CompXM

Sample questions
Chester is doing a niche differentiator strategy in the CompXM.
Andrews (your team) is doing a broad differentiator strategy.
Which actions by Andrews would worry Chester most? Rank
order the tactics below from (1) most worrisome to (5) least
worrisome. Why?

 [ ] Andrews introduces a new product in the Nano segment.

 [ ] Andrews increases their Ate promotion budget from $1,200
to $1,920.
 [ ] Andrews extends their credit terms to 90 days.
 [ ] Andrews invests in TQM to reduce R&D cycle time.
 [ ] Andrews increases automation levels on product Ate to 6.0.
Chester is doing a niche differentiator strategy in the CompXM.
Andrews (your team) is doing a niche low cost strategy. Which
actions by Andrews would worry Chester most? Rank order
the tactics below from (1) most worrisome to (5) least
worrisome. Why?

 [ ] Andrews introduces a new product in the Nano segment.

 [ ] Andrews increases their Ate promotion budget from $1,200
to $1,920.
 [ ] Andrews extends their credit terms to 90 days.
 [ ] Andrews invests in TQM to reduce R&D cycle time.
 [ ] Andrews increases automation levels on product Ate to 6.0.
Investing $2,000,000 in TQM will at a minimum increase demand for your
products 1.7% in this and all future rounds. According to the Inquirer,
last year's sales were $179,789,193. Assuming similar sales next year,
the 1.7% increase in demand will provide additional revenue of
$3,056,416.

With the overall contribution margin of 34.6%, after direct costs this
revenue will add $1,057,520 to the bottom line.

For simplicity, assume that the demand increase and margins will remain
at last year's levels. How long will it take to achieve payback on the
initial $2,000,000 TQM investment, rounded to the nearest month?

  (  )  23 months
(  )  8 months
(  )  16 months
(  )  TQM investment will not have a significant financial impact
 Last year Bill and Bolt accounted for 52.2% of Baldwin's sales. Over the next
few years, what should worry Baldwin's management most about these
products? Pick the top four worries at Baldwin about Bill and Bolt.

 [ ] Bill and Bolt are straddling three segments - Core, Nano and Elite. As the
segments drift apart, Bill and Bolt will lose Nano and Elite sales.

 [ ] Bill and Bolt have the lowest contribution margins in the industry.

 [ ] Bill and Bolt have relatively low Customer Survey scores in the Core
Segment.

 [ ] Bill and Bolt have poor accessibility and awareness in the Core
Segment.

 [ ] Bill and Bolt have poor accessibility and awareness in the Nano and Elite
segments.

 [ ] Bill and Bolt have no idle capacity.

 [ ] Bill and Bolt are priced below the Nano and Elite rough cuts.

 [ ] Bill and Bolt have MTBF specifications below the expected range in Nano
and Elite.
Your company Andrews has a bond retiring in 2008.
This bond has an interest rate of 13.5%, a face value
of $10,300,000 and a closing price of $102.53.

Since your company had sold these 10 year bonds at

$100, you would be buying them back at (a):

 ( ) Premium
 ( ) Discount
 ( ) Par
Last year, product Best produced units on both first shift and second shift for a plant utilization
value of 124%. First shift labor costs are $6.86 per unit. Second shift labor costs are $10.13
per unit. Assume this year's production total will be 743,000, again exceeding the first shift
capacity of 600,000. Baldwin’s management team is considering expanding first shift
capacity by 143,000 to eliminate the second shift. Baldwin always funds plant purchases
1/3rd with bonds, and 2/3rds with new stock issue. Assume labor costs remain unchanged.

Four of their top managers meet to discuss the problem. Which do you agree with?

Marie: Buy the capacity. Eliminating second shift will save $3.27 per unit. Each unit of capacity will cost
$34.00. Our debt will be 1/3rd of that, or $11.33 per unit. At 14.3% our interest payments would be only
$1.62 per unit. Over the 15 year life of this new first shift capacity we will save $7,014,150 in labor and it
only cost us $2,316,600 of interest payments. This is a no brainer.

Larry: Buy the capacity. We can escrow the annual depreciation of $324,133. In 5 years we will have
accumulated enough to pay for the bond. After that we save $3.27 on every unit we sell.

Shep: Wait a minute. Agreed every unit of capacity we buy and use saves us money, but suppose we don’t
use all the capacity. Moe and Larry are assuming we run one complete shift. An idle unit of capacity
would cost us $1.62 in interest plus $2.27 in depreciation. So let’s only buy 130,000 units. Running a little
second shift is better than watching new capacity gather dust.

Tracy: Let’s not buy any capacity. Some people like to work second shift because they get paid 50% more.
Material costs are the same on both shifts at $14.22 per unit. So the variable costs of our production with
current plant capacity would be $15,899,748. Including our current period costs of $4,587,000, we would
spend a total of $20,486,748 with our current plant to make our annual production. On the other hand, if
we bought more plant so we could build everything on first shift I agree our variable costs would go
down, to $15,414,137. But after adding the increase in depreciation of $324,133 and interest of $1,203,045
on the new plant, our period costs will be $6,114,178. That would bring the total cost of our production
run to $21,528,315 after purchasing new plant. It's cheaper to pay overtime than to purchase additional
plant. We should not buy capacity unless we are worried that two shifts cannot meet demand.
When you accepted the CEO position for company Andrews, you
discovered that you had inherited a profitable company with a
leading market share. Your contract has ended, and you have
accepted a new position as CEO of another company. The
board has asked you to prepare a briefing for the incoming
CEO that will replace you.

In good essay form, address the following questions:

1. What have you done during your tenure to create or enhance a

competitive advantage?

2. What major threats does the company face today?

3. What would be your vision for Andrews four years from now?
City is a product of the Chester company sold primarily in the Nano
segment. Chester starts to create their sales forecast by assuming
all policies (R&D, Marketing, and Production) for all competitors
are equal this year over last.

For this question assume that all 708 of units of City are sold in the
Nano segment. If the competitive environment remains unchanged
what will be the City product’s demand next year (in 000’s)?

  (  )  1614
  (  )  807
  (  )  757
  (  )  708
Midyear on July 31st, the Digby Corporation's balance
sheet reported:
 Total Assets of $104.818 million.
 Total Common Stock of $5.080 million.
 Cash of $8.040 million.
 Retained Earnings of $16.323 million.

What were the Digby Corporation's total liabilities?

 
(  )  $91.455 million.
  (  )  $75.375 million.
  (  )  $83.415 million.
  (  )  $88.495 million
 Chester has a new design for their product Cell next round that can reduce
their material cost of producing units from $8.13 to $7.32. Chester passes on
half of all cost savings by cutting the current price to customers. For
simplicity:
 -Use current labor costs of $4.02
 - Assume all period costs as reported on Chester's Income Statement (Annual Rpt
Pg 2) will remain the same.

 Determine how many units (000) of product Cell would need to be sold next
round to break even on the product.
 ( ) 945 units
 ( ) 756 units
 ( ) 1,001 units
 ( ) 1,229 units
 ( ) 1,079 units
 ( ) 896 units

BE = PeriodCosts/(Price-Variable Cost Per unit)

 Chester has a new design for their product Cell next round that can reduce
their material cost of producing units from $8.13 to $7.32. Chester passes on
half of all cost savings by cutting the current price to customers. For
simplicity:
 -Use current labor costs of $4.02
 - Assume all period costs as reported on Chester's Income Statement (Annual Rpt
Pg 2) will remain the same.

 Determine how many units (000) of product Cell would need to be sold next
round to break even on the product.
 ( ) 945 units - BE next round
 ( ) 756 units – 80% of BE
 ( ) 1,001 units – BE this round
 ( ) 1,229 units – 30% over BE
 ( ) 1,079 units – current sales/.95
 ( ) 896 units – BE without customer savings (using current price)

BE = PeriodCosts/(Price-Variable Cost Per unit)