Impact of Changes in the Components of Sales on Sales Growth Sustainability

Changes in volume and prices primarily propel sales growth for a multinational corporation. Besides that, exchange rate changes between the reporting currency and the currency in which sales are made also drive sales growth. Reasonably, growth in sales that comes from changes in volume or price is more sustainable than growth in sales that comes from changes in exchange rates. Also, management has reasonably greater control over sales growth resulting from greater volume or a higher price than from changes in exchange rates. The foreign currency effect on sales growth is, therefore, essential both for forecasting future performance and evaluating management’s historical performance.

Organic sales growth refers to the growth in sales, excluding the effects of acquisitions, divestitures, and currency changes. Net sales growth is equivalent to organic sales growth plus or minus the effects of acquisitions, divestitures, and foreign exchange. A foreign currency translation loss reduces net sales growth. Disclosures about the effects of sales growth are included in the company’s MD&A.

Question

Nestlo is a hypothetical US-based food and beverage company. Its presentation currency is the US dollar. Nestlo has three wholly-owned subsidiaries located in three different countries. Data on components of net sales growth in the three different subsidiaries is as shown in the table below:

$$ \textbf{Components of Net Sales Growth (%) Fiscal Year 2016} $$

$$\small{\begin{array}{l|c|c|c|c} \text{Country} & {\text{Contribution from}\\ \text{Volume Growth}} & {\text{Contribution from}\\ \text{Price Growth}} & {\text{Foreign Currency}\\ \text{Exchange}} & {\text{Net Sales}\\ \text{Growth}}\\ \hline\text{H Ltd.} & 8 & 7 & -1 & 14\\ \hline\text{S Ltd.} & 5 & 6 & 5 & 16\\ \hline\text{T Ltd.} & 8 & 4 & 0 & 12\\  \end{array}}$$

Based only on the above information, the subsidiary with the highest sustainable sales growth is most likely to be:

    A. H Ltd.

    B. S Ltd.

    C. T Ltd.

Solution

The correct answer is C.

Although S Ltd. shows the highest growth in US dollar terms, the result is partly due to currency fluctuations, which cannot be controlled. H Ltd. had the most significant change in sales resulting from price and volume at 15%. This growth is more sustainable as it excludes currency fluctuations than net sales growth, which includes currency fluctuations. This is because Nestlo’s management has more control over growth in sales resulting from greater volume or higher prices.

Reading 13: Multinational Operations

LOS 13 (i) Explain how changes in the components of sales affect the sustainability of sales growth.