Chapter 13 Strategic Profitability Analysis 1 What is Strategy? Strategy describes how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its overall objectives. Understanding the industry is key Porter’s 5 forces: Industry analysis regarding: Competitors Potential entrants into the market Equivalent products Bargaining power of customers Bargaining power of input suppliers 2 Generic Strategies 1. Product differentiation ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors 2. Cost leadership builds on brand loyalty and the willingness of customers to pay high prices strategic idea: ride down the experience curve faster than competitors key strategic variable: relative market share can be enhanced preferably during the early stages of the product life cycle Implementation of Strategy (Role of Management Accounting) : Management accountants design reports to help managers track progress in implementing strategy. Strategically relevant objectives Growth Price Recovery Productivity 3 Growth Component Revenue effect of growth component = (Actual units sold current year – actual units sold previous year) × output price (previous year) Cost effect of growth component = (Units of input or capacity that would have been used in previous year to produce current year’s output assuming the input-output relationship of previous year – actual units or capacity current year) × input price (previous year) 4 Price-Recovery Component Revenue effect of price-recovery component = (Output price (current year) – Output price (previous year)) × Actual units of output sold (current year) Cost effect of price-recovery component = (Input prices (current year) – Input prices (previous year)) × units of input or capacity that would have been used in previous year to produce current year’s output assuming the inputoutput relationship of previous year (current year) 5 Productivity Component Productivity component = (actual units or capacity current year – units of input or capacity that would have been used in previous year to produce current year’s output assuming the inputoutput relationship of previous year) × input prices current year) 6 Change in Operating Income Change in operating income Growth component Price-recovery component Productivity component (prices and volume of current year) Revenue effect Cost effect Revenue effect Cost effect (productivity and prices (productivity previous year volume of current year) previous year) 7 Managing unused capacity: Engineered Costs vs Discretionary 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 Engineered costs pertain to processes that are detailed, physically observable, and repetitive. Discretionary costs have two important features. They arise from periodic (usually yearly) decisions regarding the maximum amount to be incurred. They have no measurable cause-and-effect relationship between output and resources used. Discretionary costs are associated with processes that are sometimes called black boxes, because they are less precise and not well understood E.g. Advertising, executive training, R&D costs 8 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 CCs: 13-19 modified from 11th ed. (8%) 13-23 (=11.13-21) (8%) 13-27 (=11.13-25) (8%) 13-33 (=11.13-30) (9%) 13-35 (=11.13-33) (5%) 13-39 (new in 11th ed.) (9%) 9 13-19 2006 Number of T-shirts purchased 200.000 Number of T-shirts discarded 2.000 Number of T-shirts sold 198.000 Average selling price $ 25,00 Average cost per T-shirt $ 10,00 Administrative capacity (number of customers) 4.000 Administrative costs $1.200.000 Administrative cost per customer $ 300 Design staff 5 Total design costs $ 250.000 Design cost per employee $ 50.000 1. 2. 3. 2007 250.000 3.300 246.700 $ 26,00 $ 8,50 3.750 $1.162.500 $ 310 5 $ 275.000 $ 55.000 OI both years growth, price-recovery, and productivity components of OI change comment 10 3-23 Units peroduced and sold Selling price 2005 200 $40 000 2006 210 $42 000 Direct materials (kg) Direct materials cost /kg 300 000 $8 310 000 $8,50 Manufacturing capacity (units of D4H) Total conversion costs 250 250 $2 000 000 $2 025 000 Conversion costs per unit of capacity Selling and customer service capacity (customers) Total selling and customer service costs Selling and customer service capacity cost per customer Design staff Total design costs Design cost per employee $8 000 48 100 100 95 $1 000 000 $940 500 $10 000 $9 900 12 12 $1 200 000 $1 212 000 $100 000 $101 000 Number of customers 1. 2. 3. 75 80 OI both years growth, price-recovery, and productivity components of OI change comment 11 13-33 2007 40 000 2008 40 000 Average selling price $60 $59 Average cost per piece $40 $41 51 000 43 000 $357 000 $296 700 Selling and customer service capacity cost / customer $7 $6.90 Purchasing and administrative capacity (dist designs) 980 850 $245 000 $204 000 $250 $240 Pieces of clothing purchased and sold Selling and customer service capacity (customers) Selling and customer service costs Purchasing and administrative costs Purchasing and administrative capacity cost per dist. design 1. 2. 3. 4. Strategy? OI both years growth, price-recovery, and productivity components of OI change comment 12 13-35 1. 2. 3. 750 000 subscribers in 2005 5 customer help desks 8 hrs/day, 250 days per year fixed salary: $36 000 45 000 customer calls @ 10 minutes (average) help call costs: engineered or discretionary? cost of unused capacity in each case 2006: 900 000 subscribers, same percentage calling help as in 2005; requirement as in 2. 13 13-39 Current Operation Cafeteria employees' annual wages Additional benefits (% of salary) Downsized Operation $150.000 25% $75.000 25% Days of cafeteria operation 250 Annual cost of utilities and maintenance (paid by Mayfair) $ 40.000 250 $40.000 Daily sales: Entrees Cost of supplies (% of revenues) Annual rent (paid to Mayfair) Percent of revenues above breakeven (paid to Mayfair) 1. 2. 3. 250 $40.000 Wilco's revenues and costs: 75 at $5,00 each 120 at $4,00 each Sandwiches Beverages/desserts 100 at $3,00 each 250 at $1,00 each 60% Wilco Foods' Proposal 150 at 280 at 50% $3,50 each $1,50 each 95 at 230 at $4,00 each $1,50 each 70% $18.000 5,00% Downsizing acceptable? Breakeven level of revenues fo Wilco? Preferred alternative? other factors to be considered 14 3-27 Units of work performed Selling price Software implementation, labor hrs Cost per software implementation labor hr. Software-implementation support capacity (units of work) Total cost of software implementation support Software-implementation support capacity cost/ unit of work 2005 2006 60 70 $50,000 $48 000 30 000 32 000 $60 $63 90 90 $360 000 $4 000 $369 000 $4 100 3 3 $375 000 $125 000 $390 000 $130 000 Number of emloyees doing software development Total software developmant costs Software development cost per employee 1. 2. 3. OI both years growth, price-recovery, and productivity components of OI change comment 15 Quiz 1. a. b. c. d. Reengineering is a key element in cost leadership strategy. price recovery strategy. product differentiation strategy. productivity measures. 2. Which of the following is not a key aspect of reengineering? Eliminating unnecessary activities and tasks Developing employee skills Changing roles and responsibilities Working on one activity at a time to improve production processes a. b. c. d. 16 Quiz 3. The analysis used for evaluating the success of a strategy through changes in operating income components uses actual results of the current year compared to a. b. c. d. budgeted results for the current year. actual results for the previous year. target amounts for the current year. budgeted results for the previous year. 4. The growth in market share is used in calculating the net income effect d. a. of industry growth. b. of product differentiation. c. of cost leadership. of either cost leadership or product differentiation, depending upon the strategy chosen. 17 Quiz 5. The following strategic analysis of profitability was prepared for the Corum Company: Revenues Costs Operating income Income Statement Amounts in 2004 (1) Revenue and Cost Effects of Growth Component in 2005 (2) Revenue and Cost Effects of Price-Recovery Component in 2005 (3) $300,000 240,000 $ 60,000 $40,000 F 24,000 U $16,000 F $85,000 F 34,000 U $51,000 F Cost Effect of Productivity Component in 2005 (4) Income Statement Amounts in 2005 (5) $8,000 U $8,000 U $425,000 306,000 $119,000 $59,000 F Change in operating income The market growth rate in the industry is 9% in 2005. Sales in 2005 were 17,000 units at $25 each. Corum sold 15,000 units at a unit-selling price of $20 in 2004. The effect of the industry market size factor for Corum Company in 2005 was a. $5,200. b. $10,800. c. $12,240. d. $13,500. 18
© Copyright 2024 Paperzz