STRATEGIC PERFORMANCE MANAGEMENT QUESTION BANK QUESTION 1 Nappies Plc (Nappies), which is based in Ireland, manufactures and markets disposable nappies for babies and infant children. Disposable nappies are made of super-absorbent chemicals, paper pulp and plastics. Nappies have been very successful since its formation in the early 2000s. It has established a very strong brand name and its products are sold by all leading pharmacies and supermarkets in Ireland. Nappies have a strong organisational culture with high levels of employee motivation and satisfaction throughout the organisation. Available information regarding the disposable nappy market size and Nappies revenue is as follows: ActualActualActualActualForecastForecast201520162017201820192020mmmmmmMarket size2,7262,8072,9203,0953,2493,347Revenue354421526681715736 The marketing director of Nappies has obtained information that the birth-rate in Ireland is projected to fall after 2020. However, the number of years over which the projected fall might take place cannot be forecast with any degree of certainty. The directors of Nappies are most concerned that in spite of the growth achieved during recent years, there remains a projected planning gap. In view of this fact the directors of Nappies are considering the acquisition of Happy Babies Ltd (Happy Babies), a competitor, which had revenue of 155m during 2018 from sales of its disposable nappies. None of the directors of Nappies have any previous experience of such an acquisition. The directors of Nappies have heard that Happy Babies have experienced workplace culture based problems during recent years. The government of Ireland has recently issued a green paper, designed to encourage discussion and potentially pave the way for legislation, concerning the environment in which they stated their concerns about companies such as Nappies whose entire revenues derive from sales of non-biodegradable products. Required: Using the above information, explain in detail the term planning gap and discuss and evaluate other suitable alternative strategies to closing the planning gap which the directors of Nappies might have considered prior to giving consideration to the purchase of Happy Babies. (10 marks) Critically analyse THREE potential problems, based solely on the information provided above, that Nappies might encounter in the acquisition of Happy Babies. (5 marks) Outline in detail the reasons for the concerns of the government of Ireland with companies such as Nappies and advise the directors of a strategy that might be considered in order to avoid being subject to any forthcoming legislation concerning the environment. (5 marks) Evaluate the circumstances in which a government can act as an aid to business performance. (5 marks) Total (25 marks) QUESTION 2 Private sector organisations traditionally seek to make a profit and this forms the main purpose for which the organisation exists. Certainly, shareholders in these types of organisations are normally in agreement with this strategy. The difficulty can sometimes be with other stakeholders in the organisation, for example employees, customers, suppliers, who in their own ways are trying to extract as much from the organisation as possible. In relation to employees, performance related awards are often used by organisations in the private sector in order to encourage employees to align themselves with the organisations goal in making as large a profit as possible. That normally does not lead to any problems since employees will receive a bonus if certain profit targets are met for the overall company and employees will normally work hard to achieve that aim. However, in situations where you have a large organisation with many different divisions within the organisation, profit targets are usually set for divisional managers at a divisional level rather than a company level. This can lead to serious difficulties and between divisions. Identify and assess the practical problems, giving examples to illustrate the points made, of implementing a scheme for rewarding divisional managers in large companies on the basis of results for their divisions. (16 marks) A number of theories attempt to explain managerial motivation. Discuss and evaluate how they help in the design and evaluation of schemes for encouraging and rewarding improved managerial performance? (9 marks) Total (25 marks) QUESTION 3 Not for Profit Organisations The absence of the profit measure in non-profit seeking organisations causes problems for the measurement of their efficiency and effectiveness. Required: Explain and analyse why the absence of a profit measure might be a cause of the problems referred to above in Not for Profit Organisations. Examples should be given in your analysis. (8 marks) Identify, using examples to illustrate your points, how the problems indentified above at (a) (i) extend to activities within commercial organisations which have as their primary objective the attainment of profit. (7 marks) A doctors surgery is being measured as to its efficiency and effectiveness. Amongst a number of factors, the quality of care has been included as one aspect of the surgery which can be measured. Two features of quality of care have been listed: Clinics adherence to appointment times.Patients ability to contact the clinic and make appointments without difficulty Required: Suggest and evaluate a set of non-financial measures which can be used to identify the effective level of achievement for each of the two features above. Reasons should be given for each non-financial measure. (10 marks) Total (25 marks) QUESTION 4 Jones Plc manufactures and sells a number of rubber-based products. Its strategic focus is channelled through profit centres which sell products transferred from production divisions that are operated as cost centres. The profit centres are the primary value-adding part of the business, where commercial profit centre managers are responsible for the generation of a contribution margin sufficient to earn the target return of Jones Plc. The target return is calculated after allowing for the sum of the agreed budgeted cost of production at production divisions, plus the cost of marketing, selling and distribution costs and central services costs. The Mould Division is part of Jones Plc and manufactures moulded products that it transfers to profit centres at an agreed cost per tonne. The agreed cost per tonne is set following discussion between management of the Mould Division and senior management of Jones plc. The following information relates to the agreed budget for the Mould Division for the year ending 31 December 2020: (1) The budgeted output of moulded products to be transferred to profit centres is 100,000 tonnes. The budgeted transfer cost has been agreed on a two-part basis as follows: (i) A standard variable cost of 200 per tonne of moulded products; (ii) A lump sum annual charge of 50,000,000 in respect of fixed costs, which is charged to profit centres, at 500 per tonne of moulded products. (2) Budgeted standard variable costs (as quoted in 1 above) have been set after incorporating each of the following: (i) A provision in respect of processing losses amounting to 15% of material inputs. Materials are sourced on a JIT basis from chosen suppliers who have been used for some years. It is felt that the 15% level of losses is necessary because the ageing of the machinery will lead to a reduction in the efficiency of output levels. (ii) A provision in respect of machine idle time amounting to 5%. This is incorporated into variable machine costs. The idle time allowance is held at the 5% level partly through elements of real-time maintenance undertaken by the machine operating teams as part of their job specification. (3) Quality checks are carried out on a daily basis on 25% of throughput tonnes of moulded products. (4) All employees and management have contracts based on fixed annual salary agreements. In addition, a bonus of 5% of salary is payable as long as the budgeted output of 100,000 tonnes has been achieved; (5) Additional information relating to the points in (2) above (but NOT included in the budget for the year ending 31 December 2020) is as follows: (i) There is evidence that materials of an equivalent specification could be sourced for 40% of the annual requirement at the Mould Division, from another division within Jones Plc which has spare capacity. (ii) There is evidence that a move to machine maintenance being outsourced from a specialist company could help reduce machine idle time and hence allow the possibility of annual output in excess of 100,000 tonnes of moulded products. (iii) It is thought that the current level of quality checks (25% of throughput on a daily basis) is vital, although current evidence shows that some competitor companies are able to achieve consistent acceptable quality with a quality check level of only 10% of throughput on a daily basis. The directors of Jones Plc have decided to investigate claims relating to the use of budgeting within organisations which have featured in recent literature. A summary of relevant points from the literature is contained in the following statement: The use of budgets as part of a performance contract between an organisation and its managers may be seen as a practice that causes ma
nagement action which might lead to the following problems: (a) Meeting only the lowest targets (b) Using more resources than necessary (c) Making the bonus whatever it takes (d) Competing against other divisions, business units and departments (e) Ensuring that what is in the budget is spent (f) Providing inaccurate forecasts (g) Meeting the target, but not beating it (h) Avoiding risks. Required: Critically analyse SIX of the eight problems listed above relating to the use of budgeting (your answer must deal with the problem of Making the bonus whatever it takes and FIVE other problems). (13 marks) Illustrate EACH of the six problems chosen in (a) using the data from the Mould division/Jones Plc scenario. (6 marks) Suggest and evaluate ways in which each of the six problems chosen in (a) above may be overcome. (6 marks) Total (25 marks) QUESTION 5 The company that you work for, Computer Parts Limited is involved in the manufacture of component parts for the computer hardware sector. The company has a total production capacity of 400,000 units across its range of products. The companys products to be manufactured with forecast sales volumes are as follows: ProductForecast Sales Units (000)2020202120222023Keyboard18012010060Mouse15048240Hard Drive60727630 Other relevant information relating to the products is as follows: Selling price per unit and contribution to sales ratios (%) for 2020 and 2021 ProductSelling Price per unit Contribution to sales ratio (%)Keyboard4070Mouse5065Hard Drive6060 Product-specific fixed overheads: Year20202021000000Keyboard3,8002,400Mouse2,4001,340Hard Drive2,0402,100 The companys other fixed overheads are estimated at 1.65 million per annum. Required: 1 (a) Prepare a statement of product profitability for each of years 2020 and 2021 which also shows the net profit or loss of Computer Parts Limited. (6 marks) (b) Assess and comment on the figures in the statement prepared in 1(a) above. (6 marks) 2. The marketing director of Computer Parts Limited has suggested the introduction of a new product, a USB key, for which the following estimated information is available: Sales volumes and selling prices per unit Year ending 31 May202120222023Sales units (000)80180100Selling price per unit ()505050 The USB key will generate a contribution to sales ratio of 50% throughout the three year period.Product specific fixed overheads during the year ending 31 May 2021 are estimated to be 1.6 million. It is anticipated that these fixed overheads would decrease by 10% per annum during each of the years ending 31 May 2022 and 31 May 2023.Capital investment amounting to 3.9 million would be required in June 2020. The investment would have not residual value at 31 May 2023.Additional working capital of 500,000 would be required in June 2020. A further 200,000 would be required on 31 May 2021. These amounts would be recovered in full at the end of the three year period.The cost of capital is expected to be 12% per annum.Assume all cash flows (other than where stated) arise at the end of the year. Required: 2. Determine whether the new product is viable purely on financial grounds using Net Present Value (NPV). (5 marks) Calculate the minimum target contribution to sales ratio (%) at which the USB key will be financially viable, assuming that all other data remain unchanged. (4 marks) Identify and discuss in detail an alternative strategy that may assist in improving the performance of Computer Parts Ltd with effect from 1 May 2021 (where only the products keyboard, mouse, hard drive and USB key are available for manufacture. (4 marks) Discount factors for 12% Year 0 1.0 Year 1 0.893 Year 2 0.797 Year 3 0.712 Total (25 marks) QUESTION 6 Your Company has been presented with an exciting project. The outline of the project consists of setting up a high-grade health club. The club will also have the capability of allowing guests to stay overnight. You have been asked to put together a business plan to present to the bank manager in order to secure finance. The following are the estimates of costs and revenues for the year ahead. Costs A property has been located at a rent of 220,000 per annum. A full-time manager will be paid 30,000 per annum. In addition to this, there will be one assistant manager who will cost 18,000 per annum and 6 full time health professionals trained in various disciplines, costing 13,500 each per annum. The maintenance costs for the health club are estimated at 28,000 per annum. The utilities such as gas, electricity and telephone are expected to cost 29,000 per annum. Advertising will cost 6,500 per annum. The cost of breakfast is expected to be 3.30 per guest per day, lunch 4.75 per guest per day and evening meal 6.30 per guest per day. You will employ local people to work as domestic staff. They will be paid 7.50 per hour. It is expected that they will be able to clean 3 rooms per hour and each room will only be cleaned after a guest has occupied it. The main spa areas will be cleaned by a part time member of staff, costing 7,500 per annum. Towels and robes will be supplied to each resident. These will be provided clean every day. The cost of this is expected to be 3.45 per day per guest. Each treatment involves some consumables and these are estimated to cost 10.60 per treatment. Each guest would have two treatments per day. Revenues It is proposed that the price charged will be 110 per night. This price would be for use of the fitness facilities, all meals (breakfast, lunch and dinner), and clean laundry. Any treatments would be charged in addition to this. Treatments offered will be charged at 20 each. It is expected that guests on average will choose to have 2 treatments per day of their visit. The spa will be able to accommodate 20 guests per night. It is expected that the spa will operate 365 days per year and on average will achieve 65% occupancy. Required: Determine and justify the fixed costs for the project for the year ahead; (5 marks) (b) Determine and justify the variable costs per guest night; (5 marks) (c) Determine and justify what you think the Revenue per guest night would be; (3 marks) (d) Draft a statement that clearly shows the level of profit that can be expected from the health club assuming levels of occupancy at 60%, 65% and 70%. (7 marks) (e) Critically discuss the assumptions that you have made. (5 marks) Total (25 marks) QUESTION 7 Bonne Bia limited is a newly formed company in the catering business founded by Kate and Paul Johnson. Kate and Paul have considerable experience in the food industry and saw an opportunity to establish a food/beverage business to service the tourist market during the four months from May to August. At present Kate and Paul are trying to decide between two possible food/beverage options. Pertinent information relating to each of the options is shown below. Initially, Kate and Paul intend to operate the outlet themselves without employing any other staff. Option 1 Crepes on the Beach The food outlet would offer French style crepes with a variety of fillings. Costings rather than having a range of selling prices a fixed price has been set for each crepe and this price is midway between the highest and lowest prices expected. Additionally, an average variable ingredient cost has been computed based on possible crepe fillings. Other relevant information is as follows: Selling price per crepe (Budgeted sales 16,800 crepes) 3.20 Average variable ingredient cost per crepe 1.20 Other variable costs (disposable cutlery, packaging etc.) 20% selling price Licence fee payable to the Council 1,600 Rent of premises (including tables, chairs etc.) per month 2,000 Insurance for four-month period 1,296 Option 2 Coffee dreams This beverage outlet would offer a range of beverages using the highest quality coffee beans. Costings a fixed price has been set for all coffee beverages and this price is midway between the highest and lowest prices expected. Additionally, an average variable ingredient cost has been computed based on milk, cream and other flavourings that may be used in making the various coffee drinks. To create the coffees a special barista machine is required. This machine may be rented from a well-known coffee company on a monthly basis. The monthly rental is 1,006 plus 0.125 per cup of coffee produced. Other relevant information is as follows: Selling price per cup of coffee (Budgeted sales 12,000 cups of coffee) 3.50 Average variable ingredient cost per cup of coffee 0.75 Other variable costs (disposable cups, spoons, etc.) 10% selling price Licence fee payable to the Council 1,600 Rent of premises (including tables, chairs etc.) per month 2,000 Insurance for four-month period 1,296 Required: For each option:Calculate the breakeven point in sales revenue. (7 marks) If Bonne Bia limited requires a profit of 17,500, how many units must be sold? (5 marks) If actual sales achieved are equal to budgeted sales, compute the margin of safety in units and percentages. (6 marks) Critically discuss which option Bonne Bia limited should choose giving reasons for your answer. (7 marks) Total (25 marks)