Marketing Analysis of Zenith Computer Terminals - Case Study Example

Running Head: Marketing Final Marketing 450 Final Exam Paul R. Tomko Dr. Cutler Cleveland December 18, 2008 Table of Contents Marketing Case Study 1 Question 1 1 Question 2 5 Question 3 7 Sales Department Objectives 7 Production Department Objectives 8 Marketing Department Objectives 8 Administration Department Objectives 8 Service Department Objectives 9 Memorandum 9 References 12 Appendix A ZCT, Projected Profit and Loss Statement, Next Year at $12M Sales 13 Appendix B: ZCT, Profit and Loss Statement, Current Year 18 Appendix C: ZCT, Projected Profit and Loss Statement, Next Year at $10M Sales 19 Appendix D: ZCT, Projected Profit and Loss Statement, Next Year at $14M Sales 20 List of Tables Table 1. Projected Profit & Loss for ZCT Current Year v Next Year at $12M Sales 1 Table 2. Expense Contribution for ZCT Comparing Next Year to Current Year at $12M in Sales 5 Table 3. Projected Profit and Loss Statement, Next Year v Current Year at $10M Sales for ZCT 6 Table 4. Projected Profit and Loss Statement, Next Year v Current Year at $14M Sales for ZCT 6 Table 5. Projected Net Profits for Next Year at Various Sales Target Achievements for ZCT 7 Marketing Case Study Question 1 1. Develop a new budget based on how the ideal profit and loss statement should look if it reflects the president’s bottom-line objective for ZCT. Justify your expenses for each of the five budgeted expense areas. With the president’s objective of a bottom line of $1 million, the budget for the next fiscal year as compared to the current year for ZCT is summarized in Table 1. Details of the computations are shown in Appendix A. Table 1 Projected Profit & Loss for ZCT Current Year v Next Year at $12M Sales ZCT Projected P&L Next Year Current Year % Inc (Dec) Sales 12,125,000 10,000,000 21% Less Expenses: Sales 1,781,250 1,500,000 19% Production 6,937,500 6,000,000 16% Marketing 1,506,250 1,300,000 16% Administration 455,556 500,000 (9%) Service 390,000 250,000 56% Total Expenses 11,070,556 9,550,000 16% Net Profit 1,054,444 450,000 134% To achieve the net profit of at least $1 million, sales volume must be increased by 21% from $10 million to $12,125,000. Of this amount, $11 million must be generated by the existing 20 sales representatives by increasing their annual sales 10% for the current year. For the present 20 sales representatives this is achievable because the next year is projected as a normal year and a 10% sales increase is a normal trend in this industry. While the existing sales representatives can generate $11 million of the needed $12,125,000, to produce the additional $1million plus needed in sales, it is necessary to hire additional sales representatives. It is expected that new sales representatives can generate $300,000 sales annually compared to $500,000 sales for existing sales representatives. This is due to the sales learning curve and the need to build client relations. It is important to note that even if the new sales representatives are recruited as early as the beginning of the new year, it will take them at least three months to be productive. The first month is used for recruitment, and the second month is used for classroom training and the final and third month is reserved for on-job-coaching in the field by senior representatives. Therefore, the $300,000 of expected sales calculated for a 12-month period must in reality be calculated over an available 9 month period. Taking this factor into account, officials forecast sales for the new sales representatives at an estimated $225,000 instead of $300,000. Several areas of expense have increased for the company. Sales expenses have increased by 19% to address the expenses related to these new representatives. Therefore, the annual cost of $75,000 for a sales representative must be considered a factor in the bottom line. This is calculated at a cost of $6,250 per month per representative. In computing expenses, officials forecasted 9 months of this amount as an expense relative to each new sales representative gettino on board after completing field coaching. No expenses related to training has been imputed as these are shouldered by the Administration Department. As a company policy, no salaries for new sales representatives will also be paid during the months of training. As such, expenses related to the new sales representatives are accounted for only for the last 9 months of the year. Production expenses have increased by 16%. Aside from the production expense for the current year of $6 million, an additional $562,500 to cover amortization and labor and material costs will be incurred from the acquisition of an additional machine. This also includes the cost of making this new equipment operational as well as the hiring of 10 additional workers to operate/maintain the new equipment. Costs related to the hiring of 10 additional workers as well as their training shall be borne by the Administration Department. Any excess expenses which cannot be shouldered by the Administration Department are deemed negligible from the increased production capacity for the new machine and the resulting opportunity for increased sales. Due to the lead time required to make new machinery operational, one of the old machines will be used for double shift production for 3 months. This increased production is not without cost; it incurs an additional estimated cost of $375,000. The additional machine will increase production beyond the required production output of 1,000 units per month to meet the volume requirement to achieve the $12 million sales target, therefore the overall production expenses for labor and materials for the new machine will be reduced by $75,000. This is due to the fact that the new machine does not need to be operated for 2 months within next year because of excess production volume in the 7th and 11th months. Further, expenses related to the new machine are expensed over a 12-month period even though the new machinery will be operational for only 9 months next year. This is to compensate for overtime costs incurred with the double shifting of one old machine. Marketing expenses increased by 16% relative to the current year. Included in this is: (a) $600,000 budgeted for the coming year for staff-related expenses, (b) $606,250 for direct mail and advertising support, and (c) $300,000 for new product expenses including product development, sales aids and training. Although the marketing department leaders intend to increase the size of the mailings due to the increased sales objective and the expanded sales force, no additional costs have been added because the $606,250 allocation is already based on the increased sales target. There would also be an additional expense from the hiring of a new consulting firm to assure marketing is handled effectively. This additional expense shall be borne by the Marketing Department and will form part of the allocated development cost of $250,000. The development costs for new product expenses were forecasted to be incurred by the 3rd month upon selection of the outside consulting firm. Sales brochures for the new product are projected to enter production by the 5th month when the consulting firm has completed 1/3 of the new product development effort. Sales training is projected for the 8th month after completion of new product development and the production of the sales aids and materials. Reducing staff in administration will help offset the increased expenses in other areas. Administration expenses are to be reduced by 9% with the elimination of three clerical positions. The administration manager agreed with this decision. It is anticipated that two clerks will be released in 1 month and the final clerk will be released after the 2nd month. Two weeks will be required to cross train other staff to handled duties that were addressed by the exiting staff. There is also a plan to release a manager whose performance is marginal. A replacement manager will need to be hired therefore there are no changes in manager expenses. Moreover, even with the plan to computerize administrative function, no additional expenses related to administration have been budgeted for new year as computerization functions are expected to require almost a year to complete. The expenses for this computerization will be factored into the budget in the year after next. As a part of this a new computer vendor must be retained. The largest increase budgeted for expenses are for service expenses. Service expenses have a budget increase of 56% for next year. This is a result of the projected hiring of three additional service representatives to create a ratio of 3:1 between sales and service staff. With the projected 25 sales representatives for next year, there needs to be a total of 8 service representatives. Currently, there are only 5 service representatives. The additional expenses are a result of the new service staff as well as $30,000 worth of new servicing tools and equipment. New service representatives are projected to be hired by the 2nd month. The success of the maintenance program will reduce service calls by 25% and create opportunities for new revenue with maintenance contracts for the year after next. Based on conservative projections, no additional costs or savings have been projected for the planned maintenance program; the service manager has not completed this study. Comparing the different expense components of the current year and those projected for next year, the following summary is presented in Table 2. These figures are based on the Net Year Budget found in Appendix A and the current year Profit and Loss (P&L) found in Appendix B. Table 2 Expense Contribution for ZCT Comparing Next Year to Current Year at $12M in Sales ZCT Projected P&L Next Year % to Sales Current Year % to Sales % Inc (Dec) Sales 12,125,000 100% 10,000,000 100% Less Expenses: Sales 1,781,250 15% 1,500,000 15% 0% Production 6,937,500 57% 6,000,000 60% (3%) Marketing 1,506,250 12% 1,300,000 13% (1%) Administration 455,556 4% 500,000 5% (1%) Service 390,000 3% 250,000 3% 0% Total Expenses 11,070,556 91% 9,550,000 96% (5%) Net Profit 1,054,444 9% 450,000 4% 5% With the planned changes in production, cost of goods sold is decreased by 3% from 60% to 57% of sales (Table 2). Overall expenses decrease by 5% as a result of the reduction in expenses in production, marketing and administration. These reductions translate to increased net profit of 9% of sales for next year, as compared to 4% of sales in the current year. This equates to an increase of 5% in net profit Question 2 2. What would be the net profit if: a. Sales remained at $10 million and budgeted expenses increased to the projected levels? b. Sales increased to $14 million and budgeted expenses increased to the projected levels? With the budgeted expenses increased to the projected levels and no corresponding increase in sales, the ZCT officials would realize a net loss of $1,070,556 (Table 3, based on the Projected P&L in Appendix C). Table 3 Projected Profit and Loss Statement, Next Year v Current Year at $10M Sales for ZCT ZCT Projected P&L Next Year Current Year % Inc (Dec) Sales 10,000,000 10,000,000 0% Less Expenses: Sales 1,781,250 1,500,000 19% Production 6,937,500 6,000,000 16% Marketing 1,506,250 1,300,000 16% Administration 455,556 500,000 (9%) Service 390,000 250,000 56% Total Expenses 11,070,556 9,550,000 16% Net Profit (Loss) (1,070,556) 450,000 (338%) With the budgeted expenses increased to the projected levels and an increase in sales to $14 million, ZCT officials will realize a net profit of $2,929,444 or a 551% increase (Table 4 based on Appendix D). Table 4 Projected Profit and Loss Statement, Next Year v Current Year at $14M Sales for ZCT ZCT Projected P&L Next Year Current Year % Inc (Dec) Sales 14,000,000 10,000,000 40% Less Expenses: Sales 1,781,250 1,500,000 19% Production 6,937,500 6,000,000 16% Marketing 1,506,250 1,300,000 16% Administration 455,556 500,000 (9%) Service 390,000 250,000 56% Total Expenses 11,070,556 9,550,000 16% Net Profit (Loss) 2,929,444 450,000 551%) In summary, with the projected expenses for next year the different net profitability at various sales achievements can range from a percentage of sales of -11% to 21% (Table 5). Table 5 Projected Net Profits for Next Year at Various Sales Target Achievements for ZCT ZCT Projected Net Profit Expenses Sales Targets Sales 10,000,000 12,125,000 14,000,000 Less Expenses: Sales 1,781,250 Production 6,937,500 Marketing 1,506,250 Administration 455,556 Service 390,000 Total Expenses 11,070,556 11,070,556 11,070,556 11,070,556 Net Profit (1,070,556) 1,054,444 2,929,444 % to Sales (11%) 9% 21% Question 3 3. Determine the four most important objectives for each department. Be specific by detailing what should be done and the time frame for reaching the objective. In order to achieve the president’s bottom-line target of $1 million, each of the functional departments of sales, production, marketing, administration and service would need to set the following specific objectives respectively. Sales Department Objectives 1. Achievement of annual target sales of $550,000 for each current sales representative, or a total of $11,000,000 for 20 current sales representatives. 2. Achievement of target sales of $225,000 for each new sales representative, or a total of $1,125,000 for 5 new sales representatives over a 9-month period. 3. Recruitment, classroom training and on-the-job coaching in the first three months of the year for 5 new sales representatives. 4. Efficient time allocation of the sales manager for handling recruitment activities, 1 month classroom training of new sales representatives; 1 week of coaching in the field for each new sales representative; and designation of senior sales representatives to handle 3 weeks of coaching in the field for each new sales representative. Production Department Objectives 1. Ensure annual production capacity of 2,500 units for each of the existing ZCT production lines. 2. Ensure acquisition of new production equipment and make it operational beginning the 4th month of the year. 3. Ensure efficient operation of one current machine on double shift for the first 3 months of the year. 4. Ensure recruitment and training of 10 additional workers for the new production line, ready to work on the 4th month of the year. Marketing Department Objectives 1. Ensure production and distribution of mailers by 21% . 2. Ensure selection of consulting firm/vendor for new product by the 3rd month of the year and ensure completion of new product development by the 8th month of the year; 3. Ensure preparation and production of sales brochure for new product by the 8th month of the year; 4. Ensure successful conduct of training and introduction for the new product by the 9th month of the year. Administration Department Objectives 1. Reduction of three clerical positions during the 1st and 2nd month of the year; 2. Replacement of 1 marginally performing manager by the 2nd month of the year. 3. Conduct an internal study for computerization of the four departments, completing the departmental study by the 8th month of the year 4. Submit the computerization study report by December 1. 5. Source and contract computer vendor immediately upon approval of the study report. (Costs relative to this sourcing and engagement will be included in the budget for the year after next.) Service Department Objectives 1. Hire and train 3 additional service representatives by the 2nd month of the year. 2. Acquire new tools and equipment by the 2nd month of the year. 3. Complete the design of the maintenance program by the 7th month of the year and implement. 4. Reduce service calls by 25% for the last quarter of the year. Memorandum 4. Write up your recommendations to Juan Mendez, the president, in memorandum format. Zenith Computer Terminals, Inc. Inter-Office Memorandum Date: December 15, 2008 To: Juan Mendez, President From: Rob Zwettler, Assistant to the President Subject: Recommendations on ZCT Business Objectives for Next Year for Approval Based on the bottom-line objective that have been set forth for ZCT for the coming year, and after discussions with the five departments leaders, I hereby present my recommendations for meeting the corporate goal. In order for ZCT to achieve the net profit objective of $1 million for the coming year, below is a summary of the proposed budget as compared to the current year: ZCT Projected P&L Next Year Current Year % Inc (Dec) Sales 12,125,000 10,000,000 21% Less Expenses: Sales 1,781,250 1,500,000 19% Production 6,937,500 6,000,000 16% Marketing 1,506,250 1,300,000 16% Administration 455,556 500,000 (9%) Service 390,000 250,000 56% Total Expenses 11,070,556 9,550,000 16% Net Profit 1,054,444 450,000 134% As evidenced from the date in the table, ZCT officials would need sales of $12.125 million to be able to realize a $1 million bottom-line. This is achievable by using a combination of strategies that will be implemented by the five departments. The major strategies that will make this possible include: (a) an increase in the number of sales representatives, (b) acquisition of additional production line machinery, (c) introduction of the new product by the last quarter of next year, (d) a reduction in the administrative department clerical staff and the replacement of a marginally performing manager, and (e) an increase in the number of service representative staff. Additionally, in order to plan for continued growth, some department leaders will need to start planning for the year after next. Administration staff will need to begin the computerization study by next year in order to start the computerization project in the year after next. The Service department leaders will need to complete the study of the new maintenance program by next year and be able to run a pilot test during the third and last quarter of the year. The success of the maintenance program will reduce service calls by 25% and create opportunities for new revenue with maintenance contracts for the year after next. I have presented a timetable of department objectives for next year below. Month 1 2 3 4 5 6 7 8 9 10 11 12 Sales Achieve sales target X Recruit, train new reps X X X New sales reps on board X Sales Manager time for new X X X X Sales Manager time for old X X X X X Sr Rep time for new X Production Acquisition of new machine X X X Double shift for 1 machine X X X Recruit, train add’l workers X Marketing New Product Vendor selection X X New Product Development X X X X X X Sales Brochure production X X X X Sales Training X Administration Reduction of clerical staff X X Replacement of manager X X Computerization study-internal X X X X Vendor selection X Computerization report preparation X X Service Hire, train new service reps X Acquire new tools X Complete new maintenance program X X X X X X Pilot test of maint program X X X X X X If you would like details of budgetary computations these can be provided to you. Also available on request are details of departmental objectives. The success of the plan summarized above is contingent on the availability of resources for implementation of the strategies as well as the normal business conditions which are forecasted for next year. References “Case 1: Zenith Computer Terminals Inc.: Development of a Total Business Plan”. Case Resource Appendix A ZCT, Projected Profit and Loss Statement, Next Year at $12M Sales Appendix B: ZCT, Profit and Loss Statement, Current Year Zenith Computer Terminals Inc. Profit & Loss Statement - Current Year % to Sales Sales 10,000,000 100% Less Expenses Sales 1,500,000 15% Production 6,000,000 60% Marketing 1,300,000 13% Administration 500,000 5% Service 250,000 3% Total Expenses 9,550,000 96% Net Profit 450,000 5% Appendix C: ZCT, Projected Profit and Loss Statement, Next Year at $10M Sales Zenith Computer Terminals Inc. Projected Profit & Loss Statement - Next Year @ $10M Sales % to Sales Sales 10,000,000 100% Less Expenses Sales 1,781,250 18% Production 6,937,500 69% Marketing 1,506,250 15% Administration 455,556 5% Service 390,000 4% Total Expenses 11,070,556 111% Net Profit -1,070,556 -11% Appendix D: ZCT, Projected Profit and Loss Statement, Next Year at $14M Sales Zenith Computer Terminals Inc. Projected Profit & Loss Statement - Next Year @ $14M Sales % to Sales Sales 14,000,000 100% Less Expenses Sales 1,781,250 13% Production 6,937,500 50% Marketing 1,506,250 11% Administration 455,556 3% Service 390,000 3% Total Expenses 11,070,556 79% Net Profit 2,929,444 21% Read More