Manager Tenure Issues - Case Study Example

Accounting and Finance Answers Question 1(A) To calculate how much profit would increase by we need to calculate the linear regression with the two variables being (i) Independent i.e. Manager Tenure and (ii) Dependent being the Profit. We know the correlational coefficient is the manager tenure correlation on the chart provided. The coefficient is calculated as shown below; Calculate the Slope or the increase in profit per unit increase in manager tenure Where: Y = dependent variable; X = independent variable, a = intercept of regression line; b = slope of regression line, ε = error term y = 1,732.55 X = 12 a = (24,181.49) ε = 312.21 We find b (slope or Unit value of increase in profit monthly) 12b = 1732.55+24181.49-312.21 b = 25601.8/12 b= 2133.483 Profit will increase by 2133.483 units every extra month the manager stays. B. NO, The Manager and Crew tenure do not become less important determinant of profit. Using a t-test, the t-statistic is with a p-value of 0.00, implying that the coefficient on Manager tenure is statistically significant at the 5% level. The 95% confidence interval is C. The coefficient of the population is small but that does not mean that is insignificant against other factors. Coefficients only give direction of change and strength but are not comparable to other factors. As illustrated the factors are independent and mutually exclusive. The coefficient of population does not in any way affect any other coefficient or be affected. What we can derive from the population coefficient is that 3.48 is stronger tham 2.0 and 5.5 is stronger than 3.48. Question 2 2. A) Current accounting information is sufficient. Cost of production of the items varies but there is cost that is associated to unused capacity in the firm. If Einstein Inc. decides to stop production of Product to the unused capacity in the factory such as space, engineers and production managers will have extra cost on the produced products. To avoid the extra cost from unused capacity the firm would have to sell more items from the items that are performing or to release the resources that would carry this extra cost such as retrenching managers involved in production of product 2 B. The period under which the economy heats up will require extra resources to produce product 1 and 4 to the maximum output. The information given in above is not enough to make a decision on how much is maximum output as there resources need to produce any of the products is not included. Suggestion In calculating the maximum output for product 1 and 4 the firm needs to measure the maximum output of its resources (lumpiness of capacity). They need to establish the maximum capacity they can handle and factor it. The will also need to calculate the cost per unit during the maximum period considering the cost or unused capacity of product 2 and 5 and the limited capacity for product 3. Cost per Unit = Determining the unit cost of the product will enable the firm to calculate the maximum number of products they can produce for product 1 and 4 and take care of the unused capacity of other products also the firm will need to consider capacity product 3 which might increase the cost of production if the volumes reduce. 2. C) The information provided is not sufficient, as the cost of production is not separate. While, this is true the focus on products with highest ‘Margin 1’ require the company to assume that all products attract equal overhead costs. This might be fatally wrong, as time of production of any unit is not considered in the production cost. This type of calculation could end up having the firm to produce more Product 2 units at an overall negative profit. The information provided will have to be carefully separated by considering time of production or the production capacity of the items that have the highest ‘margin 1’ profit. Question 3 Boston Children’s Hospital BCH used a Ratio-of-cost-to-charges (RCC) method to calculate the cost. I feel that they would greatly benefit from using activity based costing to take care of the months when there are fewer patients visiting the campus. The time the physician spends treating one patient is not related to the cost of the treatment which means that the charges for a few patients could be surpassed by the cost of the resources employed. Activity-based costing focuses on the capacity to produce. BCH’s capacity is determined by the ability of the physician serving as many patients as possible with high charges for their treatment. Currently, BCH does not consider the possibility of offering services that have high cost while the charges are low. BCH has implemented activity-based costing in its department of plastic and oral surgery. Though activity costing will involve more variables it gives a near perfect costing of every man-hour put in by the hospital staff and also considers the departments that are not direct revenue earning department in the costing. The total cost of a service takes care of the entire hospital resources in coming up with the final cost of a service. Store24 Store24 does not use activity-based costing for their stores. In any event, this costing model would not increase profitability. The main factors that drive profitability in Store24 are not part of the day-to-day activities in the business. Competitors for example have the greatest coefficient in determining the profitability of a store. Activity based costing is essential where the factors affecting cost and profit are built from production. Store24 would not generate increased revenue if they concentrated on costing based on how much time a store attendant helped a customer to buy a product. The time spent in give a customer service is not bound by the cost of the item and it will vary from one customer to the other for the same product. Question 4 Customer service for DN is a factor that depends on several other factors such as age of store, skill levels of non-management staff, manager’s performance and the like. The customer service indicator generated should be used as the Independent variable in calculation of the effect on profit (Slope) that customer service has got in overall profitability. Using the regression equation we can calculate the effect that customer service will have on the stores performance. Y= a+ bX + ε Y = Profitability; X = Customer service indicator ; b = profitability coefficient (slope); a = regression coefficient and ε = Standard Error From the indicated data SUMMARY OUTPUT Regression Statistics Multiple R 0.950452717 R Square 0.903360367 Adjusted R Square 0.889303693 Standard Error 503348.2678 Observations 64 ANOVA   df SS MS F Significance F Regression 8 1.30258E+14 1.62823E+13 64.26558445 3.93611E-25 Residual 55 1.39348E+13 2.53359E+11 Total 63 1.44193E+14         Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept -4643954.799 741541.326 -6.262570455 6.04022E-08 -6130036.825 -3157872.77 -6130036.825 -3157872.773 Pop 1.038470415 3.359966751 0.309071634 0.758434843 -5.695053425 7.771994255 -5.695053425 7.771994255 Size 146371.7593 66650.83723 2.196097834 0.032319781 12800.4966 279943.0219 12800.4966 279943.0219 Percap inc 163616.9082 61003.21807 2.682102902 0.009640974 41363.7273 285870.0892 41363.7273 285870.0892 Urban 2397334.981 185404.0754 12.93032516 2.59382E-18 2025776.911 2768893.051 2025776.911 2768893.051 Store age -21052.03582 14176.26627 -1.485019781 0.143247942 -49461.90829 7357.83664 -49461.90829 7357.83664 Mgr Perf 355201.5397 161305.1697 2.202046844 0.031873474 31938.75598 678464.3235 31938.75598 678464.3235 Empskill 124225.6161 44087.84228 2.817684188 0.006707197 35871.60573 212579.6264 35871.60573 212579.6264 Custserv 127606.7825 16609.02206 7.682979892 2.87118E-10 94321.55851 160892.0065 94321.55851 160892.0065 Customer service an effect on in some stores more than others, as the output above shows. The level of customer service is affected by the skill level at the stores. Question 5 A. We choose the Anagene case. The non-financial information that is financialized in this case is the development of the new Anagene Cartridge. The intellectual property of the product and the effect it might have on the profitability of the company in future is financialized to. Anagene is will to take the extra cost of producing cartridge that is yet to take the market by storm. Costing of this product is the main reason why no specific trend can be established in the business yet and a new costing method is being discussed. Carrying of the unused capacity of the cartridge plugs a deep hole in the financial statement of Anagene with the cost of the product driving the profitability of the company up and down in a seesaw. It is important to maintain the intellectual information of the cartridge as unused capacity will continue to reduce as the product hits the market. The intellectual cost and other unused cost will assist the new team in determining how to develop the most effect method of costing the cartridge and stabilize the gross margin. B. Decision making on the cost of product-mix will be taken care of if the business continues to financialize the intellectual property of the cartridge. Determining the number of resources available at every product is important and the number of resources allocated to producing ‘an idle’ product – product whose capacity allocation according to Exhibit 8 is about 100%. This means the number of resources that are not being utilized is extreme high pushing the average cost of the product-mix up and reducing the gross margin. The fluctuation in demand of the cartridge and the high cost of unused capacity needs to be stabilized. The business should reduce the capacity in production of the Cartridge and increase capacity of other products. C. Variable cost of intellectual property of the production of the cartridge. The cost of intellectual property is not standardized and no measure exists to show its real or true cost. Average Margin for the cartridge could be affected because of the lack of true cost for intellectual property. Making decisions on cost that are assumed or cost which only future forecast of the impact the product will have in the business could end up causing a misreporting on the performance of the product. The associated cost of Intellectual property of cartridge will continue to diminish as production increases and more items are in the market. The spread would have to calculate on the maximum capacity or the practical capacity rather than on the produced capacity. With the first years of production of the cartridge being slack, the future performance of the items will only reduce the average cost component of the cartridge. D. The way to avoid miscalculation of gross margins because of intellectual property is to analysis the demand of the product over the lifecycle of the cartridge. Calculate the total cost of intellectual property of a cartridge from when it is produced to when it is full depreciated. With the average life of the cartridge calculate the total capacity over that period and divide the total cost of intellectual property with the total capacity over the period. Y = Question 6 First the probability matrix tells us that a customer who bought a particular category will most like by from that category rather than another category. Customers that take credit card loans are 40% more likely to get a credit card loan than those who get a car loan. This means that car loan customers are less likely to get the same loan or any other loan product the following year compared to those customers that take credit card loans. Customers who do not take any loan product are most likely not to take any loan product. With the probability of 1.0 it means that the bank will not concentrate on this category as prospects in the following year. With 100% likely would they won’t purchase any loan product investing in this category – neither – would be expensive and most likely fruitless. The expected profit from a car loan customer is 20% in year two. In year 3 with the same percentage decline of expected profit the profit will be 0.2 of 0.08 = is 0.016. This is about 1.6% expected profit from the CL Only. The advantages that this model offers are the predictability in budgeting. CBR bank can allocate resources in the sales department more efficiently as the areas they are likely to get more business are already mapped out. The reservation in this model is that areas where less profit is predicted might not be explored even though they could most like give the best output if more resources are allocated there. 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