FINANCIAL EFFICIENCY CONSULTANTS: REPORT ON ACME We were retained by Acme two years ago on a performance related basis, and the results displayed show company performance in the year prior to our intervention, and for the last full year. The company's only product is an exceptionally high quality executive briefcase and an indestructible picnic hamper is being developed. The company was by no means in trouble before we were retained, but it was felt that opportunities were not being exploited and that performance could be much improved. Here are the salient facts on company performance: Before After (Year 1) (Year 2) Operating surplus $1.600m $4.216m Cash flow -$312m $2.631m Return on equity 13% 43% Return on total assets 10% 15% Inventories of finished goods to output 22% 4% Wage cost per unit sold $220 $120 Material cost per unit sold $157 $90 On all of these measures the company shows a marked improvement. Our strategy focused on several areas.On all of these measures the company shows a marked improvement. Our strategy focused on several areas. Efficiency and investment: We initiated an immediate investment programme of $16 million which served as the foundation for increased efficiency and at the same time eliminated excess capacity. We cut down on labour turnover, reduced overtime working. increased output per worker, reduced warranty returns and inventory holdings; in fact, we are quite pleased about the JIT system. Expenditure on product improvement was reduced - we reckoned that there was little to be gained from trying to be any more different from competitors. Pricing and marketing: We increased marketing and kept the price steady, although competitors have been reducing prices; the market has been growing strongly so the reduction in market share was not a problem. Overheads: We took a hard look at all corporate spending and decided that the corporate centre needed strengthening. We all know that the company has been dependent on its high quality briefcase in the past, and for three years has been developing the indestructible picnic hamper, we cut back on product development of the hamper - it is a good idea to spread risks by going into a different market, but there is no point in draining profits in untried ventures. There is no doubt that we have greatly strengthened the company and it is well set for future success in a highly competitive environment and that FE Consultants are due the performance related bonus.Acme PIc Operating Account at end year: Production cost, and revenue ($000) Before After Before After SALES REVENUE 8 075 11 115 COST OF GOODS SOLD 4 586 5 115 GROSS PROFIT 3 489 6 000 Operating Account at end year: Overheads and Operating Surplus ($000) Before After Before After Corporate 500 800 Factory Overheads 200 400 Hiring & Redundancy cost 189 84 Development Expenditure 1 000 500 TOTAL OVERHEAD 1 889 1 784 OPERATING SURPLUS 1 600 4 216 Cash Flow for year ($000) Before After Before After OUTLAY INCOME Material Purchase 1 831 1 300 Loan Interest 480 1 980 Interest on Assets 60 30 Wage Cost 1 872 1 400 Line Cost 1 275 1 050 Product Development 500 200 Product Marketing 600 800 Total Overhead 1 889 1 784 Sales Revenue 8 075 11 115 Total Outlay 8 447 8 514 Total Income 8 136 11 145 Net Cash Flow -312 2 631FIXED ASSETS Factory Plant TOTAL FIXED ASSETS CURRENT ASSETS Raw Materials Finished Goods Cash TOTAL CURRENT ASSETS TOTAL AS SETS OWNER S EQUITY DEBT Short Term Loan Long Term Loan TOTAL DEBT TOTAL IJABILI11ES Balance Sheet at and year (5000] Before 5000 7000 12000 2000 1254 1000 4254 16 254 12 254 2 000 2 000 4 000 16 254 After 8000 18000 26000 1000 198 500 1698 27698 9698 0 1800 18000 27698 Before After Report on Briefcase for year Before After Before After Market share (%) 17.0 13.0 Composition of Demand Composition of Supply Orders 8 500 11 700 Output 10 650 10 500 Warranty demand 255 234 Start Year Inventory 500 1 895 TOTAL DEMAND 8 755 11 934 TOTAL SUPPLY 11 150 12 395 Distribution of Supply Warranty Replacements 255 234 Sales to orders 8 500 11 700 End Year Inventory 2 395 461 Account at end year Wage cost ($000) 1 872 1 400 Labour force 430 350 Assembly Line Cost ($000) 1 275 1 050 Working time (%) 122 100 Cost of Material Used ($000) 1 331 1 050 Labour attrition rate (%) 11 6 Product Development ($000) 500 200 Competing price ($/unit) 950 900 Product Marketing ($000) 600 800 Price ($/unit) 950 950 TOTAL COST ($000) 5 578 4 500 Unit Cost ($/unit) 524 429 Sales Revenue ($000) 8 075 11 115 Cost of Goods Sold ($000) 4 586 5 115 GROSS PROFIT ($000) 3 489 6 000Report on Development of Hamper Before After Launch date 3 years Uncertain Estimated market peak 50 000 45 000 Estimated market at launch 35 000 25 000 Competing price (S/unit) 1 100 950 Production cost ($/unit) 750 800 Forecast market share (%) 20.0 18.0 Development Expenditure Spending in year ($000) 1 000 500 Total to date ($000) 2 500 4 000_| Required: 1) Do you agree 1with FE lConsultant's claim that they have strengthened the company and are due their performance related bonus? 2} Set out your own analysis of the company's competitive position and suggest a strategy