strategic profitability analysis
TRANSCRIPT
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Strategic Profitability AnalysisPPT-5
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Learning Objective 1
Recognize which of two generic
strateg es a company s us ng.
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What is Strategy?
Strategy describes how an organization matches
its own capabilities with the opportunities in the
marketplace to accomplish its overall objectives.
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What is Strategy?
What is the focus of industry analysis?
Competitors
Potential entrants into the market
Equivalent productsBargaining power of customers
Bargaining power of input suppliers
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Basic Strategies
1. Product differentiation
2. Cost leadership
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Implementation of Strategy
Management accountants design reports
to help managers track progress inimplementing strategy.
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Learning Objective 2
Identify what comprises
reeng neer ng.
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Reengineering
Reengineering is the fundamental rethinking
of business processes delivery to achieve
improvements in critical measures of
performance such as cost, quality, service,speed, and customer satisfaction.
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Reengineering Example
Customers needs identified Quantities to be shipped
matched against purchase order
Dallas Co. order delivery system:
Purchase order issued
Production scheduled
Manufacturing completed
Finished goods to inventory
Shipping documents sent
to Billing Department
Invoice issued
Customer payment follow up
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Reengineering Example
The following was determined:
production begins in the manufacturing department.
Sometimes items are held in inventory untila truck is available for shipment.
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Reengineering Example
If the quantity shipped does not match the
number of items requested by the customer,
a s ecial shi ment must be scheduled.
Dallas discovered that the many transfers
across departments slowed down theprocess and created delays.
A multifunctional team reengineered the
order delivery process.
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Reengineering Example
A customer relationship manager is responsible
for each customer.
Dallas will enter into long-term contracts with
customers specifying quantities and prices.
The customer relationship manager will work
with the customer and manufacturing to specify
delivery schedules one month in advance.
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Reengineering Example
The schedule of customer orders will be sent
electronically to manufacturing.
Completed items will be shipped directly from
the manufacturing plant to customer sites.
Each shipment will automatically trigger an
invoice to be sent electronically to the customer.
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Learning Objective 3
Present the four perspectives
o t e a ance scorecar .
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Perspectives of Performance
1. Financial
3. Internal business process
4. Learning and growth
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Financial Perspective
Objective:
Measures:Increase in operating income
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Financial Perspective
Initiatives:Target
Performance
Actual
Performance
Manage costs andunused capacity
Build strong customerrelationships
$2,000,000
$3,000,000
6%Build strong customer
relationships
$2,100,000
$3,420,000
6.48%
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Customer Perspective
Objectives:
Increase market share
Measures:Market share in communication
networks segment
Customer satisfaction survey
ncrease cus omer sa s ac on
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Customer Perspective
Initiatives:Target
Performance
Actual
Performance
Identify future needsof customer
Identify new targetcustomer segments
6%
7
90% give toptwo ratings
Increase customer focusof sales organization
7%
8
87% give toptwo ratings
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Internal Business
Process Perspective
Objectives:
Improve manufacturing
Measures:
Yield
On-time delivery
Meet specified delivery dates
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Internal Business
Process Perspective
Initiatives:Target
Performance
Actual
Performance
Identify problems andimprove quality
Reengineer orderdelivery process
78%
92%
79.3%
90%
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Learning and Growth Perspective
Objectives:
Align employee and
Measures:
Employee satisfaction survey
Improvements in process controls
Improve manufacturing processes
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Learning and Growth Perspective
Initiatives:Target
Performance
Actual
Performance
mp oyee
participation andsuggestion programto build teamwork
Organize R&D/manufacturing teamsto modify processes
oemployees
give toptwo ratings
5
oemployees
give toptwo ratings
5
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Aligning the Balanced
Scorecard to Strategy
Different strategies call for different scorecards.
What are some of the financial
Operating income
Revenue growth
Cost reduction is some areas
Return on investment
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Aligning the Balanced
Scorecard to Strategy
What are some of the customer
perspective measures?
Market share
Customer satisfactionCustomer retention percentage
Time taken to fulfill customers requests
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Aligning the Balanced
Scorecard to Strategy
What are some of the internal business
perspective measures?
Manufacturing capabilities
Number of new products or services
New product development time
Number of new patents
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Aligning the Balanced
Scorecard to Strategy
Operations Process:
Yield
e ec ra es
Time taken to deliver product to customers
Percentage of on-time delivery
Setup time
Manufacturing downtime
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Aligning the Balanced
Scorecard to Strategy
Post-sales service:
defective products
Hours of customer training forusing the product
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Aligning the Balanced
Scorecard to Strategy
What are some of the learning and growth
perspective measures?
Employee satisfaction scores
Employee turnover rates
Information system availability
Percentage of processes with advanced controls
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Pitfalls When Implementing
a Balanced Scorecard
What pitfalls should be avoided when
implementing a balanced scorecard?
. - -
linkages to be precise.
2. Dont seek improvements acrossall measures all the time.
3. Dont use only objective measures
on the scorecard.
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Pitfalls When Implementing
a Balanced Scorecard
4. Dont fail to consider both costs and benefits
of initiatives such as spending on information
ec no ogy an researc an eve opmen .
5. Dont ignore nonfinancial measures when
evaluating managers and employees.6. Dont use too many measures.
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Learning Objective 4
Analyze changes in operating
ncome to eva uate strategy.
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Evaluating the Success
of a Strategy
Assume the following operating incomes:
Year 2003 Year 2004
evenues:
(1,000,000 $26) $26,000,000
(1,100,000 $24) $26,400,000Expenses:
Materials 4,050,000 3,631,320
Other 16,000,000 16,000,000
Operating income $ 5,950,000 $ 6,768,680
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Evaluating the Success
of a Strategy
How can the increase in operating
income of $818,680 be evaluated?
Growth
Price recoveryProductivity
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Growth Component
Assume that for 2003, Dallas produced
and sold 1,000,000 units at $26 per unit.
During the year 2004, Dallas produced
and sold 1,100,000 units at $24 per unit.
What is the revenue effect of growth?
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Growth Component
Revenue effect of growth component
(Actual units of output sold in 2004
=Actual units of output sold in 2003)
Output price in 2003
(1,100,000 1,000,000) $26 = $2,600,000 F
This component is favorable because
it increases operating income.
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Growth Component
Cost effect of growth component
Actual units of input or capacity that would
have been used in 2003 to produce year 2004
output assuming the same input-output
relationship that existed in 2003
Actual units or capacity to produce 2003 output
Input prices in 2003
=
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Growth Component
To produce 1,100,000 units in 2004 compared
with the 1,000,000 units produced in 2003
a 10% increase Dallas would re uire a
proportional increase in direct materials.
Assume that 3,000,000 square centimeters ofmaterials were used to produce the 1,000,000
units in 2003 at a cost of $1.35
per square centimeter.
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Growth Component
Assume that manufacturing conversion costs,
selling and customer service costs and research
and develo ment costs were $16 000 000
and remained stable during 2004.
What is the cost effect of the growth component?3,000,000 110% = 3,300,000 centimeters
(3,300,000 3,000,000) $1.35 = $405,000 U
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Operating Income and Growth
What is the net increase in operating income
as a result of growth?
Revenue effect of growth component $2,600,000 F
Cost effect of growth component 405,000 U
Increase in operating income
due to growth component $2,195,000 F
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Price-Recovery Component
Revenue effect of price-recovery component
= (Output price in 2004 Output price in 2003)
Actual units of output sold in 2004
What is the revenue effect of the
price-recovery component?
($24 $26) 1,100,000 = $2,200,000 U
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Price-Recovery Component
Cost effect of price-recovery component
(Input prices in 2004 Input prices in 2003)
=c ua un s o npu s or capac y a wou
have been used to produce year 2004 output
assuming the same input-output relationshipthat existed in 2003
Assume that in the year 2004, direct materials
costs were $1.31 per square centimeter.
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Price-Recovery Component
What is the cost effect of the
price-recovery component?
($1.31 $1.35) 3,300,000 = $132,000 F
What is the total effect on operatingincome of the price-recovery component?
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Operating Income and
Price-Recovery Component
Revenue effect
of price-recovery component $2,200,000 U
Cost effect
of price-recovery component 132,000 F
Decrease in operating incomedue to price-recovery component $2,068,000 U
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Productivity Component
Productivity component
Actual units of inputs or capacity to
=
Input prices in 2004
Actual units of inputs or capacity
that would have been used to produceyear 2004 output assuming the same
input-output relationship that existed in 2003
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Productivity Component
Assume that 2,772,000 actual square
centimeters of direct materials were
used in the year 2004.
Actual price was $1.31/square centimeter.
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Productivity Component
What is the productivity component of cost changes?
=
There is a $691,680 increase in operating
income due to the productivity component.
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Change in Operating Income
Increase in operating income
$818,680
Growth
component
$2,195,000 F
Price-recovery
component
$2,068,000 U
Productivity
component
$691,680 F
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Learning Objective 5
Distinguish between engineered
an scret onary costs.
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Engineered Costs
Engineered costs result specifically from a clear
cause-and-effect relationship between output
and the resources needed to produce that output.
They can be variable or fixed in the short run.
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Discretionary Costs
Discretionary costs have two important features.
decisions regarding the maximum
amount to be incurred.
They have no measurable cause-and-effect
relationship between output and resources used.
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Relationships Between
Inputs and Outputs
Engineered costs differ from discretionary
costs along two key dimensions:
Type of process
Level of uncertainty
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Relationships Between
Inputs and Outputs
Engineered costs pertain to processes that are
detailed, physically observable, and repetitive.
Discretionary costs are associated with processes
that are sometimes called black boxes, because
they are less precise and not well understood.
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Learning Objective 6
Identify unused capacity
an ow to manage t.
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Managing Unused Capacity
What actions can management take
when it identifies unused capacity?
Attempt to eliminate the unused capacity
Attempt to use the unused capacity to grow revenue
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Name of the Student:Class Roll No. University No.:Date: Marks:10
QUIZ No. 5
Strategic Profitability Analysis
ATTEMPT ALL QUESTIONS
MULTIPLE CHOICE QUESTONS
1. Which one of the following is a market force that industry
analysis will focus on?
A. Employees B. Management style C. Capital markets D. Similarproducts
ANS. D
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QUIZ-5
2.Which one of the following factors would make entry into themarket attractive to potential new businesses?
A. Limited profit margins B. Current market has close customer relations C.Current advanced product development D. Small capital needs
.
3. Improving manufacturing capability would be included in
which one of the following perspectives? A. Customer B. Learning and growth C. Internal business process D. Financial
ANS. C
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QUIZ-54. A measure of the change in operating income attributable solely to changes in
dollar amounts of inputs and outputs from one period to the next is acomponent known as the
A. revenue component. B. growth component. C. price-recovery component.
D. productivity component.
ANS. C
5. A firm that focuses on a cost leadership strategy would be most likely to do
which one of the following?
A. Establish low selling prices B. Provide superior products C. Build brand
loyalty D. Cultivate unique products
ANS.A
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QUIZ-5
TRUE OR FALSE STATEMENTS
6.The fundamental rethinking and redesign of business processes to achieveimprovements is reengineering.
TrueFalse
ANS. TRUE
7. The customer perspective under the balanced scorecard approach focuses onhow to reduce costs to provide less expensive goods.
TrueFalse
ANS. FALSE
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QUIZ-5
8. When implementing a balanced scorecard, the cause-and-effectlinkages are always precise.
TrueFalse
ANS. FALSE
9. When evaluating managers and employees under the balancedscorecard approach, only financial measures should beconsidered.
TrueFalse
ANS. FALSE
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QUIZ-5
10. A company can adequately gauge the success
of their strategy by measuring the change inoperating income from one year to the next.
True
a se
ANS. FALSE
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HOME ASSIGNMENT-5
1. DEFINE STRATEGY. WHAT IS A CUSTOMER
PREFERENCE MAP ANDWHY IS IT USEFUL?
2. WHAT IS A STRATEGY MAP? ALSO EXPLAIN
BALANCED SCORE CARD. DESCRIBE THREE
FEATURES OF A GOOD BALANCED SCORE
CARD.
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QUESTIONS RELATING TO STRATEGIC PROFITABILITY ANALYSISQ.NO.1
Snyder Corporation is small information systems consulting firm thatspecializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder must
delivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORT
CAPACITY ( IN UNITS OF WORK)
90 90
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT
3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Calculate the operating income of Snyder Corporation in 2008 and 2009.
ANS. 1 Strategic analysis of operating income
Operating income for each year is as follows:2008 2009
Revenues ($50,000 60; $48,000 70) $3,000,000 $3,360,000
Costs
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Software implementation labor costs
($60 30,000; $63 32,000) 1,800,000 2,016,000Software implementation support costs
($4,000 90; $4,100 90) 360,000 369,000Software development costs
($125,000 3; $130,000 3) 375,000 390,000
Total costs 2,535,000 2,775,000Operating income $ 465,000 $ 585,000Change in operating income $120,000 F
Q. No. 2Describe three key components in doing a strategic analysis of operating
income.
Q.NO. 3Snyder Corporation is small information systems consulting firm that
specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY ( IN UNITS OF WORK)
90 90
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT
3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the start
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of each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Calculate the growth, price recovery and productivity components thatexplain the change in operating income from 2008-2009.
ANS.The Growth Component
Revenue effectof growth
=Actual units of Actual units of
output sold output soldin 2006 in 2005
Sellingprice
in 2005
= (7060) $50,000 = $500,000 F
Cost effectof growth forvariable costs
=
Units of input Actual unitsInput
required to produce of inputprice
2006 output used to producein 2005
in 2005 2005 output
Cost effect ofgrowth forfixed costs
=
Actual units of capacity in2005 if adequate to produce
2006 output in 2005 AcOR
If 2005 capacity inadequateto produce 2006 output in 2005,
units of capacity requiredto produce 2006 output in 2005
tual unitsof capacity
in 2005
Price per
unit of capacityin 2005
Software implementation labor costs that would be required in 2006 to produce 70 unitsinstead of the 60 units produced in 2005, assuming the 2005 input-output relationship continued
into 2006, equal 35,000 (30 000
60
, 70) labor-hours. Software implementation support costs
would not change since adequate capacity exists in 2005 to support year 2006 output andcustomers. Software development costs are discretionary costs not directly related to output and,hence, would not change in 2005 even if Snyder had to produce and sell the higher year 2006output in 2005.
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The cost effects of growth component are
Software implementation labor costs (35,00030,000) $60 = $300,000 USoftware implementation support costs (9090) $4,000 = 0Software development costs (33) $125,000 = 0Cost effect of growth $300,000 U
In summary, the net increase in operating income as a result of the growth component equals:Revenue effect of growth $500,000 FCost effect of growth 300,000 UChange in operating income due to growth $200,000 F
The Price-Recovery Component
Revenue effect ofprice-recovery
= Actual units
Selling price Selling priceof output
in 2006 in 2005sold in 2006
= ($48,000$50,000) 70 = $140,000 U
Cost effect ofprice-recovery for
variable costs=
Input Inputprice in price in
2006 2005
Units of inputrequired to produce2006 output in 2005
Cost effect ofprice-recovery for
fixed costs=
Price per Price perunit of unit of
capacity capacityin 2006 in 2005
Actual units of capacity in2005, if adequate to produce
2006 output in 2005OR
If 2005 capacity inadequate toproduce 2006 output in 2005,units of capacity required toproduce 2006 output in 2005
Software implementation labor costs ($63$60) 35,000 = $105,000 USoftware implementation support costs ($4,100$4,000) 90 = 9,000 U
Software development costs ($130,000$125,000) 3 = 15,000 UCost effect of price recovery $129,000 U
In summary, the net decrease in operating income as a result of the price-recovery componentequals:
Revenue effect of price-recovery $140,000 UCost effect of price-recovery 129,000 UChange in operating income due to price recovery $269,000 U
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The Productivity Component
Cost effect ofproductivity forvariable costs
=Actual units of Units of input
input used to produce required to produce2006 output 2006 output in 2005
Inputprice in
2006
Cost effect ofproductivity for
fixed costs=
Actual units of capacity in
2005, if adequate to produce2006 output in 2005Actual units of ORcapacity in If 2005 capacity inadequate2006 to produce 2006 output in 2005,units of capacity required topro
duce 2006 output in 2005
Price perunit of
capacityin 2006
The productivity component of cost changes are:
Software implementation labor costs (32,00035,000) $63 = $189,000 FSoftware implementation support costs (9090) $4,100 = 0Software development costs (33) $130,000 = 0Change in operating income due to productivity $189,000 F
The change in operating income between 2005 and 2006 can be analyzed as follows:
IncomeStatementAmountsin 2005
(1)
Revenue andCost Effectsof Growth
Componentin 2006
(2)
Revenue andCost Effects ofPrice-Recovery
Componentin 2006
(3)
Cost Effect ofProductivityComponent
in 2006(4)
IncomeStatementAmountsin 2006
(5) =(1) + (2) + (3) + (4)
Revenues $3,000,000 $500,000 F $140,000 U $3,360,000
Costs 2,535,000 300,000 U 129,000 U $189,000 F 2,775,000
Operating income $ 465,000 $200,000 F $269,000 U $189,000 F $ 585,000
$120,000 FChange in operating income
Q.NO.4Snyder Corporation is small information systems consulting firm that
specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORT 90 90
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CAPACITY ( IN UNITS OF WORK)
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT
3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the start
of each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Comment on your answer in requirement. What do these componentsindicate?
ANS. 4The analysis of operating income indicates that a significant amount of the
increase in operating income resulted from Snyders productivity improvements in2006. The company had to reduce selling prices while labor costs were increasing
but it was able to increase operating income by improving its productivity. Theproductivity gains also allowed Snyder to be competitive and grow the business.The unfavorable price recovery component indicates that Snyder could not pass onincreases in labor-related wages via price increases to its customers, very likelybecause its product was not differentiated from competitors offerings.
Q. No. 5. Define strategy.
Q.NO.6Snyder Corporation is small information systems consulting firm that
specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000
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SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY ( IN UNITS OF WORK)
90 90
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT
3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Suppose that during 2009 the market for implementing sales managementsoftware increases by 5% and that Snyder experience a 1% decline in sellingprices. Assume that any further decreases in selling price and increases in market
share are strategic choices by Snyders management to implement their strategy.Calculate how much of the change in operating income from 2008 to 2009 isdue to the industry market size factor, cost leadership and productdifferentiation. How successful has Snyder been in implementation itsstrategy. Explain.
ANS.Analysis of growth, price-recovery, and productivity components
Effect of industry-market-size factor on operating income
Of the 10-unit increase in sales from 60 to 70 units, 5% or 3 units (5%
60) aredue to growth in market size, and 7 (10 3) units are due to an increase in marketshare.The change in Snyders operating income from the industry market-size factorrather than from specific strategic actions is:
$200,000 (the growth component in Exercise 13-27) 103
$60,000 FEffect of product differentiation on operating income
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Of the $2,000 decrease in selling price, 1% or $500 (1% $50,000) is due to ageneral decline in prices, and the remaining decrease of $1,500 ($2,000 $500) isdue to a strategic decision by Snyders management to implement its costleadership strategy of lowering prices to stimulate demand.The change in operating income due to a decline in selling price (other than the
strategic reduction in price included in the cost leadership component) $500 70units = $ 35,000 UIncrease in prices of inputs (cost effect of price recovery) 129,000 UChange in operating income due to product differentiation $164,000 U
Effect of cost leadership on operating incomeProductivity component $189,000 F
Effect of strategic decision to reduce selling price, $1,500 70 105,000 UGrowth in market share due to productivity improvement and strategic decision toreduce selling price
$200,000 (the growth component in Exercise 13-27) 107
140,000 FChange in operating income due to cost leadership $224,000 F
The change in operating income between 2005 and 2006 can then be summarizedas
Change due to industry-market-size $ 60,000 FChange due to product differentiation 164,000 UChange due to cost leadership 224,000 F
Change in operating income $120,000 F
Snyder has been very successful in implementing its cost leadership strategy. Dueto a lack of product differentiation, Snyder was unable to pass along increases inlabor costs by increasing the selling pricein fact, the selling price declined by$2,000 per work unit. However, Snyder was able to take advantage of itsproductivity gains to reduce price, gain market share, and increase operatingincome.
Q. No. 7 Describe the five key forces to consider when analyzing an industry.
Q.NO. 8Snyder Corporation is small information systems consulting firm that
specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of work
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performed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000
SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY ( IN UNITS OF WORK)
90 90
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWARE
DEVELOPMENT
3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of software
development employees. The software development staff and costs have no directrelationship with the number of units of work performed.
Where possible calculate the amount and cost of (a) unused softwareimplementation support capacity and (b) unused software development capacity atthe beginning of 2009 based on units of work performed in 2009. If you areunable to calculate the amount and cost of unused capacity. Indicate why not.
ANS.Identifying and managing unused capacity
The amount and cost of unused capacity at the beginning of year 2006 based on workperformed in year 2006 follows:Amount of Cost of
Unused UnusedCapacity Capacity
Software implementation support, 90 70; (90 70) $4,100 20 $82,000Software development Discretionary Discretionary
cost, so cannot cost, so cannotdetermine be calculated*
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unused capacity*
*The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs difficult.Management cannot determine the software development resources used for the actual output produced to compareagainst software development capacity.
Q.NO. 9Snyder Corporation is small information systems consulting firm that
specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY ( IN UNITS OF WORK)
90 90
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT 3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Suppose Snyder can add or reduce its software implementation support capacityin increments of 10 units. What is the maximum amount of costs that Snydercould save in 2009 by downsizing software implementation support capacity?
ANS.
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Snyder can reduce software implementation support capacity from 90 units
to 75 (90 15) units. Snyder will save 15 $4,100 = $61,500. This is themaximum amount of costs Snyder can save by downsizing in 2006. It cannotreduce capacity further (by another 15 units to 60 units) because it would then not
have enough capacity to perform 70 units of work in 2006 (work that contributessignificantly to operating income).
Q.NO.10Snyder Corporation is small information systems consulting firm that
specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.
PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR
$ 60 $ 63
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY ( IN UNITS OF WORK)
90 90
TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT
$ 360,000 $ 369,000
SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK
$ 4,000 $ 4,100
NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT
3 3
TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE
$ 125,000 $ 130,000
Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation support
capacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Snyder , in fact, does not eliminate any of its unused software implementationsupport capacity. Why might Snyder not downsize?
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ANS.Snyder may choose not to downsize because it projects sales increases that
would lead to greater demand for and utilization of capacity. Snyder may have alsodecided not to downsize because downsizing requires significant reduction incapacity. For example, Snyder may have chosen to downsize additional software
implementation support capacity if it could do so in, say, increments of 5, ratherthan 15 units. Not reducing significant capacity by laying off employees boostsemployee morale and keeps employees more motivated and productive.
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