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MANAGEMENT CHALLENGE

By Debbie Gardner,2014-06-17 19:47
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MANAGEMENT CHALLENGE

MANAGEMENT CHALLENGE

an exploration of business

INTRODUCTION

    This brief covers the following:

    ? INTRODUCTION

    ? THE SIMULATION

    ? THE BUSINESS SITUATION

    ? THE DECISIONS

    ? THE RESULTS

    ? RECENT TRADING HISTORY This simulation is designed to allow you to manage the development of a business. A

    computerised business model will simulate its operation and your decisions and those

    of your competitors will influence its responses. Your decisions cover pricing, sales

    promotion, production, capital investment and credit control. Based on the response to

    these decisions your sales demand will be generated. Using the sales demand figures

    and to evaluate the effect of these decisions it may be necessary to produce several

    business reports.

    Your objective will be to make your business successful.

    THE SIMULATION

    The simulation consists of the following:

    ? PREPARATION

    ? DECISION MAKING

    ? REVIEW PREPARATION

    Preparation involves becoming familiar with the basic business situation, defining

    individual responsibilities, considering objectives and strategies and deciding how to

    measure and control the business. It is important to recognise that it will take

    sometime before you fully understand the response of the market and all the facets of

    the business that you are managing. It is probable that you will only fully understand

    the business after you have made several decisions and analysed their results. Thus

    your understanding and the effectiveness of decision making will improve throughout

    the simulation.

    DECISION MAKING

    Once the initial preparation is complete the operation of the business will be simulated

    for several periods each representing one trading year. (The first decision period is

    year 1). Each period involves the following:

    ? SUBMISSION OF DECISIONS

    ? SIMULATION OF THE BUSINESS

    ? ANALYSIS OF THE RESULTS DECISION SUBMISSION - the decisions (as described later) must be submitted to the simulation control centre at or before the time set. You must keep to the decision

    making schedule for, if decisions are not submitted on time, the previous decisions will

    be used in their place. The decisions must be submitted on the forms provided and

    should be complete and legible!

    SIMULATION - the decisions are evaluated and their impact calculated. This

    evaluation will take sometime and this time should be used to reflect on your

    objectives and strategies and to update your business control systems.

    RESULTS - the sales demand figures will be returned to each team. Following this you

    may be asked to calculate a Profit and Loss Account and Balance Sheet or, more

    usually, you will be given a full set of trading results.

    REVIEW

    At the end of the simulation there will be a short review of the results and you may be

    asked to make a short presentation.

    ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 2

THE BUSINESS SITUATION

    The business that you are to manage has been operating for sometime. The company

    is a wholly owned subsidiary of another company that, with the bank, funds the

    business.

    PRODUCTS

    The company currently makes and sells two products that fulfil two different purposes.

    These products (A and B) make different use of raw materials but involve the same

    amount of labour and factory capacity to produce. Therefore the company's factory

    capacity can be split between the two products. To increase the current factory

    capacity it will be necessary to invest capital in new machinery.

    PRICE AND COST INFORMATION

    All prices and costs are measured in Account Units (AUs).

    Current Price - up to the start of the simulation all firms have charged the same price. However, once the simulation starts competitors are free to change the price for their

    products.

    Unit Cost - the unit cost covers all variable manufacturing costs (i.e. wages, materials,

    distribution etc.).

    Production Overheads - the production overheads depend on the current plant capacity and cover indirect manufacturing costs. These overheads are 3 AUs per unit

    of capacity.

    Depreciation - factory machines depreciate at ten percent per year. Thus if the value

    of the fixed assets at the start of the period is 1000 AUs the depreciation is 100 AUs

    for the period (this is further illustrated in the history).

    Marketing Expenses - consist of the total promotion expenses (which are decisions made by the team) plus the cost of the sales force (sales staff cost 25 AUs each per

    period).

    General Overheads - there are general and administrative overheads of 2000 AUs each period.

    Financing Charges - financing charges consist of two parts - bank interest and dividends paid to the parent company. Bank interest is 20% per annum provided bank

    borrowings are less than half the value of equity (if borrowings exceed this the banks

    will view the company as risky and may increase interest rates appropriately). Interest

    earned on any cash balances is 10% per annum. Interest payments or receipts are

    paid in the current year.

    The parent company requires the payment of a 10% dividend on total equity (share

    capital plus reserves) each year. This will be paid in the following year.

    FACTORY

    Currently the company has the capacity to manufacture 250 units. This may be split

    between the two products. Additional factory capacity can be purchased at a capital

    cost of 20 AUs per unit, but will not be available until the following year.

    TAXATION

    Tax equal to fifty percent of the net profit after interest must be paid in the following

    year.

    MARKETING

    The market can be influenced in four ways, by:

    ? SELLING PRICE

    ? PROMOTION

    ? SALES FORCE

    ? CREDIT POLICY

    ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 3

Price - The market for an individual product is price sensitive. Therefore, high prices

    are likely to depress demand and low prices are likely to stimulate demand.

    Promotion - The amount spent on advertising and promoting an individual product will

    influence, over time, the customers' awareness of the product.

    Sales Force - The sales force will influence the degree of distribution of the product.

    There are currently three in the sales force.

    Credit Policy - Currently the company allows customers to take 73 days to pay and

    this seems acceptable.

    USES OF FUNDS

    It is necessary to finance:

    ? INVENTORIES

    ? DEBTORS

    ? FIXED ASSETS Inventories - Inventories consist of finished inventories that are valued at the direct

    unit cost.

    Debtors - Customers do not pay immediately and the delay in payment is decided in

    terms of debtor days. Currently this is 73 days, (which means that some 20% of the

    year's sales income will be outstanding at year-end). A tight credit policy may deter

    customers and thus reduce demand.

    Fixed Assets - The current value of the factory and machinery must be financed.

    SOURCE OF FUNDS

    The finance for the company is available from:

    ? PARENT COMPANY EQUITY

    ? OVERDRAFTS

    ? CREDITORS Equity - The parent company has funded the initial development of the company. This

    initial equity funding in shares amounts to 4000 AUs and the parent company will not

    add to this.

    The bankers can finance overdrafts - Future expansion of the company. This will be

    done automatically, provided capital gearing (the ratio of bank loans to total equity) is

    kept below 50%.

    Creditors - The value of creditors (money owed to suppliers) currently equals twenty

    per cent of the total variable production costs and is not expected to change.

    DECISIONS

    The decisions to be made each period are as follows:

    ? PRICE

    ? PROMOTION

    ? PRODUCTION

    ? NUMBER OF SALES PEOPLE

    ? NEW CAPACITY

    ? DEBTOR DAYS Price - For each product you must set a price (in whole AUs).

    Promotion - For each product you must set a level of advertising and promotional

    expenditure (in Account Units).

    Production - For each product you must decide the number of units to produce. You

    must total the production and enter this figure. (Note: If there is insufficient capacity

    then a proportionally lesser amount will be produced.)

    Number of Sales People - The number of sales people must be decided. ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 4

New Capacity - The number of additional units of capacity must be entered. (It is not

    be possible to reduce factory capacity by entering a negative number).

    Debtor Days - The credit period for customers must be entered as debtor days (the

    average number of days it takes to pay).

    RESULTS

    You will receive your results in three stages:

    ? PRELIMINARY RESULTS

    ? COMPANY REPORTS

    ? BUSINESS RESEARCH

    Preliminary results supply information about sales demand and closing stocks for

    each of the products separately and operating profit, overdrafts and cash.

    Company Reports is provided a little later and show for each product range how your

    sales were arrived at, the Profit & Loss Account, Balance Sheet and several key ratios.

    (Optionally, before you receive these reports you may be asked to calculate these from

    your interim results.)

    Business Research shows for all teams and products prices and market share, a

    summary of financial performance and, possibly some editorial comments.

    TRADING HISTORY

    The company has been trading for three years. The trading history is shown separately.

    Period -2 was the first year of operation, -1 the second year and 0 the third and most

    recent year.

    You should analyse these results to evaluate how the company has been performing.

    Decisions - Year -2

    Decisions Product A Product B Total

    Price 65 50

    Promotion 150 250 400

    Production 60 140 200

    Sales Force 3

    New Capacity 0

    Debtor Days 70

    Operating Results - Year -2

    Production Product A Product B Total

    Opening Stocks 0 0

    Actual Production 60 140 200

    Available Stock 60 140

    Sales Demand 54 146

    Closing Stocks 6 0

    Production Costs Product A Product B Total

    Actual Production 60 140

    Unit Cost 40 30

    Variable Cost 2400 4200 6600

    Stocks Valuation Product A Product B Total

    Closing Stocks 6 0

    Unit Cost 40 30

    Stock Value 240 0 240

    Sales Product A Product B Total

    Actual Sales 54 140

    Selling Price 65 50

    Sales Income 3510 7000 10510 ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 5

    Cost Results - Year -2

    Manufacturing Account

    Value Of Starting Stock 0

    Total Variable Costs 6600

    Production Overheads 600

    Depreciation 400

    Value Of Ending Stocks 240

    Cost Of Goods Sold 7360

Operating Expenses

    Total Promotion 400

    Selling Costs 75

    G+A Overheads 2000

    Operating Expenses 2475

    Decisions - Year -1

    Decisions Product A Product B Total Price 66 48 Promotion 150 250 400 Production 50 150 200 Sales Force 3

    New Capacity 50

    Debtor Days 70

    Operating Results - Year -1

    Production Product A Product B Total Opening Stocks 6 0 Actual Production 50 150 200 Available Stock 56 150 Sales Demand 51 173 Closing Stock 5 0 Production Costs Product A Product B Total Actual Production 50 150 Unit Cost 40 30 Variable Cost 2000 4500 6500 Stock Valuation Product A Product B Total Closing Stock 5 0 Unit Cost 40 30 Stock Value 200 0 200 Sales Product A Product B Total Actual Sales 51 150 Selling Price 66 48 Sales Income 3366 7200 10566

    Cost Results - Year -1

    Manufacturing Account

    Value Of Starting Stock 240

    Total Variable Costs 6500

    Production Overheads 600

    Depreciation 360

    Value Of Ending Stocks 200

    Cost Of Goods Sold 7500

Operating Expenses

    Total Promotion 400

    Selling Costs 75

    G+A Overheads 2000

    Operating Expenses 2475

    ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 6

    Decisions - Year 0

    Decisions Product A Product B Total Price 65 47 Promotion 150 250 400 Production 60 190 250 Sales Force 3

    New Capacity 0

    Debtor Days 73

    Operating Results - Year 0

    Production Product A Product B Total Opening Stocks 5 0 Actual Production 60 190 250 Available Stock 65 190 Sales Demand 54 189 Closing Stock 11 1 Production Costs Product A Product B Total Actual Production 60 190 Unit Cost 40 30 Variable Cost 2400 5700 8100 Stock Valuation Product A Product B Total Closing Stock 11 1 Unit Cost 40 30 Stock Value 440 30 470 Sales Product A Product B Total Actual Sales 54 189 Selling Price 65 47 Sales Income 3510 8883 12393

    Cost Results - Year 0

    Manufacturing Account

    Value Of Starting Stock 200

    Total Variable Costs 8100

    Production Overheads 750

    Depreciation 424

    Value Of Ending Stocks 470

    Cost Of Goods Sold 9004

Operating Expenses

    Total Promotion 400

    Selling Costs 75

    G+A Overheads 2000

    Operating Expenses 2475

    Cash Flow Summary - Year -2 To Year 0

    Cash Flow Sources Year-2 Year-1 Year 0 Opening Debtors 0 2016 2026 Sales Income 10510 10566 12393 Closing Debtors 2016 2026 2479 Income From Customers 8494 10556 11940 Opening Cash 0 153 0 Total Cash Available 8494 10709 11940

    ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 7

    Cash Flow Uses Year-2 Year-1 Year 0 Opening Creditors 0 1320 1300 Total Variable Costs 6600 6500 8100 Production Overheads 600 600 750 Operating Expenses 2475 2475 2475 Capital Expenditure 0 1000 0 Tax Paid (Last Year) 0 345 233 Dividend (Last Year) 0 400 394 Opening Overdraft 0 0 757 Closing Creditors 1320 1300 1620 Total Cash Needed 8355 11340 12389 Net Cash Situation 139 -631 -449 Interest -14 126 90 Closing Overdraft Or Cash 153 -757 -539

    Profit & Loss Summary - Year -2 To Year 0

    Profit & Loss Year-2 Year-1 Year 0 Sales Income 10510 10566 12393 Cost Of Goods Sold 7360 7500 9004 Gross Profit 3150 3066 3389 Operating Expenses 2475 2475 2475 Operating Profit 675 591 914 Interest -14 126 90 Net Profit Before Tax 689 465 824 Taxation 345 233 412 Earnings 344 232 412 Dividend 400 394 378 Retained Earnings -56 -162 34

    Balance Sheet Summary - Year -2 To Year 0

    Balance Sheet - Equity Year-2 Year-1 Year 0 Share Capital 4000 4000 4000 Reserves -56 -218 -184 Total Equity 3944 3782 3816 Assets Year-2 Year-1 Year 0 Fixed Assets 3600 4240 3816 Stocks 240 200 470 Debtors 2016 2026 2479 Cash 153 0 0 Current Assets 2409 2226 2949 Total Assets 6009 6466 6765 Liabilities Year-2 Year-1 Year 0 Overdrafts 0 757 539 Creditors 1320 1300 1620 Taxation 345 233 412 Dividends 400 394 378 Total Liabilities 2065 2684 2949

This simulation is one of a comprehensive range of Computer Aided Management Education simulations developed by Hall Marketing, Studio 11, Colman's Wharf, 45 Morris Road, London E14 6PA. Phone & Fax +44 (0)20 7537 2982 E-mail jeremyhall@simulations.co.uk Web http://www.simulations.co.uk

    ? 1986, 1995 & 2000 Hall Marketing MANCHAL Page 8

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