Enhance Employee Skills Employee Turnover Rate Aver by 0k5z81n

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									Problem 13-34

For each perspective, select those strategic objectives from the list that best relate to it. For each strategic
objective, select the most appropriate performance measure(s) from the list.

The Balanced Scorecard Approach translates an organization's mission and strategy into a set of performance
measures that provides the framework for implementing its strategy.

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to
accomplish its objectives.

           Product differentiation is an organization's ability to offer products or services perceived by its custo
           to be superior and unique relative to the products or services of its competitors.

           Cost leadership is an organization's ability to achieve lower cost relative to competitors through prod
           and efficiency improvements, elimination of waste, and tight cost control.

Performance measures are indicators that drive the organization to achieve its goals. These measures to be gro
into four categories: (1) financial, (2) customer, (3) internal business process, and learning & growth measures.

           Financial measures evaluate the profitability of the chosen strategy to create shareholder value. Thes
           are lag indicators that report on the results of past actions. Has our financial performance improved?

           Customer measures identify targeted customers, market segments, and measure the company's succ
           in those markets. The measures are leading indicators of future financial performance.

           Internal business process measures focus on internal operations that create value for customers, tha
           turn, help achieve financial performance. The internal-business-process perspective comprises three
           sub processes:

                        Innovation processes create products and services that will meet the needs of customers.

                        Operations processes produce and deliver existing products and services that will meet th
                        needs of customers.

                        Postsale-service processes support the customer after the sale of a product or service.

           Learning and growth measures identify the capabilities an organization must excel at to achieve supe
           internal business processes that in turn create value for customers and shareholders. Is the organiza
           maintaining its ability to change and improve?

      Balanced Score Card                              Strategic
          Perspective                                 Objectives
                                             Increase Shareholder Wealth


            Financial



                                       Increase Profit Generated / Salesperson
                                               Acquire new customers
       Customer                          Retain Customers
                                  Develop Profitable Customers
                                 Improve Manufacturing Quality
                                     Introduce New Products
Internal Business Process          Minimize Invoice Error Rate
                                  On-time Delivery by Suppliers
                                  Increase proprietary products
                            Increase Information System Capabilities
   Learning & Growth                Enhance Employee Skills
at best relate to it. For each strategic


on and strategy into a set of performance


with the opportunities in the marketplace to


products or services perceived by its customers
ces of its competitors.

er cost relative to competitors through productivity
ht cost control.

chieve its goals. These measures to be grouped
process, and learning & growth measures.

n strategy to create shareholder value. These
 . Has our financial performance improved?

 egments, and measure the company's success
future financial performance.

rations that create value for customers, that in
iness-process perspective comprises three


vices that will meet the needs of customers.

sting products and services that will meet the


mer after the sale of a product or service.

 organization must excel at to achieve superior
ustomers and shareholders. Is the organization


                             Performance
                               Measures
                           Earnings /Share
                              Net Income
                          Return on Assets
                            Return of Sales
                           Return on Equity
                          Product Cost/Unit
                         Customer Cost/Unit
                          Profit/Salesperson
                       Number of New Customers
        % of Customers Retained
          Customer Profitability
       % of Defective Product Units

          % of Error-free Invoices
    % of On-time Deliveries by Suppliers
            Number of Patents
% of Processes With Real-time Feedback
          Employee Turnover Rate
 Aver. Job-related Training Hrs./Employee
Problem 13-22 Strategy, balanced scorecard

Given: Stanmore Corporation makes a special-purpose machine, D4H, used in the
   textile industry. Stanmore has designed the D4H machine for 2011 to be distinct
   from its competitors. It has been generally regarded as a superior machine.
   Stanmore presents the following data for 2010 and 2011.
                                                                          2010       2011
   Units of D4H produced and sold                                             200        210
   Selling price                                                          $40,000    $42,000
   Direct materials (kilograms)                                           300,000    310,000
   Direct material cost per kilogram                                        $8.00      $8.50
   Manufacturing capacity in units of D4H                                     250        250
   Total conversion costs                                              $2,000,000 $2,025,000
   Conversion costs per unit of capacity                                   $8,000     $8,100
   Selling and customer-service capacity (customers)                          100         95
   Total selling and customer-service costs                            $1,000,000   $940,500
   Selling & customer-service capacity cost per customer                  $10,000     $9,900
   Design staff                                                                12         12
   Total design costs                                                  $1,200,000 $1,212,000
   Design cost per employee                                              $100,000   $101,000

   Stanmore produces no defective machines, but it wants to reduce DM usage per D4H
   machine in 2011. Conversion costs in each year depend on production capacity
   defined in terms of D4H units that can be produced, not the actual units produced.
   Selling & customer-service costs depend on the number of customers that Stanmore
   can support, not the actual number of customers it serves. Stanmore has 75 customers
   in 2010 and 80 customers in 2011.
   At the start of each year, management uses its discretion to determine the number of
   design staff for the year. The design staff and its costs have no direct relationship with
   the quantity of D4H produced or the number of customers to whom D4H is sold.

1. Is Stanmore's strategy one of product differentiation or cost leadership?

   Stanmore Corporation follows a product differentiation strategy for 2011. D4H is distinct from
   its competitors and is generally regarded as superior to competitors' products. To succeed,
   Stanmore must continue to differentiate its product and charge a premium price.

2. Describe key measures that you would include in Stanmore's balanced scorecard and
   reasons for doing so.

    Balanced Score Card             Strategic Objectives                      Reasons for
        Perspective                     or Measures                            Elements

                              Increase in operating income      These measures indicate
                              from charging higher margins.     whether Stanmore has been
           Financial                                            able to charge premium prices
                              Price premium earned on           and achieve operating income
                              products                          increases through product
                                                                differentiation.
            Increase market share in high-   Stanmore's differentiation
            end special-purpose textile      strategy should result in
            machines                         improvements in these
Customer                                     measures which are LEADING
            Increase customer satisfaction   indicators of future financial
                                             performance.
            Increase new customers


            Improve manufacturing quality    Improvements in these
 Internal                                    measures are expected to
Business    Increase product features        result in more satisfied
Process                                      customers and in turn
            Decrease order delivery time     superior financial performance.


            Decrease development time
            for designing improved/new
            products
                                             Improvement in these
            Develop improvements in mfg.     measures have a cause-and-
Learning    processes                        effect relationship with
  and                                        improvements in internal
 Growth     Improve/increase educational     business processes, which in
            opportunities for employees      turn lead to improved customer
                                             satisfaction and improved
            Improve employee skill levels    financial performance.
            through retraining and cross-
            training

            Improve employee satisfaction
Problem 13-23 Strategic analysis of operating income (continuation of 13-22).

Given: Stanmore Corporation makes a special-purpose machine, D4H, used in the
   textile industry. Stanmore has designed the D4H machine for 2011 to be distinct
   from its competitors. It has been generally regarded as a superior machine.
   Stanmore presents the following data for 2010 and 2011.
                                                                  2010          2011
   Units of D4H produced and sold                                      200          210
   Selling price                                                  $40,000       $42,000
   Direct materials (kilograms)                                   300,000       310,000
   Direct material cost per kilogram                                 $8.00        $8.50
   Manufacturing capacity in units of D4H                              250          250
   Total conversion costs                                      $2,000,000   $2,025,000
   Conversion costs per unit of capacity                           $8,000        $8,100
   Selling and customer-service capacity (customers)                   100           95
   Total selling and customer-service costs                    $1,000,000      $940,500
   Selling & customer-service capacity cost per customer          $10,000        $9,900
   Design staff                                                         12           12
   Total design costs                                          $1,200,000   $1,212,000
   Design cost per employee                                      $100,000      $101,000

   Stanmore produces no defective machines, but it wants to reduce DM usage per D4H
   machine in 2011. Conversion costs in each year depend on production capacity
   defined in terms of D4H units that can be produced, not the actual units produced.
   Selling & customer-service costs depend on the number of customers that Stanmore
   can support, not the actual number of customers it serves. Stanmore has 75 customers
   in 2010 and 80 customers in 2011.
   At the start of each year, management uses its discretion to determine the number of
   design staff for the year. The design staff and its costs have no direct relationship with
   the quantity of D4H produced or the number of customers to whom D4H is sold.

1. Calculate the operating income of Stanmore Corporation in 2010 and 2011.

                                                                   2010          2011
   Units sold                                                           200           210
   Unit selling price                                               $40,000       $42,000
   Total Revenue                                                 $8,000,000    $8,820,000
   Costs
       Direct Materials Costs
           Kilograms used                            1,500.00       300,000      310,000 1,476.19
           Cost per kilogram                                          $8.00        $8.50
       Total Direct Materials Cost                               $2,400,000   $2,635,000
       Manufacturing Conversion Costs                             2,000,000    2,025,000
       Selling & customer service costs                           1,000,000      940,500
       Design Costs                                               1,200,000    1,212,000
   Total Costs                                                   $6,600,000   $6,812,500
   Operating Income                                              $1,400,000   $2,007,500
   Increase in operating income                                         $607,500
                                                                        Favorable

2. Calculate the growth, price-recovery, and productivity components that explain
   the change in operating income from 2010 to 2011.
The Growth Component measures the change in operating income attributable
solely to the change in the quantity of output sold between 2010 and 2011.

The Growth Component:
   Revenue effect of growth component:
       Actual units of output sold in 2011                                      210
       Actual units of output sold in 2010                                      200
           Increase in units sold                                                10
       Output price in 2010                                                 $40,000
           Favorable Revenue effect                                        $400,000

                                                                                        Selling &
                                                                            Mfg.        Customer
                                                             Direct      Conversion      Service
   Cost effect of growth component:                         Materials     Costs (1)     Costs (1)
       Actual units of input or capacity that would
       have been used to produce year 2011 output              315,000          250            100
       assuming the same input/output relationships
       that existed in 2010
       Less:
       Actual units of inputs or capacity used to
       produce 2010 output                                     300,000          250            100
       Difference                                               15,000            0              0
       Input prices in 2010                                      $8.00       $8,000        $10,000
           Unfavorable Cost effect                            $120,000           $0             $0

                                                          (300,000/200) X 210 = 1,500 X 210 = 315,000

           Note: (1) Mfg. Conversion Costs and Selling & Customer-Service Costs will not change since
                      adequate capacity exists in 2010 to support year 2011 output and customers.
                  (2) Design Costs would not change since there is no direct relationship with the quantity
                      of D4H produced or the number of customers to whom D4H is sold.

   Summary:
      Revenue effect of growth component:                                                 $400,000
      Cost effect of growth component:                                                   ($120,000)
         Change in operating income due to the growth component                           $280,000

The Price-Recovery Component measures the change in operating income attributable solely to
changes in Stanmore's prices of inputs and output between 2010 and 2011.

The Price-Recovery Component:
   Revenue effect of price-recovery component:
       Output price in 2011                                                 $42,000
       Output price in 2010                                                  40,000
           Difference in price                                               $2,000
           Times actual units of output sold in 2011                            210
       Favorable revenue effect of price-recovery component                $420,000

   Cost effect of price-recovery component:                                             Selling &
                                                                            Mfg.         Customer
                                                               Direct    Conversion       Service
                                                              Materials     Costs          Costs
       Input prices in year 2011                                  $8.50      $8,100          $9,900
       Input prices in year 2010                                    8.00       8,000         10,000
           Difference in price                                    $0.50         $100          ($100)
       Actual units of inputs or capacity that would
       have been used to produce year 2011 output                315,000           250          100
       assuming the same input-output relationship
       that existed in 2010
       Unfav. cost effect of price-recovery component          $157,500        $25,000     ($10,000)
       Total for all inputs -- unfavorable                     $184,500

   Summary:
      Revenue effect of price-recovery component:                                          $420,000
      Cost effect of price-recovery component:                                            ($184,500)
      Change in operating income due to the price-recovery component                       $235,500

The Productivity Component measures the change in costs attributable to a change in the quantity of
inputs used in 2011 relative to the quantity of inputs that would have been used in 2010 to produce the
2011 output.

The Productivity Component:                                                              Selling &
                                                                               Mfg.      Customer
                                                               Direct       Conversion    Service
                                                              Materials        Costs       Costs
   Actual units of inputs or capacity used to produce
   year 2011 output                                              310,000           250           95
   Less:
   Actual units of inputs or capacity that would have
   been used to produce year 2011 output assuming
   the same input-output relationship that existed
   in 2010                                                       315,000           250          100
   Difference in units                                            (5,000)            0           (5)
   Input prices in 2011                                            $8.50        $8,100       $9,900
   Change in operating income -- favorable                      ($42,500)           $0     ($49,500)
       Total for all inputs -- favorable                        ($92,000)

The change in operating income between 2010 and 2011 can be analyzed as follows:

                                               Income        Revenue & Revenue &        Cost Effect
                                              Statement      Cost Effects Cost Effects       of
                                              Amounts         of Growth     of Price-   Productivity
                                               in 2010       Component Recovery         Component
                                                               in 2011     Component      in 2011
                                                                             in 2011
   Revenues                                    $8,000,000       $400,000      $420,000
   Costs                                       (6,600,000)       (120,000)    (184,500)      $92,000
   Operating Income                            $1,400,000       $280,000      $235,500       $92,000
                                               $1,400,000          F            F             F
                                                                              $607,500
                                                                             $607,500
                                                             Change in operating income in 2011
3. What do these components indicate?
   Companies that have been successful at cost leadership will show large
    favorable productivity and growth components.

   Companies that have successfully differentiated their products will show
   large favorable price-recovery and growth components.

   The analysis of operating income indicates that a significant amount of the increase
   in operating income resulted from Stanmore's product differentiation strategy. The
   company was able to continue to charge a premium price while growing sales.
   Stanmore was also able to earn additional operating income by improving its
   productivity.
                 Design
                Costs (2)

                       12




                       12
                        0
                 $100,000
                       $0

210 = 315,000

not change since

p with the quantity



            Favorable
            Unfavorable
            Favorable
                Design
                Costs
                $101,000
                 100,000
                  $1,000

                     12


                 $12,000




           Favorable
           Unfavorable
           Favorable

e quantity of
o produce the




                Design
                Costs

                     12




                      12
                       0
                $101,000
                      $0




             Income
            Statement
            Amounts
             in 2011


            $8,820,000
            (6,812,500)
            $2,007,500
            $2,007,500
$2,007,500
Problem 13-24 Analysis of growth, price recovery, and productivity components
(continuation of 13-23)

Suppose that during 2011, the market for Stanmore's special-purpose machines
grew by 3%. All increases in market share (that is, sales increases greater than
3%) are the result of Stanmore's strategic actions.

1. Calculate how much of the change in operating income from 2010 to 2011 is
   due to the industry-market-size factor, product differentiation, and cost
   leadership. How successful has Stanmore been in implementing its strategy?


   Effect of the industry-market-size factor
       Sales increased from 200 units to 210 units or a total of 10 units.
       Some of this increase is due to the 3% growth in the size of the
       overall market. Six (6 = 3% X 200) units of the total increase of 10
       units is probably due to an increase in the size of the overall market.
       The remainder of the change, 4 units (10-6), is due to increase of
       market share.

       The change in Stanmore's operating income from the
       industry market size factor rather than from specific actions is:

       Favorable Growth Component                  $280,000            0.6   $168,000 F

   Effect of product differentiation
       The change in operating income (OI) due to:
           Increase in the selling price of D4H                              $420,000 F
           (revenue effect of price recovery)
           Increase in price of inputs                                       (184,500) U
           (cost effect of price recovery)
           Change in OI due to the price-recovery component                  $235,500 F

          Growth in market share due to
          product differentiation                 $280,000             0.4    112,000 F
       Change in OI due to product differentiation                           $347,500 F


   Effect of cost leadership
       The change in operating income from cost leadership is:

       Productivity component                                                    $92,000 F

   The change in operating income between 2010 and 2011:
   Change due to industry-market-size                                        $168,000   F
   Change due to product differentiation                                     $347,500   F
   Change due to cost leadership                                              $92,000   F
      Increase in operating income                                           $607,500   F

2. How successful has Stanmore been in implementing its product
   differentiation strategy?
Stanmore has been successful in implementing its product
differentiation strategy. About 57% ($347,500/$607,500) of       0.5720165
the increase in operating income during 2011 was due to
product differentiation.

Stanmore's operating income increase in 2011 was also helped
by a growth in the overall market and some productivity
improvements.


Reconciliation Spreadsheet                                                       Not Part of Co. Strategy
                                                                                Industry
Growth Component                                                                 Growth
Revenue effect of growth component:                               $400,000 F    $240,000
Cost effect of growth component:                                 ($120,000) U    ($72,000)
   Change in operating income due to the growth component         $280,000 F    $168,000
The Price-Recovery Component:
Revenue effect of price-recovery component:                       $420,000 F
Cost effect of price-recovery component:                         ($184,500) U
Change in operating income due to the price-recovery component    $235,500 F
The Productivity Component:
Cost effect of productivity component:                            $92,000 F
Change in operating income in 2011                               $607,500       $168,000
Not Part of Co. Strategy      Strategy
                Cost           Product
            Leadership     Differentiation
                                 $160,000
                                 ($48,000)
                                 $112,000

                                $420,000
                               ($184,500)


                 $92,000
                 $92,000        $347,500     $607,500
Problem 13-25 Identifying and managing unused capacity (continuation of 13-22).

1. Calculate the amount of and cost of (a) unused manufacturing capacity and (b)
   unused selling and customer-service capacity at the beginning of 2011 based
   on actual production and actual number of customers served in 2011.
   (a) unused manufacturing capacity
       Amount of unused capacity
           Capacity in units of D4H at the beginning of 2011                          250
           Units of D4H produced and sold in 2011                                     210
           Unused capacity                                                             40
           Conversion cost per unit of capacity made available in 2011            $8,100
       Cost of unused capacity                                                  $324,000
   (b) unused selling & customer-service capacity
       Amount of unused capacity
           Selling & customer service capacity at the beginning of 2011               100
           Customers serviced in 2011                                                  80
           Unused capacity                                                             20
           Cost per unit of capacity made available in 2011                       $9,900
       Cost of unused capacity                                                  $198,000
    (c) unused design capacity
       Amount of unused capacity (and related costs) cannot be determined because
       design costs is a discretionary cost -- there is no direct relationship with the
       quantity of D4H produced or the number of customers to whom D4H is sold.

2. Suppose Stanmore can add or reduce its manufacturing capacity in increments of
   30 units. What is the maximum amount of costs that Stanmore could save in 2011
   by downsizing manufacturing capacity?

   Stanmore can reduce mfg. capacity from 250 units to 220 (250 - 30) units. Stanmore
   could save $243,000 (30 X $8,100). This is the maximum amount of cost savings from
   downsizing. If additional downsizing is attempted then Stanmore would not have enough
   capacity to manufacture the 210 units needed.

3. Stanmore, in fact, does not eliminate any of its unused manufacturing capacity. Why might
   Stanmore not downsize.

   Stanmore may choose not to downsize because it might expect sales increases that
   would lead to a greater demand for and utilization of capacity.

   The fact that Stanmore can only downsize in relatively large increments may deter
   downsizing.

   Stanmore may be focused on product differentiation (its strategy) rather than on cost
   reduction.

   Not downsizing (especially in large chunks) often helps to boost and maintain employee
   morale.
Problem 13-27 Strategic analysis of operating income (continuation of 13-26)

Given:
   Westlake Corporation is a small information-systems consulting firm that specializes in
   helping companies implement standard sales-management software. The market for
   Westlake's products is very competitive. To compete successfully, Westlake must deliver
   quality service at a low cost. Westlake presents the following data for 2010 and 2011.

                                                                  2010          2011
   Number of jobs billed                                                60            70
   Selling price                                                   $50,000       $48,000
   Software-implementation labor-hours                              30,000        32,000
   Cost per software-implementation labor-hour                         $60           $63
   Software-implementation support capacity (in jobs)                   90            90
   Total cost of software-implementation support                  $360,000      $369,000
   Software-implementation support-capacity costs / jobs            $4,000        $4,100
   Number of software-development employees                              3             3
   Total software-development costs                               $375,000      $390,000
   Software-development cost per employee                         $125,000      $130,000

   Software-implementation labor-hour costs are variable costs. Software-implementation
   support costs for each year depend on the software-implementation support capacity that
   Westlake chooses to maintain each year (that is the number of jobs it can do each year). It
   does not vary with the actual number of jobs done that year.

   At the start of each year, management uses its discretion to determine the number of
   software-development employees. The software-development staff and costs have no
   no direct relationship with the number of jobs it can do each year.


1. Calculate the operating income of Westlake in 2010 and 2011.                 2010              2011
   Number of jobs billed                                                               60                70
   Selling price per job                                                          $50,000           $48,000
   Total Revenue                                                               $3,000,000        $3,360,000
   Costs
       Software implementation labor-hour costs
           Software implementation labor-hours                           500       30,000        32,000
           Cost per software implementation labor-hour                             $60.00        $63.00
       Total software implementation labor-costs                               $1,800,000    $2,016,000
       Software implementation support costs                                      360,000       369,000
       Software development costs                                                 375,000       390,000
   Total Costs                                                                 $2,535,000    $2,775,000
   Operating Income                                                              $465,000      $585,000
   Increase in operating income                                                       $120,000
                                                                                     Favorable


2. Calculate the growth, price-recovery, and productivity components that explain the change
   in operating income.
   The Growth Component measures the change in operating income attributable
   solely to the change in the quantity of output sold between 2010 and 2011.
The Growth Component:
   Revenue effect of growth component:
       Actual number of jobs billed in 2011                                       70
       Actual number of jobs billed in 2010                                       60
            Increase in units sold                                                10
       Selling price per job in 2010                                         $50,000
            Favorable revenue effect of growth component                    $500,000

                                                           Software       Software
                                                        Implementation Implementation       Software
                                                            Labor         Support         Development
   Cost effect of growth component:                         Costs         Costs (1)         Costs (2)
       Actual units of input or capacity that would
       have been used to produce year 2011 output               35,000              90              3
       assuming the same input/output relationships
       that existed in 2010
       Less:
       Actual units of inputs or capacity used to
       produce 2010 output                                    30,000                 90             3
       Difference                                              5,000                  0             0
       Input prices in 2010                                   $60.00             $4,000      $125,000
           Unfavorable Cost effect                          $300,000                 $0            $0

                                                       (30,000/60)*70 = 35,000

         Note: (1) Software implementation support costs would not change since adequate capacity
                      exists in 2010 to support year 2011 output and customers.
                 (2) Software development costs are discretionary costs not directly related to output
                     and, hence, would not change in 2010 even if Westlake had to produce and sell the higher
                     year 2011 output in 2010.
   Summary:
      Revenue effect of growth component:                                                   $500,000
      Cost effect of growth component:                                                     ($300,000)
         Change in operating income due to the growth component                             $200,000

The Price-Recovery Component measures the change in operating income attributable solely to
changes in a Westlake's prices of inputs and output between 2010 and 2011.

The Price-Recovery Component:
   Revenue effect of price-recovery component:
       Job price in 2011                                                     $48,000
       Job price in 2010                                                      50,000
           Difference in price                                               ($2,000)
           Times actual jobs sold in 2011                                         70
       Unfavorable revenue effect of price-recovery component              ($140,000)

   Cost effect of price-recovery component:                Software       Software
                                                        Implementation Implementation       Software
                                                            Labor         Support         Development
                                                            Costs          Costs             Costs
       Input prices in year 2011                                $63.00           $4,100      $130,000
          Input prices in year 2010                                     60.00          4,000         125,000
              Difference in price                                       $3.00           $100          $5,000
          Actual units of inputs or capacity that would
          have been used to produce year 2011 output                   35,000               90               3
          assuming the same input-output relationship
          that existed in 2010
          Unfav. cost effect of price-recovery component            $105,000          $9,000         $15,000
          Total for all inputs (unfavorable)                        $129,000

      Summary:
         Revenue effect of price-recovery component:                                               ($140,000)
         Cost effect of price-recovery component:                                                  ($129,000)
         Change in operating income due to the price-recovery component                            ($269,000)

   The Productivity Component measures the change in costs attributable to a change in the quantity of
   inputs used in 2011 relative to the quantity of inputs that would have been used in 2010 to produce the
   2011 output.

   The Productivity Component:                                    Software       Software
                                                                Implementation Implementation     Software
                                                                    Labor         Support        Development
                                                                    Costs          Costs           Costs
      Actual units of inputs or capacity used to produce
      year 2011 output                                                 32,000               90               3
      Less:
      Actual units of inputs or capacity that would have
      been used to produce year 2011 output assuming
      the same input-output relationship that existed
      in 2010                                                          35,000             90               3
      Difference in units                                              (3,000)             0               0
      Input prices in 2011                                             $63.00         $4,100        $130,000
      Change in operating income (favorable)                        ($189,000)            $0              $0
          Total for all inputs (favorable)                          ($189,000)

   The change in operating income between 2010 and 2011 can be analyzed as follows:

                                                    Income      Revenue &     Revenue &     Cost Effect
                                                   Statement    Cost Effects  Cost Effects       of
                                                   Amounts       of Growth     of Price-    Productivity
                                                    in 2010     Component      Recovery     Component
                                                                  in 2011     Component       in 2011
                                                                                in 2011
      Revenues                                     $3,000,000       $500,000     ($140,000)
      Costs                                         2,535,000       (300,000)     (129,000)    $189,000
      Operating Income                               $465,000       $200,000     ($269,000)    $189,000
                                                                     F             U             F
      Change in operating income in 2011                                       $120,000
                                                                                   F

3. What do these components indicate?
   Companies that have been successful at cost leadership will show large
favorable productivity and growth components.

Companies that have successfully differentiated their products will show
large favorable price-recovery and growth components.

The analysis of operating income indicates that a significant amount of the increase
in operating income resulted from Westlake's productivity improvements in 2011. The
company had to reduce selling prices while labor costs were increasing but was able to
increase operating income by improving its productivity. The productivity gains also
allowed Westlake to be competitive and grow the business. The unfavorable price recovery
component indicates that Westlake could not pass on increases in labor-related wages via
price increases to its customers, very likely because its product was not differentiated
from competitors' offerings.
457.14
quate capacity

ed to output
e and sell the higher


            Favorable
            Unfavorable
            Favorable
              Unfavorable
              Unfavorable
              Unfavorable


produce the




                Income
               Statement
               Amounts
                in 2011


               $3,360,000
                2,775,000
                 $585,000
                 $585,000
Problem 13-28 Analysis of growth, price-recovery, and productivity
components (continuation of 13-27)

Given:
   Suppose that during 2011 the market for implementing sales-management
   software increases by 5% and that Westlake experiences a 1% market decline
   in selling prices. Assume that any further decreases in selling price and
   increases in market share are strategic choices by Westlake's management
   to implement their strategy.

1. Calculate how much of the change in operating income from 2010 to 2011
   is due to the industry market-size factor, cost leadership, and product
   differentiation. How successful has Westlake been in implementing its
   strategy?

   Effect of the industry-market-size factor
       Jobs increased from 60 to 70 units. Three jobs of the ten total
       increase is due to the 5% growth in market size (5% X 60 =3).

       The change in Westlake's operating income from the industry market-size
       factor rather than from company specific actions is:

       Growth Component                  $200,000                 0.3    $60,000 F

   Effect of product differentiation
       Of the $2,000 decrease in selling price, $500
       (1% X $50,000) is due to a general decline
       in prices, and the remaining decrease of
       $1,500 ($2,000 - $500) is due to a strategic
       decision by Westlake's management to implement
       its cost leadership strategy of lowering prices to
       stimulate demand.

       The total decrease in NOI due to the lower SP is
       the revenue effect of price recovery component
       ($2,000 X 70)                                                    ($140,000) U
       The portion of the revenue effect of the price
       recovery component due to the planned strategic
       price decrease ($1,500 X 70) is                                  $105,000 U
       The portion of the revenue effect of the price
       recovery component due to the 1% general market
       price decline ($500 X 70) is                                      ($35,000) U

       The total decrease in NOI due to the increase in the
       price of inputs is the cost effect of the price recovery
       component                                                         (129,000) U
       Total change in operating income not due to cost
       leadership strategy is therefore                                 ($164,000) U

   Effect of cost leadership
       The change in operating income from cost leadership
       is:
    The portion of the revenue effect of the price
    recovery component due to the planned strategic
    price decrease is (See above.)                             ($105,000) U
    Growth component resulting from strategic price
    decrease ($200,000 X (7/10))                                $140,000 F
    Productivity component                                      $189,000 F
         Total cost leadership effect                           $224,000 F

The change in operating income between 2010
and 2011:
   Change due to industry-mkt. growth                            $60,000    F
   Change due to product differentiation                       ($164,000)   U
   Change due to cost leadership                                $224,000    F
   Change in operating income in 2011                           $120,000    F

How successful has Westlake been in implementing its
cost leadership and pricing strategy?

Westlake has been very successful in implementing its cost leadership
and pricing strategy. Westlake was unable to pass along increases in
labor costs by increasing the selling price -- in fact, the selling price
was decreased as part of the cost leadership strategy by $1,500.
Westlake was able to take advantage of its productivity gains to reduce
price, gain market share, and increase operating income.

Reconciliation Spreadsheet

Growth Component
Revenue effect of growth component:                                              $500,000 F
Cost effect of growth component:                                                ($300,000) U
Net change in operating income due to the growth component                       $200,000 F
The Price-Recovery Component:
Revenue effect of price-recovery component:                                     ($140,000) U
Cost effect of price-recovery component:                                        ($129,000) U
Net change in operating income due to the price-recovery component              ($269,000) U
The Productivity Component:
Cost effect of productivity component:                                          $189,000 F
    Change in operating income in 2011                                          $120,000 F
  Not Part of Co. Strategy     Strategy
Industry        Product          Cost
 Growth     Differentiation   Leadership
$150,000                          $350,000        70%
 ($90,000)                       ($210,000)       70%
  $60,000                         $140,000        70%

                  ($35,000)      ($105,000)
                 ($129,000)
                 ($164,000)

                                 $189,000
 $60,000         ($164,000)      $224,000     $120,000
Problem 13-29 Identifying and managing unused capacity (continuation of 13-26).

1. Calculate the amount and cost of unused
   (a) Software- implementation support capacity at the beginning of 2011,
       based on the number of jobs actually done in 2011.
       Amount of unused capacity
           Capacity in jobs at the beginning of 2011                                  90
           Jobs in 2011                                                               70
           Unused capacity                                                            20
           Cost per unit of capacity made available in 2009                       $4,100
       Cost of unused capacity                                                  $82,000
    b) Software-development capacity
       Amount of unused capacity (and related costs) cannot be determined because
       development costs are discretionary. We cannot determine the amount of software-
       development resources used for completed jobs to compare with job capacity
       available. There is no causal relationship between jobs completed and
       software-development resources used.

2. Suppose Westlake can add or reduce its software-implementation support
   capacity in increments of 15 units. What is the maximum amount of costs that
   Westlake could save in 2011 by downsizing software-implementation support
   capacity?

   Westlake can reduce software implementation support capacity from 90 units to 75
   (90 - 15) units. Westlake will save 15 X $4,100 = $61,500.
   It can not reduce capacity further (by another 15 units to 60 units) because it would
   then not have enough capacity to complete 70 jobs in 2011.

3. Westlake, in fact, does not eliminate any of its unused software-implementation
   support capacity. Why might Westlake not downsize?

   Westlake may choose not to downsize because it projects sales increases that would
   lead to a greater demand for and utilization of capacity.

   The fact that Westlake can only downsize in relatively large increments may deter
   downsizing.

   Not downsizing (especially in large chunks) often helps to boost and maintain employee
   morale.
Chapter 13 Problem: Strategic Analysis of Operating I ncome
Halsey Company sells women's clothing. Halsey's strategy is to offer at premium prices a wide selection
of distinctive clothes accompanied by excellent customer service. Halsey presents the following data
for 2007 and 2008.
                                                                                     2007           2008
1. Number of customers serviced                                                       40,000          41,000
2. Pieces of clothing purchased and sold                                              40,000          41,000
3. Average selling price                                                                  $60            $59
4. Average cost per piece of clothing                                                     $40            $41
5. Selling and customer-service capacity (expressed in customers)                     51,000          43,000
6. Selling and customer-service costs                                               $357,000       $296,700
7. Purchasing and administrative capacity (expressed in designs)                          980            850
8. Purchasing and administrative costs                                              $245,000       $204,000

Total selling and customer-service costs depend on the number of customers that Halsey has
created capacity to support, not the actual number of customers that Halsey serves. Total
purchasing and administrative costs depend on purchasing and administrative capacity that Halsey
has created (defined in terms of the number of distinct clothing designs that Halsey can purchase
and administer). Purchasing and administrative costs do not depend on the actual number of
distinct clothing designs purchased. Halsey purchased 930 distinct designs in 2007 and 820
designs in 2008.

At the start of 2008, Halsey planned to increase operating income by 10% over operating income
in 2007.

Required:
1. Is Halsey's strategy one of product differentiation or cost leadership? Explain.

2. Calculate Halsey's operating income in 2007 and 2008.

3. Calculate the growth, price-recovery, and productivity components of changes in
   operating income between 2007 and 2008.

4. Does the strategic analysis of operating income indicate Halsey was successful in
   implementing its strategy in 2008? Explain.
Problem: 13-33

Halsey Company sells women's clothing. Halsey's strategy is to offer at premium prices a wide selection
of distinctive clothes accompanied by excellent customer service. Halsey presents the following data
for 2007 and 2008.
                                                                                       2007           2008
1. Number of customers serviced                                                           40,000        41,000
2. Pieces of clothing purchased and sold                                                  40,000        41,000
3. Average selling price                                                                     $60           $59
4. Average cost per piece of clothing                                                        $40           $41
5. Selling and customer-service capacity (expressed in customers)                         51,000        43,000
6. Selling and customer-service costs                                                  $357,000       $296,700          $60,300
7. Purchasing and administrative capacity (expressed in designs)                             980           850
8. Purchasing and administrative costs                                                 $245,000       $204,000          $41,000

Total selling and customer-service costs depend on the number of customers that Halsey has
created capacity to support, not the actual number of customers that Halsey serves. Total
purchasing and administrative costs depend on purchasing and administrative capacity that Halsey
has created (defined in terms of the number of distinct clothing designs that Halsey can purchase
and administer). Purchasing and administrative costs do not depend on the actual number of
distinct clothing designs purchased. Halsey purchased 930 distinct designs in 2007 and 820
designs in 2008.

At the start of 2008, Halsey planned to increase operating income by 10% over operating income
in 2007.

Required:
1. Is Halsey's strategy one of product differentiation or cost leadership? Explain.

Halsey is following a product differentiation strategy. Halsey offers a wide selection of clothes and
excellent customer service but at a premium price. A premium price requires product differentiation.

2. Calculate Halsey's operating income in 2007 and 2008.
                                                                                        2007              2008
Units sold                                                                                40,000            41,000
Unit selling price                                                                           $60               $59
Total revenue                                                                         $2,400,000        $2,419,000
Less costs:
      Cost of goods sold
            Pieces of clothing purchased and sold                                         40,000            41,000
            Average cost per piece of clothing                                               $40               $41
            Cost of goods sold                                                        $1,600,000        $1,681,000
      Other costs:
            Selling and customer-service costs                                           357,000       296,700
            Purchasing & administrative costs                                            245,000       204,000
Total Costs                                                                           $2,202,000    $2,181,700
Operating Income                                                                        $198,000      $237,300
Increase in operating income                                                                  $39,300
                                                                                             Favorable

3. Calculate the growth, price-recovery, and productivity components of changes in
   operating income between 2007 and 2008.

The Growth Component measures the change in operating income attributable
solely to the change in the quantity of output sold between 2007 and 2008.

The Growth Component:
     Revenue effect of growth component:
         Units sold in 2008                                                               41,000
         Units sold in 2007                                                               40,000
                     Increase in units sold                                                1,000
         Average selling price per unit during 2007                                          $60
                     Favorable revenue effect                                            $60,000


                                                                                      Selling and    Purchasing
                                                                                      Customer-         and
                                                                         Clothes        Service     Administrative
     Cost effect of growth component:                                     Costs        Costs (1)      Costs (2)
         Actual units of input or capacity that would                                                             Capacity = customers
         have been used to produce year 2008 output                        41,000          51,000             980 output = article of clothing
         assuming the same input/output relationships
         that existed in 2007
         Less:
         Actual units of inputs or capacity used to
         produce 2007 output                                            40,000        51,000                980
         Difference                                                      1,000              0                 0
         Input prices in 2007                                           $40.00             $7             $250
                     Unfavorable Cost effect                          $40,000              $0                $0
                                 (40,000/40,000 X 41,000) Each customer generates sales of one article of clothing

         Note: (1) Selling & customer-service costs depend on the number of customers that Halsey
               has created capacity to support, not the actual number of customers serviced.
               (2) Purchasing and administrative costs depend on purchasing and administrative
               capacity that Halsey has created (defined in terms of the number of distinct clothing
               designs that Halsey can purchase and administer). Purchasing and administrative
               costs do not depend on the actual number of distinct clothing designs purchased.

     Summary:
        Revenue effect of growth component:                                                             $60,000 Favorable
        Cost effect of growth component:                                                               ($40,000) Unfavorable
                   Change in operating income due to the growth component                               $20,000 Favorable

The Price-Recovery Component measures the change in operating income attributable solely to
changes in a Meredith's prices of inputs and output between 2007 and 2008.

The Price-Recovery Component:
     Revenue effect of price-recovery component:
         Output price in 2008                                                              $59
         Output price in 2007                                                               60
                    Difference in price                                                    ($1)
                    Times actual units of output sold in 2008                           41,000
         Unfavorable revenue effect of price-recovery component                       ($41,000)

     Cost effect of price-recovery component:                                      Selling and      Purchasing
                                                                                   Customer-           and
                                                                       Clothes      Service        Administrative
                                                                        Costs        Costs            Costs
         Input prices in year 2008                                       $41.00           $6.90            $240
         Input prices in year 2007                                        40.00           $7.00             250
                      Difference in price                                 $1.00          ($0.10)           ($10)
         Actual units of inputs or capacity that would
         have been used to produce year 2008 output                      41,000         51,000              980
         assuming the same input-output relationship
         that existed in 2007
         Unfav. cost effect of price-recovery component                 $41,000        ($5,100)          ($9,800)
         Total for all inputs (unfavorable)                             $26,100

     Summary:
        Revenue effect of price-recovery component:                                                    ($41,000) Unfavorable
        Cost effect of price-recovery component:                                                        $26,100 Unfavorable
        Change in operating income due to the price-recovery component                                 ($67,100) Unfavorable

The Productivity Component measures the change in costs attributable to a change in the quantity of
inputs used in 2008 relative to the quantity of inputs that would have been used in 2007 to produce the
2008 output.

The Productivity Component:                                                        Selling and      Purchasing
                                                                                   Customer-           and
                                                                       Clothes      Service        Administrative
                                                                        Costs        Costs            Costs
     Actual units of inputs or capacity used to produce
     year 2008 output                                                    41,000         43,000              850
     Less:
     Actual units of inputs or capacity that would have
     been used to produce year 2008 output assuming
     the same input-output relationship that existed
     in 2007                                                             41,000         51,000              980
     Difference in units                                                      0         (8,000)            (130)
     Input prices in 2008                                                $41.00             $7             $240
     Change in operating income (favorable)                                  $0       ($55,200)        ($31,200)
          Total for all inputs (favorable)                             ($86,400)
The change in operating income between 2005 and 2006 can be analyzed as follows:

                                                           Income    Revenue & Revenue &          Cost Effect         Income
                                                          Statement  Cost Effects Cost Effects         of            Statement
                                                          Amounts     of Growth     of Price-     Productivity       Amounts
                                                           in 2005   Component     Recovery       Component           in 2006
                                                                       in 2006    Component         in 2006
                                                                                    in 2006
     Revenues                                             $2,400,000    $60,000       ($41,000)                      $2,419,000
     Costs                                                 2,202,000      40,000        26,100        ($86,400)       2,181,700
     Operating Income                                       $198,000    $20,000       ($67,100)        $86,400         $237,300
                                                                                       $39,300
                                                                     Change in operating income in 2006
                                                                                       $39,300
                                                                                            $0

4. Does the strategic analysis of operating income indicate Halsey was successful in implementing
   its strategy in 2008? Explain.

     Companies that have successfully differentiated their products will show
     large favorable price-recovery and growth components.

     This is not the case for Halsey which is implementing a product differentiation strategy.

     Companies that have been successful at cost leadership will show large
     favorable productivity and growth components.

     The strategic analysis of operation income indicates that a significant amount of the increase in OI resulted
     from productivity gains rather than product differentiation.

     Although OI increased by more than the planned increase of 10% between 2007 and 2008, Halsey could
     not pass on increases in purchase costs to its customers via higher prices. Halsey was not able to charge
     a premium price for its product and services. Halsey needs to either change its strategy or improve the
     implementation of its current product differentiation strategy.
of clothing

								
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