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Project 3
December 6, 2016
Investment
Center
`
Chief Financial Officer,
Mr. Reed
Investment
Center
MAX, Inc.
Professional
Services
Division
Industrial
Product
Division
Consumer
Product
Division
Production/
Engineering
Department
Executive
Production
Engineer
Marketing
Department
North
Region
Production/
Engineering
Department
Equipment
and Setup
Group
Land
Planning
Service Area
Machine
Run
Group
Glazing and
Finishing
Group
Landscape
Architecture
Service Area
Inspect
-ion
Group
Structural
Architecture
Service Area
Cost
Center
Sales
Manager
South
Region
Packaging
Group
Consulting
Engineering
Service Area
Profit
Center
Revenue
Center
Regional
Supervisors
Revenue
Center
Division
Manager,
Mr. Jones
Cost/
Revenue
Center
Delivery
Group
Production Staff
Service
Managers
Cost/
Revenue
Center
Investment
Center
Project 3
December 6, 2016
Measure
Increase % of
returns from
products and
services
% Return on Divisions
Target
> 7% per year for
Consumer
> 9% per year for
Industrial
> 12% per year for
Professional Services
Expected ROI that
satisfies the
benchmark for the
investment type for
the company and its
competitors
Above industry
average
Initiative
Ratio of Expected
Profit over Assets
Employed
Increase profit
Return on Assets
Service Margin
Sales growth
Product/Service Sales
and Revenue Growth
Customer loyalty
New Marketing
Approach
Customer
satisfaction
Customer satisfaction
index
Above competitors
average
Quality of Service
Defective
Product/Service
Number of defected
products and errors in
services
Zero
Quality assurance
Reduce
Production Cycle
Times
# of hours to complete
order
Find inefficiencies
Service Costs
Continuous
Improvement
Managers determining
non-value adding
activities in their
processes
Employee
training &
education
%Employees
completing training
Opportunities for
Improvement
Division Manager/
Employee
Suggestions
Learning &
Growth
Growth and
expansion
through effective
resource
allocation
Customer
Objective
Financial
100% year 1
100% year 2
Estimated value of
employee suggestions
CFO reviews
reasonableness of cost
and revenue projections
prior to accepting a
project
New sales programs
Cost reduction plans
Project 3
December 6, 2016
Internal Business
Process
Learning &
Growth
Objective
Innovativeness
Employee
turnover
Employee
Satisfaction
Defective
Consumer
Product
Cost of Service
Financial
Customer
Increase
customer base
Sales growth
Measure
%Sales from
New Practices
%Employees
leaving job
Job Satisfaction
Index
Target
Positive growth
from previous year
Below industry
average
Maintain current
level
Initiative
Door-to-door
demonstrations
Allotted sales district to
each sales representative
Assigning Regional Sales
Supervisor
Zero
Cost-saving measures
Continuous
Improvement
Cost-saving measures
Increasing growth
and expansion
Door-to-door
demonstrations
Cost per
Consumer
Product
%Sales per
district or region
Geographic
reach
%Sales and
revenue growth
Customer
retention and
loyalty
Customer
retention rate
Above industry
average
Divisional
budgets and
expenditures
Expected
Budget/Expense
vs Actual
Budget/Expense
Continuous
improvement
Cost-cutting strategies
Increase
revenue from
our new project
%Sales
generated from
project
Revenue growth
from project
Door-to-door
demonstration
Advertising cost
reduction
ROI, ROCE
Increase net
income to
generated targeted
returns
Increase sales
growth
Higher return
on investment
Increase sales
efficiency
Revenue per
FTE
Project 3
December 6, 2016
Target
Employee
Satisfaction
Measure
%Employees
completed
specialized training
Job Satisfaction
Index
Employee turnover
rate
%Employee leaving
job
Below industry
average
Opportunities for
improvement
Employee
suggestions
Value of
employee
proposals
Minimize Defective
Product
#Errors/#Orders
Zero
Maintaining
Product Quality
Employee
Productivity Rate
$Sales/#Employees
Continuous
Improvement
Cost-cutting
strategies
Reduce production
cycle time
Number of hours to
complete an order
120 hours or
15 days
100%
Build reputation
Above industry
average
Delivery service
quality
Build reputation
Post-sales services
Cut average
production time
Deliver service
quality
Cut average
production time
Cost-cutting
strategies in
completing and
filling orders
Internal Business
Process
Financial
Customer
Post-sales service
quality
Customer loyalty
%Customer
contacted after
completing sales
Customer retention
rate
100%
Maintain current
level
Minimize Customer
Complaints
#Complaints/Sales
Zero
Sales growth
%Sales and
revenue growth
Service Profitability
Growth and
expansion
Revenue Growth
Above industry
average
Increase sales
efficiency
Increase sales
growth
Initiative
Drive to increase
operational
efficiency
Not to overwork
employees
Teamwork in
completing
production
Project 3
December 6, 2016
Measure
%Employees
completed
specialized training
Target
Employee
Satisfaction
Job Satisfaction
Index
Maintain current
level
Employee turnover
rate
%Employee leaving
job
Below industry
average
Opportunities for
improvement
Employee
suggestions
Value of
proposals
Minimize Project
Errors
#Errors/#Project
Zero
Employee
Productivity Rate
$Sales/#Employees
Continuous
Improvement
Determine
inefficiencies
Cost of Service
Continuous
Improvement
Find inefficiencies
Increase customer
base
%Sales growth
Increasing
growth and
expansion
Customer loyalty
Customer retention
rate
Above industry
average
Customer risk
Profitable
businesses/clients
Maintain current
level
Service Profitability
Revenue Growth
Above industry
average
Financial
Customer
Internal Business
Process
Growth and
expansion
Customer
Profitability
%Loss customers
100%
Zero
Initiative
Drive to increase
operational
efficiency
Maintain adequate
staffing
requirement
Teamwork in
completing project
Identifying nonvalue adding
activities
Maintaining
Service Quality
Capacity to
perform
environmental
impact studies
Service quality
excellence
Zero Errors
Competitive cost of
service
Deliver service
quality
Identify areas for
improvement
Competitive cost of
service, zero errors
Project 3
December 6, 2016
Consumer
2001
2002
$ 84,256
$ 91,240
7.00%
7.00%
$ 5,898
$ 6,387
Industrial
2001
2002
$ 70,160
$ 85,557
9.00%
9.00%
$ 6,314
$ 7,700
Professional
2001
2002
$ 37,680
$ 49,460
12.00%
12.00%
$ 4,522
$ 5,935
Total Company
2001
2002
$ 192,096
$ 226,257
8.71%
8.85%
$ 16,734
$ 20,022
$
$
$
$
90,693
(70,603)
20,090
(15,105)
$
$
$
$
89,600
(68,544)
21,056
(12,500)
$
$
$
$
76,500
(58,140)
18,360
(11,240)
$
$
$
$
76,075
(57,437)
18,638
(14,500)
$
$
$
$
45,000
(33,584)
11,416
(7,000)
$
$
$
$
57,000
(42,790)
14,210
(8,490)
$ 212,193
$(162,327)
$ 49,866
$ (33,345)
$ 222,675
$(168,771)
$ 53,904
$ (35,490)
4,985
8,556
7,120
4,138
4,416
5,720
$ 16,521
$ 18,414
5.92%
9.38%
10.15%
4.84%
11.72%
11.56%
8.60%
8.14%
5.50%
9.55%
9.31%
5.44%
9.81%
10.04%
7.79%
8.27%
22.15%
23.50%
24.00%
24.50%
25.37%
24.93%
23.50%
24.21%
Margin Percentage
Required Income
5,898
6,387
6,314
(913)
2,169
806
7,700
$ (3,562)
4,522
(106)
$
$
5,935
(215)
$ 16,734
$ 20,022
$ (1,608)
(213)
ROA based on pre-tax income shows each divisions performance and whether the expected returns were met. The expected returns were
predetermined by the CEO where consideration was given to the economic and risk characteristics of the various markets. Returns of 7%, 9%,
and 12% were expected from the Consumer Product, Industrial Product and Professional Service Division. Although the margin percentage of
each division for both years were good, the margin of sales was not enough to cover the total expenses of the each division at certain periods.
During 2001, the Industrial Product Division exceeded their expected return and obtained return on assets of 10.15%. In 2002, Consumer
Product Division exceeded the expected return by obtaining 9.38% return on assets. The company did not obtain the targeted ROA in 2001 and
2002, with a residual pre-tax income of -$213 and -$1,608, respectively.
Project 3
December 6, 2016
Consumer
Industrial
Professional
Company
Sales Growth
$(1,093)
$(425)
$12,000
$10,482
Profit Growth
$3,571
$(2,982)
$1,304
$7,932
Project 3
December 6, 2016
Actual Sales
$48,000
$41,600
$45,000
$44,000
North Region
South Region
Over/Under
time
Efficiency rate
24
36
16
30
38
12
6.0
2.0
-4.0
Dollar effect on
costs
(if wage=$20/hour)
80%
$
120
95%
$
40
133%
$
(80)
4
8
32
120
3.5
6
36
125.5
-0.5
-2.0
4.0
5.5
114%
133%
89%
96%
$
$
$
$
(10)
(40)
80
110
The overall efficiency of the division is 96%, where actual hours are 5.5 hours over the standard time. To
determine the cost savings for each process, it is assumed that the wage rate per hour is $20. Using this
assumption, the dollar effect on cost was calculated for each of the process. The setup time group
showed to be the most inefficient with 80% efficiency rate and dollar cost savings of -$120 while the
glazing and finishing group showed to be the most cost-efficient with 133% efficiency rate and $80 of
cost savings. The division filled 45,000 orders during the year.
Project 3
December 6, 2016
2001
2002
9.81%
10.04%
The margin percentage shows that the trend of the divisions profitability is declining. Given this trend,
the division manager should determine key factors and causes of this downward trend. The margin
percentage shows how the division maintains its cost structure to gain the proper amount of sales.
Division Manager must understand the reasons of the decline to be able to address the issues with the
different groups within the division.
Margin Percentage
25.50%
25.40%
25.30%
25.20%
25.10%
25.00%
24.90%
24.80%
24.70%
Margin Percentage
2001
2002
25.37%
24.93%
Project 3
December 6, 2016
Division
Consumer Product
Industrial Product
Professional Services
Division
Consumer Product
Industrial Product
Professional Services
Activity Type
Sales Margin
Compensation Cost Contribution
Advertising Cost Contribution
Operating Cost Efficiency
Inventory Turnover
Expenditure over Requirement
Operating Ratio
Selling Price Variance
Cost of Service
Sales Growth
Activity Type
Sales Representative Performance
Daily Generated Sales
Inventory Period
Setup
Labor Efficiency
Lead Time Efficiency
Lateness index
Labor Rate
Productivity
Delivery performance
Quality of Service
Error Rate
Growth and Expansion
New project launches
Project 3
December 6, 2016
Strong
Economy
100,000 units
$
200,000
$
500,000
$
800,000
$ 1,500,000
$ 3,000,000
$
$
11
150,000
15
State of
the
economy
Projected
Sales in
Units
Strong
100,000
economy
Stagnant
75,000
economy
Depression 60,000
Expected Expected
Probability
Sales
Revenue
Stagnant
Economy
75,000 units
$
150,000
$
375,000
$
600,000
$ 1,125,000
$ 2,250,000
Expected
Variable
Cost
Depression
60,000 units
$ 120,000
$ 300,000
$ 480,000
$ 900,000
$ 1,800,000
Total
Expected
Assets
Profit
Employed
Return on
Capital
Employed
(ROCE)
60%
60,000
900,000
660,000
240,000
3,000,000 8.00%
25%
18,750
281,250
206,250
75,000
2,250,000 3.33%
15%
9,000
135,000
99,000
36,000
1,800,000 2.00%
State of the
economy
Strong economy
Stagnant economy
Depression
60%
25%
15%
240,000
75,000
36,000
Total
Expected ROI
Expected
Returns
144,000
18,750
5,400
168,150
6.39%
Expected Total
Assets Employed
1,800,000
562,500
270,000
2,632,500
Based on the calculated Return on Expected Profit for each of the probable scenarios of the economic
condition, the expected rate of return is $168,150 while the expected total asset to be employed is
$2.63 million. The expected return on investment for the new project, 6.39%, is less than the expected
return for the Consumer Product Division which is 7%. Mr. Ikes proposed investment will not be
approved given that it will not generate enough returns.