Question #1
Consider the following potential investment, which has the same risk as the firm's other projects:
|
Time
|
Cash Flow
|
|
0
|
-$192,000
|
|
1
|
$68,000
|
|
2
|
$70,000
|
|
3
|
$72,000
|
|
4
|
$74,000
|
The firm's current weighted-average cost of capital is 15%.
a) How much value will this investment create for the firm?
b) At what discount rate will this project break even?
c) Should the firm do this investment? Be sure to justify your recommendation.
d) How would your analysis change if this potential investment was more risky than the firm's other projects? Be specific.
Question #2
A firm believes it can generate an additional $450,000 per year in revenues for the next 6 years if it replaces existing equipment that is no longer usable with new equipment that costs $500,000. The additional sales will require an initial investment in net working capital of $35,000, which is expected to be recovered at the end of the project (after 6 years). The existing equipment has a book value of $15,000 and a market value of $5,000. The firm expects to be able to sell the new equipment when it is finished using it (after 6 years) for $20,000. The contribution margin is expected to be 40% of revenue. Assume the firm uses straight line depreciation, its marginal tax rate is 35%, and its weighted-average cost of capital is 14%.
a) How much value will this new equipment create for the firm?
b) At what discount rate will this project break even?
c) Should the firm purchase the new equipment? Be sure to justify your recommendation.
Question #3
After a study of its processes, a firm determines it has the following 4 overhead cost pools related to the production of its 2 products: Set-up, Shipping, Product design, and Plant utilities and administration.
Both products are produced in the same facility using the same equipment. Product XYZ is a higher volume product that takes a relatively small amount of machine-time to produce, while Product ABC is a lower volume product that takes a significantly higher amount of machine-time. Also, Product XYZ requires very little set-up time, while Product ABC requires a more time-consuming set-up. Both products are shipped in a similar way, with each shipment requiring a similar amount of work.
Based on this information, determine the hierarchy level for each cost pool and an appropriate allocation base for each pool.
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Cost Pool
|
Hierarchy Level
|
Allocation Base
|
|
Setup
|
|
|
|
Shipping
|
|
|
|
Product design
|
|
|
|
Plant utilities & administration
|
|
|
Question #4
The Dana Company manufactures a specialized piece of manufacturing equipment. Its machine has always been distinct from its competitors' machines and is considered to be superior to their products, too. However, its competitors are catching up both in terms of features and quality. Dana has refined its manufacturing to the point that it never produces defective machines, relying on well-trained workers and highly-complex manufacturing equipment. Without these workers and this equipment, Dana would have a difficult time producing its products without defects. Since a large amount of materials are wasted in production, however, one of its goals is to reduce the amount of direct materials used to produce the machines. Given the unique and specialized nature of the machines, Dana often needs to provide a significant amount of support to its customers.
a) Based on this information, what type of strategy do you believe Dana is pursuing? Be sure to back up your claim with specific evidence.
b) List and justify eight metrics (2 in each of the Balanced Scorecard perspectives) that you believe Dana should include in its Balanced Scorecard.
c) Dana calculates the following figures:
|
2012 operating income
|
$2,700,000
|
|
2013 operating income
|
$3,319,500
|
|
Growth component
|
$280,000
|
|
Price-recovery component
|
$247,500
|
|
Productivity component
|
$92,000
|
In 2013, Dana sold more units and charged a higher price than in 2012. Dana also paid more for raw materials in 2013 than it did in 2012.
Based on this information, do you believe Dana's increase in operating income in 2013 is consistent with its goals and strategy? Be sure to justify your answer with specific information.
Question #5
Consider the following quality cost report:
|
Q1
|
Q2
|
Q3
|
Q4
|
|
Prevention costs
|
$1,020
|
$1,508
|
$1,300
|
$1,140
|
|
Appraisal costs
|
$880
|
$910
|
$766
|
$532
|
|
Internal failure costs
|
$710
|
$636
|
$472
|
$358
|
|
External failure costs
|
$1,470
|
$1,264
|
$672
|
$512
|
|
Total quality costs
|
$4,080
|
$4,318
|
$3,210
|
$2,542
|
|
Total revenues
|
$16,480
|
$18,160
|
$18,600
|
$18,040
|
Do you believe this firm's quality initiatives have been successful? Be sure to justify your opinion with specific information.
Question #6
a) What is a transfer price?
b) How can firms use transfer prices strategically?
Question #7
a) What is goal incongruence?
b) How can using the metric "return on investment" for performance evaluation lead to goal incongruence?
c) What can a firm do to reduce goal incongruence caused by using "return on investment" for performance evaluation?
Question #8
a) List and describe the 4 "levers of control" that a firm can use to motivate behavior that is consistent with its strategy?