is the first element16. The labour cost is the second element17. The labour element is equal to the amount paid to workers converting the raw materials into salable products18. The factory overhead is the third element19.

The operating profit is one aspect of the value-added calculation. The operating profit is arrived at by adding back the depreciation expenses to the operating profit. The operating profit is the result after deducting the administrative expenses and the marketing expenses from the difference between the total cost of revenues and the total revenues. The profit does not include the company’s interest expense.

Outside the economic sphere, Ronald Hilton20 stated the valued added amount includes the additional features aspect of the Ericsson products21. The value added amount is equal to the free air condition given to the car client. Adding another layer of cake to a cake customer is the value added amount. Offering additional benefits, such as high pixel camera, will entice the prospective clients to buy the Ericsson’s products22. Michael Czinkota23 mentioned strategic marketing includes most mobile phone features increase Ericsson phone revenues.

Peter Doyle24 states the value-added amount extensively increases Ericsson’s resulting sales performance. The value-added amount aids in increasing the Ericsson’s resulting sales performance in the telecommunications market25. Theodore Grossman26 emphasised the company’s internet website, http://www.ericsson.com/, represents an added value to Ericsson’s advertising presence. The valued added amount increases Ericsson’s sales performance outcome27.

The cash flow is extensively connected to Ericsson’s resulting sales performance. The cash flow represents the amount of cash flowing into Ericsson. Mark Hirsche discusses the cash inflow is used to promote the benefits of the company’s mobile phone products’ benefits28. Joseph Taylor29 mentioned the increase in cash inflows helps increase phone production. More phones increase revenue.

Dennis Tucker30 opined Ericsson’s profit is directly connected to Ericsson’s resulting sales performance. Ericsson’s profits will increase if the prototypes are created to fill a need. The managers should replace its initial focus on improving the features of the prototype to filling the discriminating needs of the current and prospective clients31. Offering more camera pixels on Sony Ericsson’s Xperia play will increase client demand for better picture quality, increasing profits. Rany Albelda32 stated the profit increases as the sales increases. On the other hand, as the sales amount declines, there is a corresponding decline in the Ericsson’s profit.

The above paragraph can be explained mathematically. Sales person AB sells one unit of Ericsson’s Xperia X10 mini pro for € 300 per unit. The factory cost of each unit is € 120. The gross profit earned by sales person AB for selling one unit is € 280 (€ 300 – €120). However, sales person CD selling 10 Ericsson units will generate a higher sales performance amounting to € 3,000 (10 units x € 300 per unit).

Based on the above discussion, the valued added amount is calculated based on Ericsson’s financial information. Ericsson’s value-added amount is calculated using revenue and cost factors. The value-added amount includes all expenses aimed at increasing Ericsson’s sales performance. The cash flows added value is used to increase market presence and increase sales performance. Indeed, value-added amount, cash flow, and profit factors significantly affect Ericsson’s sales performance.

References

Albelda, R. (1999) Real World Micro. London, Saltus Press.

Baumo, W. (2011) Economics: Principles and Policies. London, Cengage Press.

Blekaoui, A. (1992) Valued Added Reporting. London, Greenwood Press.

Brigham, E. (2001) Fundamental of Financial Management. London, Harcourt Press.

Czinkota, M. (1998) Trends in International Business. London, Blackwell Press.

Dodd, M. (1998) Economics: Principles and Applications. London, Goodwill Press.

Doyle, P. (2008) Value-based Marketing. London, J. Wiley & Sons Press.

Field, A. (1998) International Economics. London, McGraw-Hill Press.

Grant, J. (2003) Foundations of Economic Value-added. London, J Wiley & Sons Press.

Gilchrist, R. (1971) Managing for Profit: the Added Value Concept, George Allen & Unwin, London.

Grossman, T. (2009) The Portable MBA. London, Wiley & Sons Press.

Hamel, Gary. , Harvard Business Review. 2011. Web.

Choi, Thomas., Linton, Tom. . Harvard Business Review, 2011. Web.

Coyne, Kevin, Horn, John. Predicting Your Competitor’s Reaction. Harvard Business Review, 2009. Web.

Gottfredson, Mark., Aspinell, Keith. Innovation Versus Complexity: What is Too Much of a Good Thing?, Harvard Business Review, 2005. Web.

Haslam, C. and Neale, A. (2000) Economics in a Business Context, London, Business Press.

Hilton, R. (2008) Managerial Accounting. London, Southern Press.

Hirschey, M. (2005) Managerial Economics. London, Cengage Press.

Keil, T, Laamanen, T, , Harvard Business Review, 2011. Web.

Leonardi, Paul. , 2011. Web.

Lindert, P. (1982) International Economics. London, Irwin Press.

Lipsey, R. (2007) Economics. London, Oxford Press.

Mankins, Michael. Stop Wasting Valueble Time, Harvard Business Review, 2004. Web.

Nelson, C. (1999) International Business. London, Thompson Press.

Nordhaus, W. (1995), Economics. London Sydney, McGraw –Hill.

Rush, M. (1998), Microeconomics, Harlow, Addison Wesley Press.

Savarese, C. (2001) Economic Value-added. London, Allen Press.

Slavin, S. (1989) Economics. London, Irwin Press.

Stern, J. (2003) The Economic Value-added Challenge. London, J. Wiley & Sons.

Stickney, C. (2009) Financial Accounting. London: Cengage Press.

Taylor, J. (1997) Macroeconomics. London, Norton Press.

Thompson, A. (1999) Strategic Management. London, McGraw-Hill Press.

Tucker, D. (1997) Macroeconomics Today. London, West Press.

Weygandt, J. (2005) Managerial Accounting. Sydney, Wiley & Sons.

Footnotes

  1. Haslam, C. and Neale, A. (2000) Economics in a Business Context, London, Business Press.
  2. Hamel, Gary. First, Let’s Fire the Managers, Harvard Business Review, 2011. Web.
  3. Keil Thomas, Laamanen, Tomi, When Rivals Merge, Think Before Your Follow Suit, Harvard Business Review, 2011. Web.
  4. Choi, Thomas., Linton, Tom. . Harvard Business Review, 2011. Web.
  5. Stop Wasting Valuable Time. Web.
  6. Predicting Your Competitor’s Reaction. Web.
  7. Innovation Versus Complexity: What Is Too Much of a Good Thing?. Web.
  8. Lipsey, R. (2007) Economics. London, Oxford Press.
  9. Savarese, C. (2001) Economic Value-added. London, Allen Press.
  10. Stickney, C. (2009) Financial Accounting. London: Cengage Press.
  11. Dodd, M. (1998) Economics: Principles and Applications. London, Goodwill Press.
  12. Baumo, W. (2011) Economics: Principles and Policies. London, Cengage Press.
  13. Lindert, P. (1982) International Economics. London, Irwin Press.
  14. Brigham, E. (2001) Fundamental of Financial Management. London, Harcourt Press.
  15. Blekaoui, A. (1992) Valued Added Reporting. London, Greenwood Press.
  16. Nordhaus, W. (1995), Economics. London Sydney, McGraw –Hill.
  17. Rush, M. (1998), Microeconomics, Harlow, Addison Wesley Press.
  18. Stickney, C. (2009) Financial Accounting. London: Cengage Press.
  19. Grant, J. (2003) Foundations of Economic Value-added. London, J Wiley & Sons Press.
  20. Hilton, R. (2008) Managerial Accounting. London, Southern Press.
  21. Field, A. (1998) International Economics. London, McGraw-Hill Press.
  22. Thompson, A. (1999) Strategic Management. London, McGraw-Hill Press.
  23. Czinkota, M. (1998) Trends in International Business. London, Blackwell Press.
  24. Doyle, P. (2008) Value-based Marketing. London, J. Wiley & Sons Press.
  25. Slavin, S. (1989) Economics. London: Irwin Press.
  26. Grossman, T. (2009) The Portable MBA. London, Wiley & Sons Press.
  27. Weygandt, J. (2005) Managerial Accounting. Sydney, Wiley & Sons.
  28. Nelson, C. (1999) International Business. London, Thompson Press.
  29. Taylor, J. (1997) Macroeconomics. London, Norton Press.
  30. Tucker, D. (1997) Macroeconomics Today. London, West Press.
  31. Leonardi, Paul. Early Prototypes Can Hurt a Team’s Creativity,2011. Web.
  32. Albelda, R. (1999) Real World Micro. London, Saltus Press.
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