ABC Ltd., has been facing cash shortage problem for many years. You have just joined the company and made the proposal to prepare cash budget for controlling of cash shortage problem. Management has given you the green signal to prepare the cash budget and made the projection for requirement of cash through commercial bank channel in the coming period. The following information were gathered for preparing the cash budget.

1. Sales budgets

November, 2019…………………………. Rs.200,000

December, 2019……………………………    300,000

January, 2020……………………………..     400,000

            February, 2020……………………………     500,000

            March, 2020………………………………..    600,000

All sales are made on credit basis and customers follow the following patter to pay;

1. 40 % pay in the month of sales.
2. 50 % in the following month of sales.
3. 10 % pay in the second month of sales.

1. Purchase budgets

1. Purchases are made equal to 60 % of the respective month sales at beginning of the month. 50% of purchase amount is paid in the month of purchases and 50% in the following month of purchases
2. Cash operating expenses per month is estimated Rs.80,000.
3. Dividend is expected to be paid Rs.100,000 in the month of January, 2020.
4. Tax is to be paid Rs.50,000 in the month of march, 2020.
5. A new plant costing Rs. 250,000 to be purchased in the month of Feb.,2020.
6. Cash on hand on 1^st January, 2020 is Rs.100,000.
7. A minimum cash balance of Rs.150,000 to be maintained from 31^st January,2020 on ward, company has made arrangement with the local bank a line of credit to meet its cash requirement and if excess cash available it would be paid to bank to pay the loan.

Required: Prepare a cash budget for the month of January, February, March, 2020.

What is the monthly safety stock cost for the route shipped through U.S. east coast ports, and the monthly safety stock cost for the route shipped through U.S. east coast ports?

What is the monthly pipeline inventory cost for the route shipped through U.S. west coast ports, and the monthly safety stock cost for the route shipped through U.S. west coast ports?

(After calculating this, you should find what is the monthly total inventory (cycle stock + safety stock + pipeline inventory) cost of the most economical route?)

Vinicola Sofia is a Chilean company that grows and exports grapes to major world markets. The company distributes their grapes to main U.S. cities through wholesalers. Currently, Vinicola Sofia is trying to identify the most economical route to ship their products.

Containers are loaded at Vinicola Sofia’s warehousing facility and then shipped to the port of Valparaiso, Chile. From there, containers can be shipped to U.S. west or east coast ports. Finally, containers are shipped from U.S. ports to wholesalers’ distribution centers. Vinicola Sofia owns the product until it is delivered at the final destination.

On average, it takes 15 days (0.5 months) to get the grapes through east coast ports. The total transportation cost of this route is $1700 per container. Similarly, it takes 18 days (0.6 months) to get the product through west coast ports. The transportation cost of this route is $1500 per container.

The demand of grapes in the U.S. is normally distributed with an average of 52 containers per month and monthly standard deviation of 5.2 containers. One container of grapes is worth $15000. Vinicola Sofia’s holding charge is 20% per month and the company includes the transportation cost when calculating inventory costs. It costs $700 to process the required paperwork to export the goods, independently of the volume shipped. The company’s cycle service level target is 95%.

(Note: For all this problem, assume 30 days in a month.)

(Note: Remember that Vinicola Sofia includes the transportation cost when calculating inventory costs. This means that the holding cost per container will be equal to the holding charge times the sum of the value of the load per container and the transportation cost per container.)

Based on a preliminary analysis, the company determined the economic order quantity of containers to ship by route:

• EOQ for product shipped through east coast ports: 5 containers
• EOQ for product shipped through west coast ports: 5 containers

What is the monthly safety stock cost for the route shipped through U.S. east coast ports, and the monthly safety stock cost for the route shipped through U.S. east coast ports?

What is the monthly pipeline inventory cost for the route shipped through U.S. west coast ports, and the monthly safety stock cost for the route shipped through U.S. west coast ports?

(After calculating this, you should find what is the monthly total inventory (cycle stock + safety stock + pipeline inventory) cost of the most economical route?)

MiniCase 6—How JCPenney Sailed into a Red Ocean

How JCPenney Sailed into a Red Ocean

This activity is important because, as a strategic leader, you must be able to guide your company toward effective strategic positions of cost leadership, differentiation or a blue ocean strategy.

The goal of this exercise is to illustrate the risks of attempting a blue ocean strategy.

Read the following case on JCPenney and then answer the questions that follow.

JCPenney was once one of the top department stores in the United States, with more than 2,000 locations at its peak. Indeed, the retailer was so common in the suburbs that one could not imagine a shopping mall without a JCPenney. Generations of America's children were mesmerized by its annual holiday catalog. As recent as 2007, JCPenney had enjoyed a market valuation of $18 billion. In a bit over a decade, JCPenney's market cap had fallen to a mere $269 million. Thus, the retailer lost 98.5 percent of its valuation or $17.7 billion in a bit over decade. Many observers expect JCPenney to follow Sears—once the leading American retailer—to also file for bankruptcy, which Sears did in 2018. What went wrong?

Of course, all retailers are exposed to the same threat, Amazon, which has become synonymous with online shopping. Although Walmart, Target, and Best Buy all have become more competitive in recent years, JCPenney sped up its own demise with a bad business strategy. In particular, under former CEO Ron Johnson, JCPenney learned the hard way how difficult it is to change a strategic position. When hired as JCPenney's CEO in 2011, Johnson was hailed as a star executive. Johnson was poached from Apple, where he had created and led Apple's retail stores since 2000. Apple's stores are the most successful retail outlets globally in terms of sales per square foot. No other retail outlet, not even luxury jewelers, achieves more. This poaching didn't come cheap: JCPenney paid Ron Johnson close to $53 million in total compensation in 2011, even though he didn't start until November of that year.

Once on board with JCPenney, Johnson immediately began to change the company's strategic position from a cost-leadership to a blue ocean strategy, attempting to combine its traditional cost-leadership position with a differentiation position. In particular, he tried to reposition the department store more toward the high end by providing an improved customer experience and more exclusive merchandise through in-store boutiques. Johnson ordered all clearance racks with steeply discounted merchandise, common in JCPenney stores, to be removed. He also did away with JCPenney's long-standing practice of mailing discount coupons to its customers. Rather than following industry best practice by testing the more drastic strategic moves in a small number of selected stores, Johnson implemented them in all of the then 1,800 stores at once. When one executive raised the issue of pretesting, Johnson bristled and responded: "We didn't test at Apple."1  Under his leadership, JCPenney also got embroiled in a legal battle with Macy's because of Johnson's attempt to lure away homemaking maven Martha Stewart and her exclusive merchandise collection.

The envisioned blue ocean strategy failed badly, and JCPenney ended up being stuck in the middle. Within 12 months with Johnson at the helm, JCPenney's sales dropped by 25 percent. In a hypercompetitive industry such as retailing where every single percent of market share counts, this was a landslide. Things went from bad to worse. In 2013, JCPenney's stock performed so poorly it was dropped from the S&P 500 index. Less than 18 months into his new job, Johnson was fired. JCPenney had lost over two-thirds of its market valuation (or $6 billion) under Johnson's leadership. The attempted overhaul of JCPenney under Johnson also left the company burdened with more than $4 billion in debt. Myron Ullman, his predecessor, was brought out of retirement as a temporary replacement.

Under Johnson's leadership, JCPenney failed at its attempted blue ocean strategy and instead sailed deeper into the red ocean of bloody competition. This highlights the perils of attempting a blue ocean strategy because of the inherent trade-offs in the underlying generic business strategies of cost leadership and differentiation. As a result, JCPenney continues to experience a sustained competitive disadvantage and may go out of business.

To turn around the 120-year-old icon, the board appointed Marvin Ellison as CEO in 2015. With a strong background in operations management and leadership skills honed at The Home Depot, he focused on lowering JCPenney's cost structure while increasing perceived value offered to its customers. In an attempt to stem losses, in 2017 JCPenney closed some 140 retail stores across the United States out of a total of 1,000 remaining outlets. Marvin Ellison was lured back into the home improvement industry when he was appointed CEO of Lowe's in 2018.

In October 2018, Jill Soltau was appointed CEO of JCPenney. She was previously the CEO of Jo-Ann Stores, a fabric-and-craft retailer. Her new business strategy is not yet clear, and several top executive positions were still vacant as of spring 2019. Soltau retained McKinsey, a strategy consulting firm, to help with the turnaround. One question she faces is whether to continue selling appliances, which her predecessor brought back in 2016 to take away sales from failing Sears. JCPenney had discontinued sales of appliances in 1983 to focus on apparel, and the majority of JCPenney's sales still come from apparel, an area the retailer has neglected in recent years, even though JCPenney was once the go-to apparel retailer for American middle-class families. Whether Soltau will successfully sharpen JCPenney's strategic position and thus make the American icon competitive again remains to be seen.

**JCPenney filed for bankruptcy in May 2020, after the publication of this case.

AFTER READING THE CASE ANSWER THE FOLLOWING QUESTIONS:

• While all brick-and-mortar retailers face the threat of Amazon and online shopping in general, why did JCPenney perform so poorly while other retailers such as Walmart, Best Buy, or Target fare better?
• Ron Johnson was hailed as a star executive at Apple, where he led the company's highly successful retail arm. As CEO of JCPenney, he applied the "Apple playbook," for example, moving JCPenney toward the higher end of the market or going with hunches ("we didn't test at Apple"), rather than applying more traditional decision making. Why did his attempt to change JCPenney's strategic position from cost-leadership to a blue ocean strategy fail so spectacularly? What are some of the lessons?
• You are part of the McKinsey strategy consulting team that the new CEO, Jill Soltau, retained to help turn around JCPenney. What recommendations would you give her? In particular, what type of business strategy would you want JCPenney to pursue, and how would you make the changes necessary? Be specific.

Stark Industries is considering adding a vibranium shield to the Iron Man Suits the company manufactures for the U.S. Armed Forces. The equipment to build the shields has a purchase price of $1,100,000, and the company will spend $100,000 to ship the equipment to its plant and install it on the production floor. Stark Industries engineers expect the machine to have a $50,000 salvage value at the end of its 10-year life and a practical capacity of 1,200 shields per year. The new equipment requires an average of $25,000 investment in working capital to keep the equipment running efficiently; the $25,000 investment in working capital is fully recoverable at the end of the investment.

Stark Industries managerial performance evaluations include an 18% charge on invested capital. The company can obtain a 6% return on short-term investments and its current weighted average cost of capital is 15%.

Stark Industries’ negotiations with its union regarding the staffing of the new shield-manufacturing machine resulted in the firm agreeing to hire new workers and pay them $200,000 annually. The union agreement also stipulated that the employees have the option to request a salary revision after the fifth year of the agreement of up to 5% of the agreed salary. The company also agreed to invest $40,000 to train the new employees on the equipment when hired. Training the new employees will be on the job, which will likely reduce the output for the first year of the project by up to 100 shields; in the worst case scenario the decrease in output would be 25%.   

Each shield consumes $500 worth of vibranium (imported from Wakanda). Recent contract negotiations with Wakanda and King T’Challa have locked-in this cost for the next five years and specify an increase to $550 per shield thereafter. The current contract negotiated with the U.S. Armed Forces guarantees a price of $960 per shield for the first 5 years in the contract. Tony Stark, Stark Industries’ CEO, believe it is unlikelythe government will require a reduction of more than 10% of the price per shield in the next contract negotiation.

Common practice in the tax department of Stark Industries is to depreciate the full value of any acquired assets regardless of their salvage values. Pepper Potts (Stark Industries CFO) determined the equipment is 7-years class property (see depreciation percentages for this type of property in Exhibit 1). Stark Industries is subject to a 26% tax rate (21% corporate tax rate plus 5% blended rate of state taxes).[1]

Exhibit I: Depreciation Schedule (in percentages) for 7-year property.

1          14.29

2          24.49

3          17.49

4          12.49

5            8.93

6            8.92

7            8.93

8            4.46

Required (Please, provide supporting schedules for all your answers):

[20 points] Determine the NPV of the project. Clearly state the assumptions for your calculations. (Hint: since your will be evaluating more than one scenario, it will be on your best interest to use formulas and cell references in your Excel worksheets.)

[20 points] Using the information on the project and the assumptions you made in part I indicate the following:

[5 points] What is the Internal Rate of Return of the project?

[5 points] What is the after-tax payback period of the project?

[5 points] How sensitive is the viability of the project to the choice hurdle rate assumptions you made part I? (Indicate the NPV for each of the alternative hurdle rates you use).

[5 points] What will be the lowest price that Stark Industries may be able to accept upon contract renegotiation in year 5 that would continue to make the project viable?

[1] We are assuming the 2017 Tax Reform Legislation applies to this scenario.

Cranford Company completed and transferred out 2,900 units in May 2020. There were 200 units in the Work-in-Process Inventory on May 31, 2020, 30% complete as to conversion costs and 100% complete as to materials. The month's charges for conversion costs and material costs were $13,320 and $9,610, respectively. There was no beginning inventory on May 1, 2020. What is the cost of the work transferred-out during May, assuming that Cranford uses weighted-average process costing?

At the end of the financial year 2019, Strong Tool Company anticipated its revenues, expenses, capital expenditures and changes in working capital over the next 3 years (2020-2022) to be as shown in the table below.

The company estimated the depreciation charges to be fixed at $15,000 every year. The firm has a tax rate of 28% and a cost of capital of 15%.

Requirement 1: You are required to estimate the free cashflow available to the firm (FCFF) for the period of 2020-2022. Calculate each of the missing values in the table below (there are 20 missing values in total).

Requirement 2 Free cash flows beyond year 3 are estimated to grow at an annual rate of 5%. Apply the growing perpetuity formula to estimate the terminal value of Strong Tool Company as of year 3. What is the value of the terminal value today?

Requirement 3 Strong Tool Company's current value of existing debt is ​$80,000. Estimate the value of the equity of the company by applying the free cash flow to the firm method.

1. Calculate the cost of a Regular widget in 2020 using the traditional costing system.
2. Calculate the cost of a Regular widget in 2020 using the ABC system.
3. Explain why your results differ in questions 7 and 8. Be specific.
4. What characteristics of Company DEF suggest that changing to an ABC system might benefit it? Which costing system do you recommend Company DEF use? Why

The accounting department has also compiled the following data by product line for 2020:

Company DEF makes three types of widgets: Simple, Regular, and Deluxe. The company currently uses a traditional costing system with one indirect cost pool and machine hours as its allocation base; however, it is considering whether it should implement an activity-based costing (ABC) system in 2020. The accounting department has studied the indirect cost pool and developed the following cost pool data for use in an ABC system in 2020:

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in investing activities for the above transaction?

Select one:

a. Cash payment

b. Acquisition price

c. Zero

d. Mortgage amount

“Indimex” is a Mexicam company that was intending to expand their fashion business, so they acquired new factory for USD 20 million, that would allow them to expand their business abroad. Its useful life is 20 years, and its expected residual value is USD 8 million.

Prepare a tabular comparison of the annual depreciation and book value for each of the first 3 years of service life under straight line and the double-declining-balance (DDB) depreciation method. Show all amounts in thousands of euros (rounded to the nearest thousand).

If a company, acquired a machine on December 31, 1982, in exchange for $4,000 in cash and a note payable. The company has to pay 8 annual payments of $15,000 with the first payment being made on December 31, 1983. Interest on the note is 9%.

How much interest expense will the company spend in 1984?

What is the carryingvalue of the loan in 1982 and what is the acquisition cost?

The machine has a useful life of 10 years, and a salvage value of $4,000. What's the carrying value after 4 years of useon December 31, 1986? What's the carrying value on December 31, 1992?