Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Computron's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice president plus its major stockholders (who were all local business people), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off credit. As a result, Al Watkins, Computrons president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computron's chairman and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's assistance. Jamison began by gathering financial statements and other data, shown below. The data show the dire situation that Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather than the expected profit. Jamison examined monthly data for Year 2 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than Computron's managers had anticipated. For these reasons, Jamison and Campo see hope for the companyprovided it can survive in the short run. Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Computron Diagnostics Statement of Operations Yr 1 Actual Yr 2 Actual Yr 3 Projected Revenue: Net patient service revenue $3,432,000 $5,834,400 $7,035,600 Other revenue $0 $0 $0 Total revenues $3,432,000 $5,834,400 $7,035,600 Expenses: Salaries and benefits $2,864,000 $4,980,000 $5,800,000 Supplies $240,000 $620,000 $512,960 Insurance and other $50,000 $50,000 $50,000 Drugs $50,000 $50,000 $50,000 Depreciation $18,900 $116,960 $120,000 Interest $62,500 $176,000 $80,000 Total expenses $3,285,400 $5,992,960 $6,612,960 Operating income $146,600 -$158,560 $422,640 Provision for income taxes $58,640 -$63,424 $169,056 Net income $87,960 -$95,136 $253,584 Computron Diagnostics Balance Sheet Yr 1 Actual Yr 2 Actual Yr 3 Projected Assets Current assets: Cash $9,000 $7,282 $14,000 Marketable securities $48,600 $20,000 $71,632 Net accounts receivable $351,200 $632,160 $878,000 Inventories $715,200 $1,287,360 $1,716,480 Total current assets $1,124,000 $1,946,802 $2,680,112 Property and equipment $491,000 $1,202,950 $1,220,000 Less accumulated depreciation $146,200 $263,160 $383,160 Net property and equipment $344,800 $939,790 $836,840 Total assets $1,468,800 $2,886,592 $3,516,952 Liabilities and shareholders' equity Current liabilities: Accounts payable $145,600 $324,000 $359,800 Accrued expenses $136,000 $284,960 $380,000 Notes payable $120,000 $640,000 $220,000 Current portion of long-term debt $80,000 $80,000 $80,000 Total current liabilities $481,600 $1,328,960 $1,039,800 Long-term debt $323,432 $1,000,000 $500,000 Shareholders' equity: Common stock $460,000 $460,000 $1,680,936 Retained earnings $203,768 $97,632 $296,216 Total shareholders' equity $663,768 $557,632 $1,977,152 Total liabilities and shareholders' equity $1,468,800 $2,886,592 $3,516,952 Other data: Stock price $8.50 $6.00 $12.17 Shares outstanding 100,000 100,000 250,000 Tax rate 40% 40% 40% Lease payments $40,000 $40,000 $40,000