Comprehensive Case #2 Tizer Pharmaceuticals Tizer Pharmaceuticals has an annual budget preparation and review pro cess that begins on November I. At that time the finance department instructs all departments to prepare their budgets for the upcoming yeur. which would start on January 1. Normally, units are expected to plan for modest growth in sales and production activity based on the growth in the cconomy in general and the province's health cure budget in particular Hazel Coleman is Human Resource Manager at Tizer Pharmaceuticals She prepared the following budget: Tizer Pharmaceuticals Human Resources Department Budget for the Year Cost line Cost Driver Manager's salary Manager S 80,000 Employees salaries * Human resource employees 400,000 Total salarios 5480,000 Salary related costs 15% of salaries 72,000 Travel & interview costs # interviews 100,000 Position advertising # new positions 50,000 Office expenses Centrally allocated cost 100,000 Miscellaneous 50.000 Total 5852.000 It is mid-December. Hazel has just received the following email from the finance department Bad news, we are sorry to tell you. A strategic analysis of the market has indicated that we have an unexpected problem. Changes in the North American Free Trade Agreement have resulted in greater competition being expected from our neigh bours south of the border. Instead of our usual growth of between 2% and 5%, we are now anticipating a 109 shrinkage In our sales All departments will please submit revised budgets, bearing in mind the following: An overall cut of 20% must be made to all budget Totals. Plan to reduce your departmental head count by at least 10%. Employ- ces should be let go on Inst-in, first-out basis There will be no new hiring in any unit for the next 6 months. As Hazel, how would you respond to the proposed budget cut? 303 Comprehensive Case Comprehensive Case s Stella's Office Supply Business Stella is planning to buy an office supply business. The purchase price is S100,000), for which she will get the existing inventory (worth $15,000 ar cost), all the fixtures and fittings (worth about $10,000). and the goodwill of the store (valued at $75,000). You have made the following estimates of activities for the first three months, Month 1 Month 2 Month 3 Total Sales revenue $ 25,000 S40,000 S 50,000 $ 115,000 Cest of goods sold (60% of sales revenue) 15.000 24,000 30.000 69.000 Gross margin S 10.000 S 16.000 S 20.000 S46,000 Sales commissies 2.500 s 4,000 s 5.000 S 11.500 Salaries 5,000 5.000 5.000 15,000 Rent 2.000 2.000 2,000 6,000 Utilities 500 500 500 1,500 Cleaning 200 200 200 500 Depreciation 200 200 600 Insurance 100 100 100 300 Total expenses $10.500 $ 12.000 $13.000 S 35.500 Operating profit 5 (500) 5 4,000 s 7.000 $ 10,500 Income tax nil 1.000 2.000 3.000 Net income $ (500) 3,000 5.000 S7.500 Owner's withdrawals $ 2.500) 5 (2,500) $ 2.500) 5 (2,500) Change in owner's equity $ (3,000) $ 500 2300 nil Stella figures that she has $112.500, which will be enough to buy the business and give her a $12,500 working capital. As she is cxpecting a small loss in Month 1, and she is only planning to take out what the busi- ness carns in profit, she should be OK in respect of cash management and liquidity. She will be able to get one month's credit on her purchases, but she will need to carry inventory at the end of each month sufficient to meet the following month's sales. Half the customers will pay cash for the goods they buy: the other half will take one month's credit Rent is paid monthly in advance, with first and last due on the first day of Month 1. Insurance is paid annually in advance. Utilities are paid monthly one month in arrcars, All other cash expenses are paid in the month they are incurred. Required Advise Stella on whether her business will prosper or not 5 Comprehensive Case Comprehensive Case Piltdown Plating Piltdown Plating has been in operation for 20 years and applies metal coatings, such as chromium or silver, to metal items by electro-chemical processes. Each job is unique, and the company prides itself on the skill of the workers and the quality of the final product. The production machin- ery has been depreciated to nil value, but it is still functional There are 20 workers: 5 operate the machines that remove the old coatings: 2 work on the degreasing tanks; 5 operate the plating machines: and 3 are in the raw material store. The remaining 5 are less skilled and do final cleaning and packing. Results for a recent month were as follows: Sales revenue $ 250,000 Raw materials $ 100,000 Production wages 50,000 Production salaries 10,000 Administrative salaries 5,000 Employee benefits and on-costs (20% of total wage bill) 13,000 Rent 10,000 Utilities 5,000 Repairs and renewals 2,000 Marketing and advertising 5,000 Factory depreciation Total cost S 200,000 Operating profit $ 50,000 The production manager has been told by the owners that the com- pany is not profitable cnough, so he has been investigating some ways of improving the return on investment. He has identified a new computerized cleaning machine that will elimi- nate the need for five of his workers and save $12.500 in direct wage costs every month. This machine can be rented for $5,000 per month. It will also require additional power, so utility costs will go up by 10%. Required Discuss the effect of renting the new machine on the following Profitability The break-even point and the risk of the company Human resource management