M4: Performance Assessment Assignment: Polly Plates, Inc. (PPI)...

M4: Performance Assessment Assignment: Polly Plates, Inc. (PPI) Polly Peyrotte started designing and decorating fine china plates more than 100 years ago. As her artistry caught on, she became famous. She also turned out to have considerable business skills. She grew her design studio into what today is Polly Plates, Inc. (PPI), with millions of dollars in annual revenue. Polly's daughters and granddaughters became involved in the business. When Polly retired, they hired a series of talented designers who built on Polly's designs to continue the Polly Plates fine china tradition. Over the past two decades, however, fewer family members have gone into the family business and nonfamily managers are now running most parts of the operation. Some of these professional managers also now serve on the board of directors. The few family members who remain on the board have become concerned about the business' profitability in recent years and its potential for future growth. They worry, for example, that the delicate flowers and landscapes that were a mainstay of the company's designs in the past no longer appeal to today's collectors. Anna Slevnik, vice president of marketing and one of the last remaining descendants of Polly actively involved in running the company, defended those designs at a recent board meeting. Anna noted that many of the plates feature acanthus leaves, "...which have adorned the world's best architecture and most beautifully illuminated manuscripts for more than two millennia!" At the 20x0 year-end board meeting (held in February of 20x1), the company's controller, Robin Aul, reported that in calendar 20x0, PPI sold 15 million plates at an average price of $2/plate. The plates have total variable manufacturing costs (including direct materials, direct labor, and variable manufacturing overhead) of $0.50/plate. The company has a substantial fixed manufacturing overhead cost of $20 million per year. Much of this overhead is rent paid to various Peyrotte family members who have inherited, as personal assets, the real estate (land and buildings) in which the company manufactures and warehouses plates. Gareth Snyder, a tax advisor to Polly in the early days, used to preach, "hold depreciating assets in the company, but hold appreciating assets in your personal portfolios." The good news about PPI's high fixed manufacturing costs is that they do provide enough capacity to make 60 million plates a year (which could come in handy if demand ever returns to the lofty levels of years gone by). In addition, the company has selling and administrative costs (all fixed) of $4 million per year. Robin noted that the 20x0 beginning and ending inventories of plates were both zero and suggested that the firm might be losing sales and should consider keeping more plates in inventory to meet sudden increases in demand. Anna responded, "I believe controllers should stick to bean counting and leave important sales and distribution decisions to those who are experienced in such matters." She then added, "Harrumph!" The company's president, Barbara Boxtuttle, had hired consultant Deb Bett in October when she learned the company was likely to show a net loss for 20x0. Barbara had received the consultant's report earlier in the day (of the board meeting) and was not happy. The report concluded that the company needed a new president. Further, the report recommended hiring Ms. Bett as a temporary president who could really turn the place around. Deb, discussing her report at the board meeting, said her analysis showed strong evidence that PPI's customer base was no longer intact (her report used the phrase "dying off") and that the company needed to explore new markets. Over Anna's groans, Deb said, "In addition to the lovely plates the company has been selling for a century, we can open an exciting new market by printing funny sayings, slogans, and political messages on the plates. To accomplish this goal, we must open new marketing channels, ramp up production to fill those channels, and spend more on advertising as we move into new markets." Every time Deb said "we," Barbara winced. A lively discussion among the board members ensued, ending with a motion, duly seconded, to adopt the report's recommendation. The motion passed with only one "nay" vote. The board thanked Barbara for her years of devoted service, fired her, and asked her to leave the meeting immediately. After a brief recess, the board unanimously voted to elect Deb president for no more than two years and charged her with implementing the company's foray into new markets. To show her confidence, Deb agreed to a one-year contract that could be renewed for one-year at PPI's option, but only if Deb managed to show a profit for the company at the end of 20x1. Further, Deb agreed to work for an annual salary of $1 plus a bonus of 20% of annual net income. No profits, no bonus. Robin (the controller) made sure Deb's employment contract included a provision that "net income," for purposes of the contract renewal option and the bonus calculation, would be calculated using absorption costing, noting that, "Absorption costing is GAAP and that's what our auditors will expect to see in a contract like this." In 20x1, Deb implemented her plan. She hired new staff to write the funny sayings, slogans and political messages to go on the plates, launched three separate advertising campaigns and trained PPI salespeople to call on the types of customers who would be interested in the new plate designs. As promised, she ramped up production and PPI manufactured 45 million plates in 20x1 and sold 18 million of them, a 20% increase in sales over 20x0. Deb thrilled with the sales growth and was happy to have so many plates in inventory at the end of 20x1. She knew that fresh orders would be pouring in as soon as her sales crew opened the new selling channels fully and that inventory would come in handy for quick shipments as demand continued to increase. Doing all this was, of course, expensive. The new fixed selling and administrative costs (including Barbara's severance package and Deb's $1 salary) were $4 million, doubling 20x0's fixed selling and administrative costs to a total of $8 million for 20x1. Deb kept variable costs per plate and the plates' average selling price the same as in 20x0. At the year-end board meeting for 20x1 (held in February 20x2), everyone was jubilant over the sharp rise in sales and the financial results. Robin (the controller) provided a draft financial statement that showed a net income of $11 million (before taxes and Deb's bonus). Celebratory champagne and caviar were served. The controller handed Deb a check for $2.2 million and the entire board gave her a standing ovation while chanting, "One more year, one more year!" After thanking the board for the opportunity to show "what a little fresh thinking could do for a company that had been stuck in the past" (and for the $2.2 million), Deb announced her regrets that she would be unable to continue for a second year. Instead, she explained that she would be on the next flight to Frostbite Falls, Minnesota, where Kernel Mills, a struggling cereal manufacturer, has asked her to help them turn around some of their businesses.

Question:

1. In no more than 200 words, write an assessment of Ms. Bett's performance as president (do not evaluate her performance as a consultant before she became president). In the first sentence, you must state whether you found her performance overall was "excellent," "average," or "poor." Then you should present facts (such as numbers from one or more of the financial statements you created to answer previous requirements) and logical arguments that support your assessment. You may only use facts stated or readily inferred from the case (that is, do not make things up). Support your assessment using those facts and draw logical conclusions from those facts.