- Smith compressors Ltd. si a company based out of Ontario, manufacturing and supplying compressors to various industries since 1980. In 2004 they bagged a very prestigious contract ot sell their products to Brazil after PM of Canada signed on a bilateral trade deal with Brazil. To support the increased demand
ni production, Smith compressors invested ni a new production facility ni Nova Scotia. 1st shipment left for Brazil inthe summer of 2005.
Everything was working wel for Smith compressors ulnit recession hit the world markets ni 2008 and by
2010 Smith compressors was struggling ot keep itself above the water. Eventually they decided to close down their facility ni Ontario and laid off 250 employees. Fast forward 2014, encouraged by better economic environment Smith compressors reopened its closed-out facility ni Ontario and made a cautious start of production. It penetrated in newer growing markets inAsian countries and in couple of years it was producing at its full capacity. Happy days were back again.2018 onwards Smith compressors however started facingproblems with it's labour unions regarding wages, benefits & working conditions
at the plant level. High turnover of supervisory and managerial level staff wsa also becoming a big challenge for the company to deal with. After they failed to manage this situation, Smith compressors hired your company for external intervention and bail them out and put them back ontrack.
Other information available:
Smith Compressors Ltd. Is the 3rd largest compressor manufacturing company in Canada employing about 1200 employees serving domestic as well as international markets. After about 4 weeks of investigations by interacting with al stake holders your team concluded that employees at lal levels are unhappy. Apart from many other points following were the 2 main reasons of discontentment.
a) No clear cut guidelines for appraisals leading to random promotions/increments/transfers
- Smith compressors Ltd. si a company based out of Ontario, manufacturing and supplying compressors to various industries since 1980. In 2004 they bagged a very prestigious contract ot sell their products to Brazil after PM of Canada signed on a bilateral trade deal with Brazil. To support the increased demand
ni production, Smith compressors invested ni a new production facility ni Nova Scotia. 1st shipment left for Brazil inthe summer of 2005.
Everything was working wel for Smith compressors ulnit recession hit the world markets ni 2008 and by
2010 Smith compressors was struggling ot keep itself above the water. Eventually they decided to close down their facility ni Ontario and laid off 250 employees. Fast forward 2014, encouraged by better economic environment Smith compressors reopened its closed-out facility ni Ontario and made a cautious start of production. It penetrated in newer growing markets inAsian countries and in couple of years it was producing at its full capacity. Happy days were back again.2018 onwards Smith compressors however started facingproblems with it's labour unions regarding wages, benefits & working conditions
at the plant level. High turnover of supervisory and managerial level staff wsa also becoming a big challenge for the company to deal with. After they failed to manage this situation, Smith compressors hired your company for external intervention and bail them out and put them back ontrack.
Other information available:
Smith Compressors Ltd. Is the 3rd largest compressor manufacturing company in Canada employing about 1200 employees serving domestic as well as international markets. After about 4 weeks of investigations by interacting with al stake holders your team concluded that employees at lal levels are unhappy. Apart from many other points following were the 2 main reasons of discontentment.
a) No clear cut guidelines for appraisals leading to random promotions/increments/transfers
Related questions
Continental Industries is a diversified corporation withseparate operating divisions. Each divisionâs performance isevaluated on the basis of profit and return on investment. The AirComfort Division manufactures and sells air-conditioner units. Thecoming yearâs budgeted income statement, which follows, is basedupon a sales volume of 15,000 units.â
AIR COMFORT DIVISIONBudgeted Income Statement(In thousands)
Total Per Unit
Sales revenue $12,000 $800
Manufacturingcosts:
Compressor $2,100 $140
Other direct material 1,110 74
Direct labor 900 60
Variable overhead 1,350 90
Fixed overhead 96064
Total manufacturing costs $6,420$428
Gross margin $5,580$372
Operatingexpenses:
Variable selling $540$36
Fixed selling 570 38
Fixed administrative 1,14076
Total operating expenses $2,250$150
Net income before taxes $3,330 $222
Air Comfortâs division manager believes sales can be increasedif the price of the air-conditioners is reduced. A market researchstudy by an independent firm indicates that a 5 percent reductionin the selling price would increase sales volume 16 percent or2,400 units. The division has sufficient production capacity tomanage this increased volume with no increase in fixed costs. |
The Air Comfort Division uses acompressor in its units, which it purchases from an outsidesupplier at a cost of $140 per compressor. The Air Comfort Divisionmanager has asked the manager of the Compressor Division aboutselling compressor units to Air Comfort. The Compressor Divisioncurrently manufactures and sells a unit to outside firms which issimilar to the unit used by the Air Comfort Division. Thespecifications of the Air Comfort Division compressor are slightlydifferent, which would reduce the Compressor Divisionâs directmaterial cost by $3 per unit. In addition, the Compressor Divisionwould not incur any variable selling costs in the units sold to theAir Comfort Division. The manager of the Air Comfort Division wantsall of the compressors it uses to come from one supplier and hasoffered to pay $100 for each compressor unit. |
| The Compressor Division has thecapacity to produce 75,000 units. Its budgeted income statement forthe coming year, which follows, is based on a sales volume of64,000 units without considering Air Comfortâs proposal. COMPRESSOR DIVISIONBudgeted Income Statement(In thousands) TotalPer Unit Sales revenue $12,800$200 Manufacturingcosts: Direct material $1,536$24 Direct labor 1,02416 Variable overhead 1,28020 Fixed overhead 1,40822 Total manufacturing costs $5,248$82 Gross margin $7,552$118 Operatingexpenses: Variable selling $768$12 Fixed selling 5128 Fixed administrative 89614 Total operating expenses $2,176$34 Net income before taxes $5,376$84 1. Independently of your answer to Required 1-a, assume the AirComfort Division needs 17,400 units. Calculate theincrease/decrease in net income before taxes for the CompressorDivision if it supplies the 17,400 compressor units for $100 each.(Round intermediate calculations to 2 decimal places andyour final answer to the nearest whole dollar amount. Enter youranswer in dollars and not in thousands. |
Decrease in net income before taxes of $ _____________?
2. Independently of your answer to Required 1-a, assume the AirComfort Division needs 17,400 units. Calculate theincrease/decrease in net income before taxes for ContinentalIndustries if the Compressor Division supplies the 17,400compressor units for $100 each. (Enter your answer indollars and not in thousands.) |
Increase in net income before taxes of $ _________________?
Spreadsheet printout(s) showing your derivation of
o Operating Cash Flows
o Incremental Cash Flows, including investment and salvage
o Warranty costs
o WACC
o NPV, IRR, Profitability Index, and Payback Period
o Scenario and Sensitivity
INFO
Exhibit 1
Sales forecasts: The forecasts are based on projected levels ofdemand. The firm could face weak, average, and strong demand. Allthe numbers are expressed in todayâs dollars. The forecastedaverage inflation per year is 2.5%.
Demand Level | Weak | Average | Strong |
Probability | 25% | 45% | 30% |
Price per Refrigerator | $1,375 | $1,575 | $1,600 |
Units Sold Per Year | 40,000 | 42,500 | 43,000 |
Labor cost per Refrigerator | $250 | $250 | $250 |
Parts | $300 | $300 | $300 |
Selling General And Admin. | $10,000,000 | $10,000,000 | $10,000,000 |
Average warranty cost per year per refrigerator for the firstfive years is $75. The present value of this cost will be used as acost figure for each refrigerator. Afterwards, the refrigeratorowners will become responsible the repairs.
Exhibit 2
Compressor Price
Compressor model number | CM - 004 | TS - L12 |
Price per Compressor and Installation | $280 | $260 |
Average annual warranty cost per year for five years.Afterwards, the refrigerator owner will became responsible | $40 | $50 |
The chosen compressor will be installed in every refrigeratorand will become a cost figure for each unit produced. * Thecompressor manufacturers are not providing Tesca Works with anywarranty. However, Tesca Works will provide warranty to itscustomers. After the initial five years, the refrigerator ownersmay purchase extended warranty from any insurance company thatoffers such packages.
Investment needs:
Year 0 | Year 1 | Year 2 | Year 3 |
$3 million | $5 million | $3 million | Production and selling of commercial appliances starts |
Straight line depreciation will be used. To facilitate theoperation of manufacturing the refrigerators, the company will haveto allocate funds to net working capital (NWC) equivalent to 11% ofannual sales. The investment in NWC will be recovered at the end ofthe project.
Exhibit 4 Financing
Historically, the company tried to maintain a debt to equityratio equal to 0.60. This ratio was used because lowering the debtimplies giving up the debt tax shield and increasing it makes debtservice a burden on the firmâs cash flow. In addition, increasingthe debt level may cause a reduced rating of the companyâs bonds.The marginal tax rate is 25%. All the numbers are expressed intodayâs dollars. The forecasted average inflation per year is2.5%.
Cost of debt: The companyâs bond rating is roughly at the highend of the A range. Surveying the debt market yielded the followinginformation about the cost of debt for different rating levels:
Bond Rating | AA | A | BBB |
Interest Cost Range | 3.5% - 3.75% | 3.75% - 4.5% | 4.50% - 5.00% |
Cost of equity: The current 10-year Treasury notes have a yieldto maturity of 2.71% and the five year rolling average for theS&P 500 market return is 11.0%. The companyâs overall b is1.3.
Company | Tesca Works | Electrics Plus | General Generators | Universal Power | Generators Inc | International Generators |
Over all B | 1.3 | 1.4 | 1.3 | 1.6 | 1.2 | 1.35 |
Debt to Equity | 0.4 | 0.3 | 0.5 | 0.45 | 0.35 | 0.25 |
Percentage of income from generators | 50 | 45 | 90 | 95 | 85 | 85 |
