SPA Inc are a US based company who have operations throughout Europe and North America. SPA design and install office equipment, all manufacturing is outsourced. The company strategic objective is to create shareholder value by designing innovative, high quality office equipment, supported by exceptional customer service. However, Barry Davis, the operational manager of SPA’s UK division is now concerned, they are half way through the financial year and the latest forecast suggests that the UK Division will miss their budgeted targets for 2020. Barry has now taken the following actions to improve financial performance

 

He has cancelled the annual bonus for all staff except his senior management team. He has promised to reintroduce the bonus in 2022 or 2023 when performance has improved

He has cancelled plans to broaden their product portfolio by starting to sell home office equipment. He believes that this decision will save £600,000 of design and marketing cost. These costs would have been treated as an expense in the 2020 financial accounts

He announced that 60% of all installations must be outsourced by the end of the year.  He is also in talks with another company to take on the 40% of the design work.

Barry has asked that the financial controller reviews the depreciation policy, as he thinks it depreciates non-current assets far too quickly and it doesn’t reflect industry norms

He has cancelled a £1,800,000 investment in new warehouse software. This software would have saved £165,000 in fixed costs in 2020 alone and reduced average delivery times from 8 to 5 working days

He has reduced prices by 15% as he believes that it will have a significant impact on demand

 

If the UK operation achieves a ROI of 12% or more at the end of 2020 the operational manager, Barry Davis, will receive a bonus of £500,000. The companies cost of capital is 9%. Any redundancies are treated as exceptional items and the cost does not affect Barry’s  bonus.

 

Required:

Write a report to the SPA board which critically evaluates the six measures Barry Davis took to improve financial performance in 2020. 

Fully explain what Economic Value Added (EVA) is and using examples, explain three benefits of using EVA to measure and create shareholder value.