Instructions
Individually students
will develop a formal response to the problem(s) posed in the case, addressing
the following areas within the analysis, and using the same headings. (Numbers
in brackets do not necessarily correspond to length but represent the weight
that will be given to each section in the grading):
- Issue Identification (5%):
Identification of the problem/issue that must be resolved or decision that must
be made. Phrase the problem/cause in the most succinct way possible. Think about:
- Differentiating the immediate from the basic problem
- The implications of the problem(s)
- Identifying the root cause of the problem(s)
- Determining the decision facing the key person(s)?
- Identification of Key Success Factors (10%):
Identify the company-specific factors in point form that are absolutely
critical to the success of the organization. These are the factors that, if
ignored, will mean the project will probably fail. Include the following
considerations:
- What factors must be managed successfully for the company to
prosper?
- Key success factors should reflect the top priorities of the
organization in this particular case (eg., quality, productivity, low cost
leader, etc.)
- These factors are part of the criteria against which you will
evaluate solutions (along with basic criteria such as profit)
- Identification of Alternatives (5%):
Identify alternative solutions. Only deal with feasible alternatives. In the
next three sections, analyse all alternatives against criteria set out in key
success factors and basic requirements (eg., profitability).
- Quantitative Analysis (40%):
Push numbers in an analysis that is relevant to the issue at hand.
Differentiate between what is relevant and what is irrelevant.
- Qualitative Analysis (30%):
Be sure to analyze qualitative issues – they need discussion in most cases. In
particular, analyze alternatives in light of key success factors – will this
alternative solve the problem and fit with our key success factors.
- Recommendation on Course of Action (5%):
State your recommendation. State briefly the justification for your
recommended course of action. Make sure your recommendation flows out of your
quantitative and qualitative analyses. Tie your recommendation back to the key
success factors. The solution and implementation shout fit with problems and
criteria identified above.
- Circumvention of Potential Problems (5%):
If there could be problems with your recommendations, state them. As well,
suggest ways to overcome these problems – a contingency plan to address
potential difficulties.
There is no set length
to the report, but clear, succinct and concise language and organization will
be considered favourably in the grade.
Students will submit
the final report as a word document through the submission link below.
The
Case
You are a Senior
Consultant for the professional service firm, BUSI 2083 LLP. Your firm
specializes in providing a wide variety of internal business solutions for
different clients. It is your final week on the job and a Manager asks you for
some help prior to your departure. Eager to leaving a lasting impression, you
start reading the background information provided by the Manager.
Lesley Donovan is the
controller for the East division of Explorer Ltd. Jason Conner, head of plant
engineering, has just left Donovan’s office after presenting three alternatives
for submission in the capital expenditure budget for the fiscal year 2014. The
budget is due to the CEO in two days and therefore Donovan realizes that time
is of the essence.
Conner has outlined
the following alternatives to replace an outdated milling machine:
- build a general purpose milling machine;
- buy a special purpose numerically controlled milling machine; or
- buy a general purpose milling machine.
Explorer Ltd. is a
well-established company. The company was set up about 30 years ago by two
brothers Dan and Kevin Thompson, in Huntsville, Ontario, to produce accessories
for the automobile industry. The Central division continues to serve the auto
industry, and is the largest division in the company with sales of $35 million
annually. Dan’s son is now head of this division. Kevin is still active in the
company and is the Chief Executive Officer (CEO). His office is located in
Toronto.
The parts division
supplies seals to the mining and petrochemical industry from a plant in
Toronto. This division is only ten years old and until 2010 was highly
profitable. As a result of the downturn in the sector of the economy, sales in
2012 were only $12 million.
The East division,
located in Scarborough, is the engineering division. Full-time employees tend
to work approximately 2,000 hours in the division. Regular product lines
include industrial fans, industrial cooling units, and refrigeration units for
industrial users. The division is highly capital-intensive and sales tend to be
directly related to general economic conditions.
Each division runs
independently and performance is based upon budgeted return on investment.
Bonuses are paid if the budget target is achieved. Annually, each division
prepares a detailed budget submission to Kevin, outlining expected profit
performance and capital expenditure requests. The milling machine proposal is
part of the capital expenditure request.
The 2013 pro forma
income statement for East division is set out below:
Sales
|
$22,364,000
|
Cost of Goods Sold
|
$14,760,240
|
Gross Profit
|
$7,603,760
|
Selling and General Administrative Costs
|
$3,578,760
|
Allocated Costs (based on sales)
|
$1,677,300
|
|
|
Income Before Income Taxes
|
$2,347,700
|
Return on Sales – 10.5%
|
|
Return on Investment – 8.5%
|
|
Investment (Historical Cost)
|
$27,626,118
|
Jason Connor has pointed out to Donovan that the existing
machine is not only outdated but maintenance costs are becoming prohibitive.
Jason also noted that maintenance costs of new general purpose machines are
only $26,000 while special purpose machines can save an additional $14,000 in
maintenance. Also there would be a significant savings in insurance as the
price for a general purpose machine would drop to $3,000 while a special
purpose machine would be 67% higher than the general purpose machine. The
machine has no market or salvage value and he is sure that its book value is
now zero. The trouble is that he doesn’t know which proposal is best for the
company. In addition to the cost and revenue date provided, Connor provided
comments on each alternative below:
- Build a general purpose machine:
- This
machine can be built by East division. The division is below capacity at
present as a major contract has just been completed. The division could thus
produce the machine without affecting revenue-producing activity, but it will
take six months to complete. The machine is expected to last five years and
have no salvage value because removal costs will probably equal selling price.
- Connor
believes that the division has the technical expertise to undertake the work.
In 2012, the division produced a specialized drilling machine that has proven
very successful. Connor pointed out that David Williams, chief engineer, loves
the design challenge of new machines. Donovan sat down with Connor and produced
the following cost estimates:
Material and parts
|
$55,000
|
Direct labour (DL$)
|
$90,000
|
Variable overhead (50% of DL$)
|
$45,000
|
Fixed overhead (25% of DL$)
|
$22,500
|
TOTAL
|
$212,500
|
- Donovan
argues that this job should also bear a proportion of administrative costs; she
suggests $12,000.
- Buy a special purpose machine:
The advantage of this special purpose machine is that only one operator is
required and output per hour could increase by 25%. In addition, maintenance
costs are significantly reduced because microchip circuitry is employed.
Connor points out that this machine is state-of-the-art and would probably mean
that new work could be taken on. A numerically controlled machine required
extensive training of operators. In total, 26 weeks are spent in the supplier’s
factory located in Florida. While the training is going on, the supplier
provides an operator to work the machine without charge. Expected costs of this
training period including hotel, per diem, and travel will cost $3,000 per
week, excluding the operator’s labour which is set at $15 per hour.
The machine costs $625,000, and the supplier guarantees the salvage value of
$25,000 at the end of five years. It is available immediately. It is estimated
the machine can generate sales of $243,750 annually at full capacity and
require $19,500 in direct materials cost. While the direct material costs are
equivalent, the level of sales for the general purpose machine are $48,000
lower than the special purpose machine. - Buy a general purpose machine:
The purchase price of this machine is $295,000 and cost levels associated with
the machine are expected to be the same as the general purpose machine built by
the company because the technology is similar. The salvage value of the machine
net of removal costs, is estimated to be $5,000 in five years. It can be
delivered immediately.
General comments
The required rate of return for this investment class has been
set at 8% by Kevin Thompson.
Required
Prepare the budget submission to Kevin.
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