Bannister Company, an electronics firm, buys circuit boards and manually inserts various electronic devices into the printed circuit board. Bannister sells its products to original equipment manufacturers. Profits for the last two years have been less than expected. Mandy Confer, owner of Bannister, was convinced that her firm needed to adopt a revenue growth and cost reduction strategy to increase overall profits. After a careful review of her firm’s condition, Mandy realized that the main obstacle for increasing revenues and reducing costs was the high defect rate of her products (a 6 percent reject rate). She was certain that revenues would grow if the defect rate was reduced dramatically. Costs would also decline as there would be fewer rejects and less rework. By decreasing the defect rate, customer satisfaction would increase, causing, in turn, an increase in market share. Mandy also felt that the following actions were needed to help ensure the success of the revenue growth and cost reduction strategy: a. Improve the soldering capabilities by sending employees to an outside course. b. Redesign the insertion process to eliminate some of the common mistakes. c. Improve the procurement process by selecting suppliers that provide higher-quality circuit boards. Required: 1. State the revenue growth and cost reduction strategy using a series of cause-and-effect relationships expressed as if-then statements. 2. Illustrate the strategy using a strategy map. 3. Explain how the revenue growth strategy can be tested. In your explanation, discuss the role of lead and lag measures, targets, and double-loop feedback.

Kendall & Floyd provides landscaping services in Eastvale. Sara Kendall, the owner, is concerned about the recent losses the company has incurred and is considering dropping its yard cleanup services, which she feels are marginal to the company's business. She estimates that doing so will result in lost revenues of $67,800 per year (including the lost tree business from customers who use the company for both services). The present manager will continue to supervise the tree services with no reduction in salary. Without the yard cleanup business, Sara estimates that the company will save 14 percent of the equipment leases, labor, and other costs. She also expects to save 29 percent on rent and utilities. The Income statement before dropping the yard cleanup service follows. Required: a. Prepare a report of the differential costs and revenues if the yard cleanup service is discontinued. b. Should Sara discontinue the yard cleanup service? Complete this question by entering your answers…

Lisa currently manages the polished chrome division of Whispering Broadway, a business that specializes in ceiling light fixtures. Its performance has been stable for the past few years. However, the crystal division has been losing market share, while the rustic iron and chrome divisions have been growing. For the most part, executives feel that these changes are a result of customer preferences and current trends versus the quality or prices of their products. While they expect preferences to return to the crystal product line in the next five years, a short-term decision must be made now. Budgeted financial information for Whispering Broadway's upcoming fiscal year is presented below for each division Sales Variable costs Contribution margin Fixed costs Operating income Chrome $1,230,000 753,000 477,000 236.000 Crystal $424.000 298.000 126.000 236,000 $241.000 $(110,000) Iron $752,000 313,000 All foxed costs are currently assigned evenly to all divisions. 439,000 236,000 $203.000

Jerry Prior, Beeler Corporation’s controller, is concerned that net income may be lower this year. He is afraid upper-level management might recommend cost reductions by laying off accounting staff, including him. Prior knows that depreciation is a major expense for Beeler. The company currently uses the double-declining-balance method for both financial reporting and tax purposes, and he’s thinking of selling equipment that, given its age, is primarily used when there are periodic spikes in demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The gain on the sale would be reported in the income statement. He doesn’t want to highlight this method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the salvage values? That will decrease depreciation expense and require less extensive disclosure, since the changes are accounted for prospectively. I may be able to save my job and those of my staff.” Instructions Answer…

Rivera Corporation runs two convenience stores, one in Connecticut and one in Rhode Island. Operating income for each store in 2014 is as follows: (Click to view the operating income for the stores.) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Rivera Corporation, makes the following comment, "Rivera can increase its profitability by closing down the Rhode Island store." Is Maria Lopez Correct? Read the requirements. Requirement 1. By closing down the Rhode Island store, Rivera can reduce overall corporate overhead costs by $40,000. Calculate Rivera's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. 4 Begin by calculating Rivera's operating income if it closes the Rhode Island store. (Enter losses in revenues as a negative amount. Enter a "0" if the cost is not relevant. If the net effect is an operating loss enter…

Mercury, Incorporated, produces cell phones at its plant in Texas. In recent years, the company's market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market. A year ago, the company's cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury's president, initiated an intense effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success. After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of…

Nunez Corporation runs two convenience stores, one in Connecticut and one in Rhode Island. Operating income for each store in 2014 is as follows: (Click to view the operating income for the stores.) The equipment has a zero disposal value. In a senior management meeting, Maria Lopez, the management accountant at Nunez Corporation, makes the following comment, "Nunez can increase its profitability by closing down the Rhode Island store." Is Maria Lopez Correct? Read the requirements. Requirement 1. By closing down the Rhode Island store, Nunez can reduce overall corporate overhead costs by $45,000. Calculate Nunez's operating income if it closes the Rhode Island store. Is Maria Lopez's statement about the effect of closing the Rhode Island store correct? Explain. Begin by calculating Nunez's operating income if it closes the Rhode Island store. (Enter losses in revenues as a negative amount. Enter a "0" if the cost is Data Table (Loss in Revenues) Savings in Costs Revenues Connecticut…

On March 3, 2016, Zad Company was established to produce and sell plastic products. The company produces a full line of plastic products included customized orders. The Chief Executive Officer of the company is working hard to enhance profitability and liquidity. Recently, you have been hired as the Financial Director of the company. 1. On March 8, 2020, the Chief Financial Officer stated to you that she wishes to reduce the company's investment in current assets since those assets provide little, if any, return to the firm. How would you respond to this statement? 2. On September 17, 2020, the Chief Financial Officer stated to you that as long as the company maintains a positive cash balance, why is it essential to review the firm's cash flows? 3. On January 5, 2021, the Chief Financial Officer wishes to expand the company's operations and are trying to determine the amount of debt financing the company should obtain versus the amount of equity financing that should be raised. The…

A payday loan company has decided to open several new locations in a city and hires consultants to decide where to open these locations. The consultants are paid per store that is opened, and at the end of the quarter, the company notices a many of the new stores' sales volume fail to meet expectations. To incentivize the consultants to instead focus on opening profitable stores, the company decided to alter the compensation to a percentage of the profit earned per new store. This puts the consultants_ and the payday loan company should expect to compensate for this change. to Group of answer choices 1. In a less risky position; pay the consultants more than they would in the per- store scheme 2. A more risky position; pay the consultants less than they would in the per- store scheme 3. In a less risky position; pay the consultants less than they would in the per- store scheme 4. A more risky position; pay the consultants more than they would in the per- store scheme

Manuel Inc. produces textiles in many different forms. After recording lower than anticipated profits last year, Manuel has decided to shut down one of its divisions that is not performing well. The accounting manager has compiled the following data on the two divisions being considered for closing and has asked you to evaluate the short-term and long-term effects on profits of closing each division. Which division should be closed if Manuel is most concerned with increasing long-run profits? Winter Outerwear High-End Suits Net revenues $ 1,200,000 $ 5,200,000 Variable costs 660,000 2,160,000 Contribution margin 540,000 3,040,000 Controllable fixed costs 0 2,020,000 Controllable margin 540,000 1,020,000 Noncontrollable fixed costs 770,000 1,540,000 Contribution by division $ (230,000 ) $ (520,000 ) multiple choice Winter Outerwear High-End Suits Closing either would have the same…

Maxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several years, competition has intensified. In order to maintain—and perhaps increase—its market share, Maxwell’s management decided that the overall quality of its products had to be increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some investigation, Maxwell concluded that many of its problems could be traced to the unreliability of the parts that were purchased from outside suppliers. Many of these components failed to work as intended, causing performance problems. Over the years, the company had increased its inspection activity of the final products. If a problem could be detected internally, then it was usually possible to rework the appliance so that the desired performance was achieved. Management also had increased its warranty coverage; warranty work had been increasing over the years. DAVID…

Maxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several years, competition has intensified. In order to maintainand perhaps increaseits market share, Maxwells management decided that the overall quality of its products had to be increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some investigation, Maxwell concluded that many of its problems could be traced to the unreliability of the parts that were purchased from outside suppliers. Many of these components failed to work as intended, causing performance problems. Over the years, the company had increased its inspection activity of the final products. If a problem could be detected internally, then it was usually possible to rework the appliance so that the desired performance was achieved. Management also had increased its warranty coverage; warranty work had been increasing over the years. David Haight, president of Maxwell Company, called a meeting with his executive committee. Lee Linsenmeyer, chief engineer; Kit Applegate, controller; and Jeannie Mitchell, purchasing manager, were all in attendance. How to improve the companys competitive position was the meetings topic. The conversation of the meeting was recorded as seen on the following page: DAVID: We need to find a way to improve the quality of our products and at the same time reduce costs. Lee, you said that you have done some research in this area. Would you share your findings? LEE: As you know, a major source of our quality problems relates to the poor quality of the parts we acquire from the outside. We have a lot of different parts, and this adds to the complexity of the problem. What I thought would be helpful would be to redesign our products so that they can use as many interchangeable parts as possible. This will cut down the number of different parts, make it easier to inspect, and cheaper to repair when it comes to warranty work. My engineering staff has already come up with some new designs that will do this for us. JEANNIE: I like this idea. It will simplify the purchasing activity significantly. With fewer parts, I can envision some significant savings for my area. Lee has shown me the designs so I know exactly what parts would be needed. I also have a suggestion. We need to embark on a supplier evaluation program. We have too many suppliers. By reducing the number of different parts, we will need fewer suppliers. And we really dont need to use all the suppliers that produce the parts demanded by the new designs. We should pick suppliers that will work with us and provide the quality of parts that we need. I have done some preliminary research and have identified five suppliers that seem willing to work with us and assure us of the quality we need. Lee may need to send some of his engineers into their plants to make sure that they can do what they are claiming. DAVID: This sounds promising. Kit, can you look over the proposals and their estimates and give us some idea if this approach will save us any money? And if so, how much can we expect to save? KIT: Actually, I am ahead of the game here. Lee and Jeannie have both been in contact with me and have provided me with some estimates on how these actions would affect different activities. I have prepared a handout that includes an activity table revealing what I think are the key activities affected. I have also assembled some tentative information about activity costs. The table gives the current demand and the expected demand after the changes are implemented. With this information, we should be able to assess the expected cost savings. Additionally, the following activity cost data are provided: Purchasing parts: Variable activity cost: 30 per part number; 20 salaried clerks, each earning a 45,000 annual salary. Each clerk is capable of processing orders associated with 100 part numbers. Inspecting parts: Twenty-five inspectors, each earning a salary of 40,000 per year. Each inspector is capable of 2,000 hours of inspection. Reworking products: Variable activity cost: 25 per unit reworked (labor and parts). Warranty: Twenty repair agents, each paid a salary of 35,000 per year. Each repair agent is capable of repairing 500 units per year. Variable activity costs: 15 per product repaired. Required: 1. Compute the total savings possible as reflected by Kits handout. Assume that resource spending is reduced where possible. 2. Explain how redesign and supplier evaluation are linked to the savings computed in Requirement 1. Discuss the importance of recognizing and exploiting internal and external linkages. 3. Identify the organizational and operational activities involved in the strategy being considered by Maxwell Company. What is the relationship between organizational and operational activities?

At the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.

Solution Summary: The author explains the use of a strategy map, which demonstrates the cause-and-effect relationships and links the balanced scorecard strategy with an organization's operating activities.

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