Week 2 portfolio PDF

Preview

Summary

exam...

Description

CMA 200108

(1) (2)

Autumn 2005 Suggested Marking Guide

Avoid deducting marks for consequential errors. Please err on the generous side when marking parts of questions calling for explanation or comment provided knowledge is demonstrated.

Question 1 1.

Calculation of ROI (target):

Publishing

(1 mark) Beverages (1 marks)

Entertainment (1 marks)

2003 440 x 2588

2588 4400

2004 539 x 2600

2600 4900

17% x 0.59 = 10.0%

20.7% x 0.53 = 11.0%

(10.0%) 950 x 4750 4750 5000 20% x 0.95 = 19.0% (19.0%) 200 x 1800 1800 6660 11.1% x 0.27 = 3.0% (3.0%)

(11.0%) 1100 x 4500 4500 6471 24.4% x 0.70 = 17.1% (17.0%) 350 x 1850 1850 7000 18.9% x 0.26 = 5.0% (5.0%)

Students are required to show each part (profit margin etc) and the absence of a part should be penalised (minus ¼) as an error. The Beverages Division has outperformed the two other divisions in both 2003 and 2004, and in both years has performed better than target. Even though 2004 ROI was lower than 2003, this appears to have been anticipated due to the lower target ROI. Old written down assets could help explain the high ROI. Compared to the other two divisions, asset turnover is higher as is profit margin. The Publishing Division is the second highest performing division. Its performance is on target for 2003, and just above target in 2004. An increase in profit margin seeming to be the main source of profit improvement in 2004. The performance of the Entertainment Division is the lowest of the three divisions. However, it is performing above target. In 2003 its profit margin was the lowest in the group at 11.1%, however, this increased to 18.9% in 2004. (1 mark) 1 mark for each correct calculation minus ¼ mark for each error until zero. Up to 1 marks for comments.

1

CMA 200108 2.

Autumn 2005 Suggested Marking Guide

Explain why Stanley is reluctant…… Stanley is the Manager of the Beverages Division, which earned an ROI of 19% and 17% in 2003 and 2004. The new beverage equipment is needed for competitive reasons. Without the equipment, the Division’s ROI may drop to 14% in 2005! However, if the new equipment is acquired, it will also decrease the Division’s 2005 ROI. The incremental ROI on the equipment in year one is 10 per cent (see calculations below). This is why Stanley is reluctant to invest in the new equipment. The effect on 2005 ROI from investing in the new equipment may be lower than the 14% ROI expected if the equipment is not purchased. Stanley should realise that in the longer term it will be important to invest in the new equipment to prevent any loss of competitive position. To make that happen, Stanley should have an incentive in the Performance Measure and Reward System that will motivate him to be goal congruent and eventually improve the ROI. Incremental ROI in year one

=

$ 1,000,000 $10,000,000

=

10%

If the new equipment was to increase profit and assets over its 2004 levels, then the 2005 ROI could be as follows:2005 ROI

= =

$ 2,100,000 $16,471,000 12.75%

Up to 1 marks for explanation, plus 1 mark for a calculation supporting the explanation

2

CMA 200108

3.

Autumn 2005 Suggested Marking Guide

Performance Measures – Publishing Division Objectives

Lag indicators

Lead indicators

ROI Profitability of main products

(driven by measures under other objectives)

Sales revenue growth Market share Number of new customers

Customer complaints Delivery on time Regular publications promotions

3. Internal Business Processes Improve efficiency of production processes

Annual Productivity Reports

Number of machine breakdown Regular maintenance of equipment Wastage of material Cycle time

4. Learning and Growth Improve skills levels of Employees

% of internal promotions.

Employee days spent in training New, more highly-skilled employees engaged

1. Financial Improve returns to Shareholders 2. Customer Increase customer satisfaction

Question calls for two (2) objectives for each perspective, and one lead and one lag indicator for each perspective. A variety of answers are possible and it is important that the scorecard is tailored to suit the Publishing Division. Hansen & Mowen 596/602 are likely to be drawn on heavily. 1 marks for correctly identifying objectives 2 marks for appropriate lagged indicators 2 marks for appropriate lead indicators minus ¼ mark (up to maximum available for section) for error or item missed

3

CMA 200108 4.

Autumn 2005 Suggested Marking Guide

Long-term emphasis: A long run emphasis could be added to the performance measurement system in several ways. For example: • •

•

linking rewards to average divisional performance over three years choosing performance measures that focus on long-term performance, such as those relating to new product development, and employee training. Continuing the share option plan which may encourage managers to consider future performance

Company-wide and divisional-based performance measures. This can be achieved by tying rewards to both company performance and divisional performance. This can encourage managers to consider the effect of various decisions on both divisional and company-wide performance. The existing share option plan may also help managers identify with the company as a whole. 1 marks for appropriate explanation for each proposed change

5.

Continuous Improvement processes could be built into the system by selecting performance measures that focus on problem areas. Then as performance improves, dropping those measures to focus on other areas that need improvement. Changing the way that performance in a particular area is measured over time to makes the targets more difficult to achieve and setting more challenging targets. For example, delivery performance may be measured quite loosely at first. It could be measured as the percentage of orders delivered to schedule. The target could start as low as 60% and be progressively made more difficult each month. As achievement of this target becomes easier (say 90%), delivery performance could then be measured as the percentage of complete orders that are delivered on schedule. In the initial measure, on-time delivery may still have been achieved if part of the order was missing. Once again the target for this new measure can be made increasingly challenging over time to encourage higher performance. Up to 2 marks for explanation

6.

Overall understanding of the reading and its reflections on this case. 2 marks for identifying each of two (2) points presented in th article. Additional ½ marks where the explanation or illustration is appropriate for each point

4

CMA 200108

Autumn 2005 Suggested Marking Guide

Question 2 Q1 (2 mks) Plant Wide Overhead Rate

= Total Manuf o/head/Total Direct Lab. Hrs = 1,768,500/(20,000 + 5,000) = 1,768,500/25000 = $70.74/hr (1 marks for correct calculation. Minus ½for each error))

Product Allocation: ALL CLEAN O/head per unit

ALL WHITE O/head per unit

= 20,000 x 70.74 = 1,414,800 = 1,414,800/800,000 units = $1.76

(1/2 mark)

= 5,000 x 70.74 = 353,700 = 353,700/200,000 = $1.76

(1/2 mark)

(Check: 1,414,800 + 353,700 = 1,768,500) Students may achieve this result with only one calculation as the ratio of DL hrs and units is the same.

Q2 (1 mk) Suitable Cost driver is number of rejects – calculated from reject rate of 10% for ALL WHITE and zero for ALL CLEAN. (1 mark)

5

CMA 200108

Autumn 2005 Suggested Marking Guide

Q3 (5 mks) Number of Rejects for ALL WHITE = 10% x 200,000 units = 20,000 units Number of Rejects for ALL CLEAN = 0% x 800,000 units = 0 units (Activity Rate = $150,000/(20,000 + 0) = $7.50 per reject) Description

Factory Rent Deprec Maintenance Quality Supervision Electricity Waste Total

Calculation

Actvity Rate

Overhead Overhead ($) – All White ($) – All Clean 70000/70000 $1 per sq foot 30,000 40,000 48500/485000 $0.10 per $ 2,000 46,500 500000/180 $2,777.78/setup 222,222 277,778 150000/20000 $7.50 per reject 0 150,000 600000/100000 $6.00 per 480,000 120,000 inspection 300000/10000000 $0.03 per watt 120,000 180,000 100000/10 $10,000 per 10,000 90,000 load $864,222 $904,278

(Check 864,222 + 904,278 = 1,768,500) (1 1/2 mks for correct activity rates – subtract ¼ mk for each incorrect rate until zero) ( 3 mks for overhead allocation figures - subtract ¼ mk for each incorrect calc until zero) Per Unit Rate as follows:

Total Overhead/No. of Units

ALL CLEAN

ALL WHITE

864,222/800,000

904,278/200,000

Rate per unit: $1.08 (1/2 mk for correct rates- subtract ¼ mk for each error) Total mks = 5

6

$4.52

CMA 200108

Autumn 2005 Suggested Marking Guide

Q4 (3 marks) General Transfer Pricing Rule TP = VC + Oppy Cost VC

= D/L 3.75 + Mat 5.00 = additional outlay cost = 8.75

Opportunity Cost

TP

= =

= =

(20-8.75) 11.25

(1 mark)

(1 mark)

8.75 + 11.25 $20.00 per unit

Affect on company as a whole would be Nil as the company is selling the same amount to outside customers at the same price: (1 mark) GP before transfer = 800,000 x (20 – 8.75) = $9,000,000 GP after transfer = [700,000 x (20 - 8.75) ]+ [100,000 x (20 – 8.75)] = $9,000,000

Should also consider if supply of 100,000 units is made to All Gifts, then orders are not filled for external customers, thus losing future business for the company as not perceived as “reliable” suppliers. Transfer is likely not to occur under these circumstances. Q5 (2 mks) (a) Full cost method using functional based costing: TP = VC + FC TP = 5.00 + 3.75 +1.76 (from (1)) TP = 8.75 + 1.76 TP = $10.51 (1 mark) (b)

TP = 8.75 + 1.08 (from (3)) TP = $9.83

(1 mark)

7

CMA 200108

Autumn 2005 Suggested Marking Guide

Q6 (2 mks) Distribution of Profit between divisions: Full Cost Method using ABC: All Ways Contribution: (9.83 - 8.75) x 100,000 = 108,000 Total (20.00 – 8.75) x 100,000 108,000 + 1,017,000

All Gifts (20 – 9.83) x 100,000 = 1,017,000

= $1.125,000 = $1,125,000

The market price is $20.00 and the variable cost is $8.75. The increased contribution/profit is therefore the $1,125,000 above. This is the amount by which corporate profit improve due to the internal transfer. Instead of buying externally at $20, the firm only outlays an additional $8.75 for the extra units. The distribution of the increased contribution/profit depends upon the negotiated price between the two limits of $8.75 (minimum) and $20.00 (maximum) (1 mark for explanation and 1 mark for calculations/ figures to support answermax 2 marks) Q 7 (2 mks) Yes, the answer in 5 (b) would change because the change in bottle shape may have an impact on : • The number of setups as the bottle shape is different to the other 700,000 • Inspections (a new bottle may require more inspections ) • Number of rejects (the new bottle may be purchased from a new supplier with poorer or better quality standards than the current one. Also the new bottle may be harder to fill causing more rejects .) ( 1 mark for each reason up to maximum 2 marks)

8

CMA 200108

Autumn 2005 Suggested Marking Guide

Q8 (3 mks) Advantages/Disadvantages of Full Cost Transfer Price using ABC Advantages Considers Long term by including overhead costs in calculation Divisions able to work together to better utilise assets and reduce costs as ABC allows for more accurate tracing of costs Cost system subject to internal scrutiny

Disadvantages Can distort performance measures Does not allow for opportunity costs

One manager can benefit at expense of another or company as a whole. Best to be used only where no market based price is available

Internal customer more likely to consider factors such as design of component which can lower costs for both buying and selling division and company as whole.

(1 mark per valid argument up to maximum of 3 marks)

9

CMA 200108

Autumn 2005 Suggested Marking Guide

Question 3 1. What competitive strategy is Bob Brown recommending GPC adopt to attain a sustainable competitive advantage? What competitive strategy is Howard Way recommending? (1 mark) Bob: differentiation based on eco-efficiency Howard: cost leadership and possibly focusing re Aust market - similar computer but cheaper due to comparative advs in fossil fuels and distribution. Some element of differentiation in that it will be “Australian made” 2. Briefly explain the concepts of product stewardship and life cycle assessment. (2 marks) Product stewardship: is the practice of designing, manufacturing, maintaining, and recycling products to minimize adverse environmental impacts. Life cycle cost assessment: assigns costs and benefits to the environmental consequence and improvement

3. Howard has commissioned market research that indicates that GPC’s market share could easily top 25 % in the first year if the price were set at $1,600 rather than the average market price of $1,800. Top management have indicated that the division is likely to require a margin or return on sales of 10% to become viable. What is the target cost of a computer in these circumstances? (2 marks) $1,600 x 10% = $160 Target cost= 1,600 –160 = $1,440 4. The team prepares a preliminary environmental inventory analysis with associated cost information for the two computer design alternatives as shown in the table below. Continue the life-cycle assessment by assessing the environmental impact of the two designs as follows: a. Using the non-financial information assess and rank the environmental impacts of both designs. (1 mark) The existing design is heavily reliant on fossil fuels- a nonrenewable resource which results in GHG emissions- a double impactstudents may refer to potential carbon trading issues in the future and the inability possibly to deal with trading blocs such as the EU – all probably except US. Water also is a scarce world resource and particularly in Australia- governments may not support a development that was not water efficient. In every area the innovated design is more ecologically sustainable and therefore it is ranked number 1

10

CMA 200108

Autumn 2005 Suggested Marking Guide

b. State two (2) societal costs evident from the table. Provide one (1) reason why such costs should be included in an environmental impact analysis. (2 marks) Unrealized or societal costs are costs caused by the firm but paid for by third parties (members of society bear these costs): Toxic air emissions, hazardous substances in computers (potential effect on water table and soil), GHG emissions (regulations and monitoring not done nor likely to be introduced in Aust). Although no-one specifically bears these costs currently they may result in a poor reputation with attendant impacts on ability to raise capital. It is often difficult to estimate the societal costs, and many firms restrict their cost assignments to private costs but they are relevant to decision making.

c. Using the financial information calculate the cost per computer of the opposing strategies in relation to the potential environmental costs. (6 marks – minus ½ mark for each error in table until zero)

Activity Fossil fuels (average per kg) Chemicals (per kg) Water (per litre) Pollution control (per hr) Packaging (per kg) Petro-Chemical plastics (per kg) Biopolymer plastics (per kg) Landfill (per kg) Take-back (recycle)

Cost of Activities Existing Process Innovated Process $2.00 $0.10 x 240 kg $24.00 $0.10 x 20 $1.00 x 22 $0.10 x 1,500 litres $25.00 x 2 hrs $5.00 x 2 kg $0.40 x 5 kg

22.00 $1.00 x 1 150.00 $0.10 x 15 50.00 Nil 10.00 $8.00 x 2 kg 2.00 Nil

16.00

$0.80 x 5 kg

4.00

Nil $0.50 x 4 kg Nil

1.00 1.50

2.00 Nil

TOTAL POTENTIAL ENVIRONMENTAL COSTS

$260

11

(2.00) $22.50

CMA 200108

Autumn 2005 Suggested Marking Guide

d. Which environmental cost category (prevention, detection, internal failure or external failure) would you classify the operation of pollution control equipment and why? (2 marks) Internal failure, because contaminants have been produced and now must be treated if they are not to be released into the environment - with possible fines

5. With reference to your findings in Requirement 4 above and to the Epstein and Roy reading (Environmental Management to Improve Corporate Profitability) from Reeve Readings and Issues in Cost Management), discuss two (2) salient issues that you believe the team and top management need to address in order to make a decision about the viability of the proposed new computer manufacturing division. (4 marks – 2 marks for each issue that is included in the article or otherwise acceptable, but not repeating the content of the question) The environmental costs of the existing design are almost 13 times that of the innovated - all else equal the new design may be cheaper anyway. But other costs may need to be included - such as the K to set up and ROI required to satisfy shareholders. Also some of the technology such as biopolymers is new and supply sources would need to be locked in. E&R p173 argue that teams need to be multidisciplinary eg accounting, product and process design, product management, legal, operations etc and especially require executive leadership so maybe the team could be enlarged- especially as 2 new appointees and one veteran who may throw his weight around but know little about current environmental thinking.

The team requires top management input in relation to culture and ethos and mission. Other investigation needs to be undertaken in relation to overseas markets and whether any similar moves are afoot in relation to eco efficient computer manufacture - it is likely given the constraints on GHG emissions under the Kyoto protocol and in light of the UN condemnation of the computer manufacturing industry practices (students may not know of this one but if they do it means they are keeping up to date) Under Kyoto research monies will tend to flow into sustainable practices. E&R discuss that we manage what we measure and that drivers of env costs need to be identified and that env costs should not be hidden in overhead accounts. The MAS may need some overhaul. 12

CMA 200108

Autumn 2005 Suggested Marking Guide

If GPC wishes to export personal computers and this would be a logical extension down the track - they may need to produce the ecologically sustainable computers - many countries will have embargos on imports of carbon producing goods especially if an alternative is available. E&R p 176 state that env costs are understated significantly and full environmental costing is becoming critical as global industry recognises it obligations E&R discuss how performance evaluation systems should include environmental measures E&R p 177 discuss how corporate decision-making must encompass environmental matters, that corporate initiatives are required to enhance ...