Strategic Profitability Analysis

7/30/2019 Strategic Profitability Analysis

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Strategic Profitability AnalysisPPT-5


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Learning Objective 1

Recognize which of two generic

strateg es a company s us ng.


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What is Strategy?

Strategy describes how an organization matches

its own capabilities with the opportunities in the

marketplace to accomplish its overall objectives.


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What is Strategy?

What is the focus of industry analysis?

Competitors

Potential entrants into the market

Equivalent productsBargaining power of customers

Bargaining power of input suppliers


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Basic Strategies

1. Product differentiation

2. Cost leadership


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Implementation of Strategy

Management accountants design reports

to help managers track progress inimplementing strategy.


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Identify what comprises

reeng neer ng.


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Reengineering

Reengineering is the fundamental rethinking

of business processes delivery to achieve

improvements in critical measures of

performance such as cost, quality, service,speed, and customer satisfaction.


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Reengineering Example

Customers needs identified Quantities to be shipped

matched against purchase order

Dallas Co. order delivery system:

Purchase order issued

Production scheduled

Manufacturing completed

Finished goods to inventory

Shipping documents sent

to Billing Department

Invoice issued

Customer payment follow up


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The following was determined:

production begins in the manufacturing department.

Sometimes items are held in inventory untila truck is available for shipment.


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If the quantity shipped does not match the

number of items requested by the customer,

a s ecial shi ment must be scheduled.

Dallas discovered that the many transfers

across departments slowed down theprocess and created delays.

A multifunctional team reengineered the

order delivery process.


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A customer relationship manager is responsible

for each customer.

Dallas will enter into long-term contracts with

customers specifying quantities and prices.

The customer relationship manager will work

with the customer and manufacturing to specify

delivery schedules one month in advance.


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The schedule of customer orders will be sent

electronically to manufacturing.

Completed items will be shipped directly from

the manufacturing plant to customer sites.

Each shipment will automatically trigger an

invoice to be sent electronically to the customer.


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Present the four perspectives

o t e a ance scorecar .


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Perspectives of Performance

1. Financial

3. Internal business process

4. Learning and growth


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Financial Perspective

Objective:

Measures:Increase in operating income


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Financial Perspective

Initiatives:Target

Performance

Actual

Performance

Manage costs andunused capacity

Build strong customerrelationships

$2,000,000

$3,000,000

6%Build strong customer

relationships

$2,100,000

$3,420,000

6.48%


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Customer Perspective

Objectives:

Increase market share

Measures:Market share in communication

networks segment

Customer satisfaction survey

ncrease cus omer sa s ac on


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Customer Perspective

Initiatives:Target

Performance

Actual

Performance

Identify future needsof customer

Identify new targetcustomer segments

6%

7

90% give toptwo ratings

Increase customer focusof sales organization

7%

8

87% give toptwo ratings


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Internal Business

Process Perspective

Objectives:

Improve manufacturing

Measures:

Yield

On-time delivery

Meet specified delivery dates


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Internal Business

Process Perspective

Initiatives:Target

Performance

Actual

Performance

Identify problems andimprove quality

Reengineer orderdelivery process

78%

92%

79.3%

90%


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Learning and Growth Perspective

Objectives:

Align employee and

Measures:

Employee satisfaction survey

Improvements in process controls

Improve manufacturing processes


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Learning and Growth Perspective

Initiatives:Target

Performance

Actual

Performance

mp oyee

participation andsuggestion programto build teamwork

Organize R&D/manufacturing teamsto modify processes

oemployees

give toptwo ratings

5

oemployees

give toptwo ratings

5


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Aligning the Balanced

Scorecard to Strategy

Different strategies call for different scorecards.

What are some of the financial

Operating income

Revenue growth

Cost reduction is some areas

Return on investment


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What are some of the customer

perspective measures?

Market share

Customer satisfactionCustomer retention percentage

Time taken to fulfill customers requests


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What are some of the internal business


Manufacturing capabilities

Number of new products or services

New product development time

Number of new patents


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Operations Process:

Yield

e ec ra es

Time taken to deliver product to customers

Percentage of on-time delivery

Setup time

Manufacturing downtime


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Post-sales service:

defective products

Hours of customer training forusing the product


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What are some of the learning and growth


Employee satisfaction scores

Employee turnover rates

Information system availability

Percentage of processes with advanced controls


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Pitfalls When Implementing

a Balanced Scorecard

What pitfalls should be avoided when

implementing a balanced scorecard?

. - -

linkages to be precise.

2. Dont seek improvements acrossall measures all the time.

3. Dont use only objective measures

on the scorecard.


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Pitfalls When Implementing

a Balanced Scorecard

4. Dont fail to consider both costs and benefits

of initiatives such as spending on information

ec no ogy an researc an eve opmen .

5. Dont ignore nonfinancial measures when

evaluating managers and employees.6. Dont use too many measures.


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Analyze changes in operating

ncome to eva uate strategy.


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Evaluating the Success

of a Strategy

Assume the following operating incomes:

Year 2003 Year 2004

evenues:

(1,000,000 $26) $26,000,000

(1,100,000 $24) $26,400,000Expenses:

Materials 4,050,000 3,631,320

Other 16,000,000 16,000,000

Operating income $ 5,950,000 $ 6,768,680


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Evaluating the Success

of a Strategy

How can the increase in operating

income of $818,680 be evaluated?

Growth

Price recoveryProductivity


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Growth Component

Assume that for 2003, Dallas produced

and sold 1,000,000 units at $26 per unit.

During the year 2004, Dallas produced

and sold 1,100,000 units at $24 per unit.

What is the revenue effect of growth?


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Growth Component

Revenue effect of growth component

(Actual units of output sold in 2004

=Actual units of output sold in 2003)

Output price in 2003

(1,100,000 1,000,000) $26 = $2,600,000 F

This component is favorable because

it increases operating income.


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Growth Component

Cost effect of growth component

Actual units of input or capacity that would

have been used in 2003 to produce year 2004

output assuming the same input-output

relationship that existed in 2003

Actual units or capacity to produce 2003 output

Input prices in 2003

=


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Growth Component

To produce 1,100,000 units in 2004 compared

with the 1,000,000 units produced in 2003

a 10% increase Dallas would re uire a

proportional increase in direct materials.

Assume that 3,000,000 square centimeters ofmaterials were used to produce the 1,000,000

units in 2003 at a cost of $1.35

per square centimeter.


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Growth Component

Assume that manufacturing conversion costs,

selling and customer service costs and research

and develo ment costs were $16 000 000

and remained stable during 2004.

What is the cost effect of the growth component?3,000,000 110% = 3,300,000 centimeters

(3,300,000 3,000,000) $1.35 = $405,000 U


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Operating Income and Growth

What is the net increase in operating income

as a result of growth?

Revenue effect of growth component $2,600,000 F

Cost effect of growth component 405,000 U

Increase in operating income

due to growth component $2,195,000 F


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Price-Recovery Component

Revenue effect of price-recovery component

= (Output price in 2004 Output price in 2003)

Actual units of output sold in 2004

What is the revenue effect of the

price-recovery component?

($24 $26) 1,100,000 = $2,200,000 U


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Cost effect of price-recovery component

(Input prices in 2004 Input prices in 2003)

=c ua un s o npu s or capac y a wou

have been used to produce year 2004 output

assuming the same input-output relationshipthat existed in 2003

Assume that in the year 2004, direct materials

costs were $1.31 per square centimeter.


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What is the cost effect of the

price-recovery component?

($1.31 $1.35) 3,300,000 = $132,000 F

What is the total effect on operatingincome of the price-recovery component?


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Operating Income and


Revenue effect

of price-recovery component $2,200,000 U

Cost effect

of price-recovery component 132,000 F

Decrease in operating incomedue to price-recovery component $2,068,000 U


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Productivity Component

Productivity component

Actual units of inputs or capacity to

=

Input prices in 2004

Actual units of inputs or capacity

that would have been used to produceyear 2004 output assuming the same

input-output relationship that existed in 2003


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Assume that 2,772,000 actual square

centimeters of direct materials were

used in the year 2004.

Actual price was $1.31/square centimeter.


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What is the productivity component of cost changes?

=

There is a $691,680 increase in operating

income due to the productivity component.


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Change in Operating Income

Increase in operating income

$818,680

Growth

component

$2,195,000 F

Price-recovery

component

$2,068,000 U

Productivity

component

$691,680 F


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Distinguish between engineered

an scret onary costs.


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Engineered Costs

Engineered costs result specifically from a clear

cause-and-effect relationship between output

and the resources needed to produce that output.

They can be variable or fixed in the short run.


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Discretionary Costs

Discretionary costs have two important features.

decisions regarding the maximum

amount to be incurred.

They have no measurable cause-and-effect

relationship between output and resources used.


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Relationships Between

Inputs and Outputs

Engineered costs differ from discretionary

costs along two key dimensions:

Type of process

Level of uncertainty


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Relationships Between

Inputs and Outputs

Engineered costs pertain to processes that are

detailed, physically observable, and repetitive.

Discretionary costs are associated with processes

that are sometimes called black boxes, because

they are less precise and not well understood.


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Identify unused capacity

an ow to manage t.


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Managing Unused Capacity

What actions can management take

when it identifies unused capacity?

Attempt to eliminate the unused capacity

Attempt to use the unused capacity to grow revenue


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Name of the Student:Class Roll No. University No.:Date: Marks:10

QUIZ No. 5

Strategic Profitability Analysis

ATTEMPT ALL QUESTIONS

MULTIPLE CHOICE QUESTONS

1. Which one of the following is a market force that industry

analysis will focus on?

A. Employees B. Management style C. Capital markets D. Similarproducts

ANS. D


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QUIZ-5

2.Which one of the following factors would make entry into themarket attractive to potential new businesses?

A. Limited profit margins B. Current market has close customer relations C.Current advanced product development D. Small capital needs

.

3. Improving manufacturing capability would be included in

which one of the following perspectives? A. Customer B. Learning and growth C. Internal business process D. Financial

ANS. C


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QUIZ-54. A measure of the change in operating income attributable solely to changes in

dollar amounts of inputs and outputs from one period to the next is acomponent known as the

A. revenue component. B. growth component. C. price-recovery component.

D. productivity component.

ANS. C

5. A firm that focuses on a cost leadership strategy would be most likely to do

which one of the following?

A. Establish low selling prices B. Provide superior products C. Build brand

loyalty D. Cultivate unique products

ANS.A


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QUIZ-5

TRUE OR FALSE STATEMENTS

6.The fundamental rethinking and redesign of business processes to achieveimprovements is reengineering.

TrueFalse

ANS. TRUE

7. The customer perspective under the balanced scorecard approach focuses onhow to reduce costs to provide less expensive goods.

TrueFalse

ANS. FALSE


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QUIZ-5

8. When implementing a balanced scorecard, the cause-and-effectlinkages are always precise.

TrueFalse

ANS. FALSE

9. When evaluating managers and employees under the balancedscorecard approach, only financial measures should beconsidered.

TrueFalse

ANS. FALSE


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QUIZ-5

10. A company can adequately gauge the success

of their strategy by measuring the change inoperating income from one year to the next.

True

a se

ANS. FALSE


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HOME ASSIGNMENT-5

1. DEFINE STRATEGY. WHAT IS A CUSTOMER

PREFERENCE MAP ANDWHY IS IT USEFUL?

2. WHAT IS A STRATEGY MAP? ALSO EXPLAIN

BALANCED SCORE CARD. DESCRIBE THREE

FEATURES OF A GOOD BALANCED SCORE

CARD.


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QUESTIONS RELATING TO STRATEGIC PROFITABILITY ANALYSISQ.NO.1

Snyder Corporation is small information systems consulting firm thatspecializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder must

delivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.

PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR

$ 60 $ 63

SOFTWARE IMPLEMENTATION SUPPORT

CAPACITY ( IN UNITS OF WORK)

90 90

TOTAL COST OF SOFTWARE IMPLEMENTATIONSUPPORT

$ 360,000 $ 369,000

SOFTWARE IMPLEMENTATION SUPPORTCAPACITY COST PER UNIT OF WORK

$ 4,000 $ 4,100

NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT

3 3

TOTAL SOFTWARE DEVELOPMENT COSTS $ 375,000 $ 390,000SOFTWARE DEVELOPMENT COST PEREMPLOYEE

$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Calculate the operating income of Snyder Corporation in 2008 and 2009.

ANS. 1 Strategic analysis of operating income

Operating income for each year is as follows:2008 2009

Revenues ($50,000 60; $48,000 70) $3,000,000 $3,360,000

Costs


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Software implementation labor costs

($60 30,000; $63 32,000) 1,800,000 2,016,000Software implementation support costs

($4,000 90; $4,100 90) 360,000 369,000Software development costs

($125,000 3; $130,000 3) 375,000 390,000

Total costs 2,535,000 2,775,000Operating income $ 465,000 $ 585,000Change in operating income $120,000 F

Q. No. 2Describe three key components in doing a strategic analysis of operating

income.

Q.NO. 3Snyder Corporation is small information systems consulting firm that

specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of workperformed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.


$ 60 $ 63

SOFTWARE IMPLEMENTATION SUPPORTCAPACITY ( IN UNITS OF WORK)

90 90


$ 360,000 $ 369,000


$ 4,000 $ 4,100


3 3


$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the start


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of each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Calculate the growth, price recovery and productivity components thatexplain the change in operating income from 2008-2009.

ANS.The Growth Component

Revenue effectof growth

=Actual units of Actual units of

output sold output soldin 2006 in 2005

Sellingprice

in 2005

= (7060) $50,000 = $500,000 F

Cost effectof growth forvariable costs

=

Units of input Actual unitsInput

required to produce of inputprice

2006 output used to producein 2005

in 2005 2005 output

Cost effect ofgrowth forfixed costs

=

Actual units of capacity in2005 if adequate to produce

2006 output in 2005 AcOR

If 2005 capacity inadequateto produce 2006 output in 2005,

units of capacity requiredto produce 2006 output in 2005

tual unitsof capacity

in 2005

Price per

unit of capacityin 2005

Software implementation labor costs that would be required in 2006 to produce 70 unitsinstead of the 60 units produced in 2005, assuming the 2005 input-output relationship continued

into 2006, equal 35,000 (30 000

60

, 70) labor-hours. Software implementation support costs

would not change since adequate capacity exists in 2005 to support year 2006 output andcustomers. Software development costs are discretionary costs not directly related to output and,hence, would not change in 2005 even if Snyder had to produce and sell the higher year 2006output in 2005.


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The cost effects of growth component are

Software implementation labor costs (35,00030,000) $60 = $300,000 USoftware implementation support costs (9090) $4,000 = 0Software development costs (33) $125,000 = 0Cost effect of growth $300,000 U

In summary, the net increase in operating income as a result of the growth component equals:Revenue effect of growth $500,000 FCost effect of growth 300,000 UChange in operating income due to growth $200,000 F

The Price-Recovery Component

Revenue effect ofprice-recovery

= Actual units

Selling price Selling priceof output

in 2006 in 2005sold in 2006

= ($48,000$50,000) 70 = $140,000 U

Cost effect ofprice-recovery for

variable costs=

Input Inputprice in price in

2006 2005

Units of inputrequired to produce2006 output in 2005

Cost effect ofprice-recovery for

fixed costs=

Price per Price perunit of unit of

capacity capacityin 2006 in 2005

Actual units of capacity in2005, if adequate to produce

2006 output in 2005OR

If 2005 capacity inadequate toproduce 2006 output in 2005,units of capacity required toproduce 2006 output in 2005

Software implementation labor costs ($63$60) 35,000 = $105,000 USoftware implementation support costs ($4,100$4,000) 90 = 9,000 U

Software development costs ($130,000$125,000) 3 = 15,000 UCost effect of price recovery $129,000 U

In summary, the net decrease in operating income as a result of the price-recovery componentequals:

Revenue effect of price-recovery $140,000 UCost effect of price-recovery 129,000 UChange in operating income due to price recovery $269,000 U


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The Productivity Component

Cost effect ofproductivity forvariable costs

=Actual units of Units of input

input used to produce required to produce2006 output 2006 output in 2005

Inputprice in

2006

Cost effect ofproductivity for

fixed costs=

Actual units of capacity in

2005, if adequate to produce2006 output in 2005Actual units of ORcapacity in If 2005 capacity inadequate2006 to produce 2006 output in 2005,units of capacity required topro

duce 2006 output in 2005

Price perunit of

capacityin 2006

The productivity component of cost changes are:

Software implementation labor costs (32,00035,000) $63 = $189,000 FSoftware implementation support costs (9090) $4,100 = 0Software development costs (33) $130,000 = 0Change in operating income due to productivity $189,000 F

The change in operating income between 2005 and 2006 can be analyzed as follows:

IncomeStatementAmountsin 2005

(1)

Revenue andCost Effectsof Growth

Componentin 2006

(2)

Revenue andCost Effects ofPrice-Recovery

Componentin 2006

(3)

Cost Effect ofProductivityComponent

in 2006(4)

IncomeStatementAmountsin 2006

(5) =(1) + (2) + (3) + (4)

Revenues $3,000,000 $500,000 F $140,000 U $3,360,000

Costs 2,535,000 300,000 U 129,000 U $189,000 F 2,775,000

Operating income $ 465,000 $200,000 F $269,000 U $189,000 F $ 585,000

$120,000 FChange in operating income

Q.NO.4Snyder Corporation is small information systems consulting firm that



$ 60 $ 63

SOFTWARE IMPLEMENTATION SUPPORT 90 90


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CAPACITY ( IN UNITS OF WORK)


$ 360,000 $ 369,000


$ 4,000 $ 4,100


3 3


$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the start

of each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Comment on your answer in requirement. What do these componentsindicate?

ANS. 4The analysis of operating income indicates that a significant amount of the

increase in operating income resulted from Snyders productivity improvements in2006. The company had to reduce selling prices while labor costs were increasing

but it was able to increase operating income by improving its productivity. Theproductivity gains also allowed Snyder to be competitive and grow the business.The unfavorable price recovery component indicates that Snyder could not pass onincreases in labor-related wages via price increases to its customers, very likelybecause its product was not differentiated from competitors offerings.

Q. No. 5. Define strategy.



PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000


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SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR

$ 60 $ 63


90 90


$ 360,000 $ 369,000


$ 4,000 $ 4,100


3 3


$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Suppose that during 2009 the market for implementing sales managementsoftware increases by 5% and that Snyder experience a 1% decline in sellingprices. Assume that any further decreases in selling price and increases in market

share are strategic choices by Snyders management to implement their strategy.Calculate how much of the change in operating income from 2008 to 2009 isdue to the industry market size factor, cost leadership and productdifferentiation. How successful has Snyder been in implementation itsstrategy. Explain.

ANS.Analysis of growth, price-recovery, and productivity components

Effect of industry-market-size factor on operating income

Of the 10-unit increase in sales from 60 to 70 units, 5% or 3 units (5%

60) aredue to growth in market size, and 7 (10 3) units are due to an increase in marketshare.The change in Snyders operating income from the industry market-size factorrather than from specific strategic actions is:

$200,000 (the growth component in Exercise 13-27) 103

$60,000 FEffect of product differentiation on operating income


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Of the $2,000 decrease in selling price, 1% or $500 (1% $50,000) is due to ageneral decline in prices, and the remaining decrease of $1,500 ($2,000 $500) isdue to a strategic decision by Snyders management to implement its costleadership strategy of lowering prices to stimulate demand.The change in operating income due to a decline in selling price (other than the

strategic reduction in price included in the cost leadership component) $500 70units = $ 35,000 UIncrease in prices of inputs (cost effect of price recovery) 129,000 UChange in operating income due to product differentiation $164,000 U

Effect of cost leadership on operating incomeProductivity component $189,000 F

Effect of strategic decision to reduce selling price, $1,500 70 105,000 UGrowth in market share due to productivity improvement and strategic decision toreduce selling price

$200,000 (the growth component in Exercise 13-27) 107

140,000 FChange in operating income due to cost leadership $224,000 F

The change in operating income between 2005 and 2006 can then be summarizedas

Change due to industry-market-size $ 60,000 FChange due to product differentiation 164,000 UChange due to cost leadership 224,000 F

Change in operating income $120,000 F

Snyder has been very successful in implementing its cost leadership strategy. Dueto a lack of product differentiation, Snyder was unable to pass along increases inlabor costs by increasing the selling pricein fact, the selling price declined by$2,000 per work unit. However, Snyder was able to take advantage of itsproductivity gains to reduce price, gain market share, and increase operatingincome.

Q. No. 7 Describe the five key forces to consider when analyzing an industry.


specializes in helping companies implement sales management software. Themarket for Synders products is very competitive. To compare, Snyder mustdelivery quality service at a low cost. Snyder bills clients in terms of units of work


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performed, which depends on the size and complexity of the sales managementsystem. Snyder presents the following dates for 2008 and 2009.

PARTICULARS 2008 2009UNITS OF WORK PERFORMED 60 70SELLING PRICE $ 50,000 $ 48,000

SOFTWARE IMPLEMENTATION LABOUR HOURS 30,000 32,000COST PER SOFTWARE IMPLEMENTATIONLABOUR HOUR

$ 60 $ 63


90 90


$ 360,000 $ 369,000


$ 4,000 $ 4,100

NUMBER OF EMPLOYEES DOING SOFTWARE

DEVELOPMENT

3 3


$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of software

development employees. The software development staff and costs have no directrelationship with the number of units of work performed.

Where possible calculate the amount and cost of (a) unused softwareimplementation support capacity and (b) unused software development capacity atthe beginning of 2009 based on units of work performed in 2009. If you areunable to calculate the amount and cost of unused capacity. Indicate why not.

ANS.Identifying and managing unused capacity

The amount and cost of unused capacity at the beginning of year 2006 based on workperformed in year 2006 follows:Amount of Cost of

Unused UnusedCapacity Capacity

Software implementation support, 90 70; (90 70) $4,100 20 $82,000Software development Discretionary Discretionary

cost, so cannot cost, so cannotdetermine be calculated*


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unused capacity*

*The absence of a cause-and-effect relationship makes identifying unused capacity for discretionary costs difficult.Management cannot determine the software development resources used for the actual output produced to compareagainst software development capacity.




$ 60 $ 63


90 90


$ 360,000 $ 369,000


$ 4,000 $ 4,100

NUMBER OF EMPLOYEES DOING SOFTWAREDEVELOPMENT 3 3


$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation supportcapacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Suppose Snyder can add or reduce its software implementation support capacityin increments of 10 units. What is the maximum amount of costs that Snydercould save in 2009 by downsizing software implementation support capacity?

ANS.


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Snyder can reduce software implementation support capacity from 90 units

to 75 (90 15) units. Snyder will save 15 $4,100 = $61,500. This is themaximum amount of costs Snyder can save by downsizing in 2006. It cannotreduce capacity further (by another 15 units to 60 units) because it would then not

have enough capacity to perform 70 units of work in 2006 (work that contributessignificantly to operating income).




$ 60 $ 63


90 90


$ 360,000 $ 369,000


$ 4,000 $ 4,100


3 3


$ 125,000 $ 130,000

Software implementation labour costs are variable costs. Software implementationsupport costs for each year depend on the software implementation support

capacity (defined in terms of units of work) that Snyder chooses to maintain eachyear. It does not vary with the actual units of work performed that year. At the startof each year, management uses its discretion to determine the number of softwaredevelopment employees. The software development staff and costs have no directrelationship with the number of units of work performed.Snyder , in fact, does not eliminate any of its unused software implementationsupport capacity. Why might Snyder not downsize?


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ANS.Snyder may choose not to downsize because it projects sales increases that

would lead to greater demand for and utilization of capacity. Snyder may have alsodecided not to downsize because downsizing requires significant reduction incapacity. For example, Snyder may have chosen to downsize additional software

implementation support capacity if it could do so in, say, increments of 5, ratherthan 15 units. Not reducing significant capacity by laying off employees boostsemployee morale and keeps employees more motivated and productive.


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Strategic Profitability Analysis

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