H&H Financial was founded in 1997 as a local insurance and investment consulting firm specializing in financial, estate, and retirement planning. The business started as a part-time consulting practice given Mr. Blake’s dissatisfaction with his full-time job working for a franchise office affiliated with a large insurance agency. Mr. Blake found that his agency’s focus on productivity and numbers precluded his ability to do what he really wanted to do for his clients: provide personalized service that they could trust. He wanted his clients to be faces, not names and numbers. He wanted to offer them the optimal products and services that would best fit their needs, not just the selling needs of a corporation hyping their latest product through their franchises.

Mr. Blake bid his time and learned “the ropes to skip and the ropes to know” about running an agency. He obtained several key financial and insurance licenses and professional certifications (CFP, CFA, CFT, CTEP, etc.) as well as financial product suppliers. When he had developed a sizable private client base, he opened H&H as an independent agency to replace his consulting practice.

The firm started with just Mr. Blake operating out of a cheap storefront, and he was quickly overwhelmed with the paperwork side of the business. Mr. Blake was great at selling and knew the product lines in and out, but he was not an expediter or comfortable with details.

Mr. Blake’s solution was to hire a part-time administrative assistant to handle phone calls, deal with foot traffic (what little there was), and do some light computer work. Times were not easy, and Mr. Blake squeaked by on a very limited income.

Early Success Leads to Growth

Mr. Blake’s formula for success (personalized service) quickly caught on, and he found that he needed full-time assistance in order to help handle phone calls, process policies, and assist with claims. His office expanded quickly, and he replaced his one part-timer with three full-time employees who buffered him from the mundane paperwork and day-to-day office duties. He remained the sole agent providing sales and expert advice and counseling while the staff provided his clients with all of the support needed (processing bills or claims, answering questions about policies, etc.). His office staff consisted of one office staff person from Mr. Blake’s old agency (Ms. Jane Sutton) and Ms. Johnson and Mr. Hayes (two “raw” college graduates: Jen Johnson and Kenneth Hayes). For the most part they all worked independent of Mr. Blake.

Although Mr. Blake never gave any of them titles, job descriptions, or formal authority, it was clear to everyone that Ms. Sutton was the informal leader of the office given her expertise and prior experience in an insurance office. All three employees became flexible generalists, part of a self-managed work team. Work was parceled out through volunteerism and cooperation. Mr. Blake was proud that his team operated so well without his input.

As the business grew, Mr. Blake realized that he would need to bring in new agents (consultants) to help him deal with the increasing flow of customers, and there was just no place to put them in his small back office. Mr. Blake and his team moved into a newly renovated office complex, which had more offices, a main office area that could hold more employees, and a separate waiting area for his clients.

Mr. Blake hired one financial planner and one insurance agent so as to provide more sales and technical expertise to his consulting team. The new associates worked out so well and his business grew so quickly that within three months, three new staff people (all recent college graduates) had to be hired to help Ms. Sutton, Ms. Johnson, and Mr. Hayes manage the additional workload. Debbie Matthews was one of the three new employees hired.

The Birth of Departments and Continued Growth

The addition of these three new employees altered the structure of the company. As the office manager, Ms. Sutton still managed her two “old rookies” but made each one a supervisor. Jen Johnson became in charge of supplier relations and managed one new employee while Kenneth Hayes ran client relations and managed Ms. Matthews and another new employee (see Figure 1).

Ms. Sutton felt this new structure was highly efficient since it allowed Ms. Johnson and Mr. Hayes the time to develop their own expertise and familiarity with their specific focal group. These new department managers would handle the day-to-day work routine of their own department with their new staff while Ms. Sutton served as coordinator and in-house expert—the answer person. This structure also made the assignment and training of new office personnel much easier since each employee was allocated to one of the two departments where their supervisor would then provide them with basic training within the department.

Mr. Blake was quite happy with Ms. Sutton’s work processes and procedures since it allowed him to concentrate on his clients and stay out of the office operations. He could now work with his other specialist consultants to help locate new clients as well as new products and services. This was often voiced by Mr. Blake as a critical operational strategy for continuing to grow the business.

ORGANIZATIONAL STRUCTURE OF H&H FINANCIAL SERVICES, LLC

At the department level, Mr. Hayes and Ms. Johnson made the work environment fun, which Ms. Matthews greatly appreciated. Ms. Sutton, however, wanted the office to have a more professional demeanor since she felt that H&H was now an established firm with expert consultants on staff who also seemed to not appreciate the horseplay of the office workers. For Ms. Sutton, maintaining an expert image became everything, and therefore she went to great strides to minimize office antics (like wastebasket basketball) and excessive chatter. Mr. Hayes and Ms. Johnson were not happy with the new rules but went along with them since they spent most of their time in their own work areas and away from the back office where Ms. Sutton stayed and did most of her work. The change in rules did create tension between the newest employees (including Ms. Matthews) and Ms. Sutton. Ms. Matthews quickly learned that she could joke around with Mr. Hayes and Ms. Johnson when Ms. Sutton was out of sight but had to be on her best behavior when Ms. Sutton was around or when they went into the management territory area of the office.

The companywide informal monthly meetings with Mr. Blake, which happened early on in the firm’s history, became formal monthly meetings just with Ms. Sutton and all of her subordinates. The monthly meetings consisted of discussions of new products, services, clients, new procedures, and any outstanding problems that either department could not solve alone. These were open meetings, but rarely did anyone but Ms. Matthews raise questions, and these questions were always about work processes and procedures. Everyone else, including the supervisors, only spoke when Ms. Sutton spoke directly to them or asked very general questions about the growth plans of H&H.

With sustained success, the organization continued to grow, adding several more consultants and back office staff while keeping the same basic organizational structure and work flow. Mr. Blake once again needed new office space to contain his firm’s growing needs. Mr. Blake announced as part of his growth plan that he was conducting preliminary inquiries as to a possible “number two” who would handle the ever- growing functions of finance, accounting, and Human Resource Management—a job that Ms. Matthews quickly aspired to.

As H&H Grows, So Does Ms. Matthews’s Frustration

As a recent college graduate and single mother, Ms. Matthews was excited when she got the job working for H&H Financial as their Assistant Case Manager in the Client Relations Department. In her first month she quickly and eagerly learned all of her required duties and executed them to the best of her ability and therein received more and more demanding work.

In her second month when they moved to a much larger office, Ms. Matthews felt that she had real opportunities for advancement and promotion. She thought, “As the firm grows, so will I.” She felt that she had made an excellent choice in a very tough job market. She was aware of Mr. Blake’s preliminary search for an Assistant Manager and thought that after she finished her MBA she would be the perfect candidate once she had learned the ins and outs of the business.

Those dreams, however, quickly became a nightmare. Ms. Matthews found that after the first few months of working at H&H Financial, her learning curve came to a complete and sudden halt. Ms. Matthews realized that jobs were very compartmentalized, and the Office Manager Jane Sutton did not want the employees to learn anything more than the bare minimum of what their jobs in their own departments required of them.

Mr. Hayes, her immediate supervisor, was very helpful and supportive about the work in his department, but when Ms. Matthews asked questions about interdepartmental and organizational processes, he deflected most of her questions, saying, “I’m really not sure why we do things this way; check with Ms. Sutton.” Ms. Sutton’s response to Ms. Matthews’s questions was always the same: “I’ll tell you what you need to know when you need to know it . . . just do your job, do it well, and you’ll get along fine.” Ms. Matthews thought that perhaps with a few more months on the job Ms. Sutton would learn to trust her more; but she couldn’t have been more wrong.

During her third monthly office meeting, Ms. Matthews became increasingly irate because her questions were still being answered by Ms. Sutton with “You don’t need to know that” or “You will never deal with that situation” or, worse, “That’s not your concern.” Ms. Matthews found that these were the answers to even the simplest of questions dealing with the most essential parts of the business outside of her department. This approach made it difficult for Ms. Matthews to properly do her job because she did not see how her job related to the other jobs in the firm.

Ms. Matthews thought there was a clear lack of communication between the owner, Ms. Sutton, the two supervisors, and the lower-level employees and that this created slowdowns and gaps that bottlenecked the flow of the entire work process of the business. She also noticed that not only was her job compromised by this lack of knowledge, but also, in her opinion, was everybody else’s. All of her questions regarding this matter were not only disregarded by Ms. Sutton but discouraged as well. Ms. Matthews thought that for such a small but fast-growing company, the operations would run much smoother if all of the employees were aware and informed about each other’s jobs for they were all dependent and interrelated. Overall Ms. Matthews felt that Ms. Sutton was overly controlling and excessively formal.

After several attempts to learn more about her job, Ms. Matthews was starting to lose motivation. She felt like a robot that was programmed to do the same thing day in and day out, and it was starting to affect the quality of her work. She was surprised and disappointed to learn that she no longer cared about her performance, her job, and the firm.

In the meantime, the new large sitting area required the firm to hire a receptionist who then handled walk-ins and who would also orient the new clients to all of the services provided by H&H. The receptionist would also, on occasion, administer customer questionnaires that dealt with customer service satisfaction as well as desired additional services. Ms. Matthews was sorely tempted to take this job because the receptionist reported directly to Mr. Blake; Ms. Sutton would be out of her reporting loop. She quickly let go of the notion, though, since she would be devolving in terms of her career and personal development, not growing.

This is when she realized, after being with the firm for nearly a year, that by staying at H&H she was starting to compromise her work ethic—her values of always striving to achieve and working to the best of one’s ability. Ms. Matthews also found out that she was not the only one feeling less motivated and interested. Both Ms. Johnson and Mr. Hayes confided to her that they felt the same way but never said anything to Ms. Sutton or Mr. Blake.

With all this negativity surrounding her work life, the decision to leave was still a difficult one to make. The company had some great employees in her department that made it fun to come to work every day. Since everybody was about the same age, people got along well. Ms. Matthews also liked the relatively laid-back environment in the department and the flexibility of hours the job offered, especially considering that she was now in graduate school. However, Ms. Matthews was not sure if that was enough; after 11 months of working at H&H she wondered if it was worth it for her to continue working there. On the one hand, Ms. Matthews knew that she had no future at the company. She was pursuing her MBA, and she now knew that that would not make a difference for her future at H&H. Ms. Matthews wondered, “What is the point in spending money and time to get a graduate degree if it is never going to be appreciated or add value to my career at H&H? Should I stay at a place where there was no chance for growth and no value given my curiosity and desire to learn? At the same time, is it a bad decision to try to change jobs right now considering the downturned economic climate, my need for a flexible schedule for graduate school, and my financial responsibilities? Should I stay simply for the money and my flexible schedule?” Ms. Matthews realized that she had an important decision to make, and she had to make it soon before she became completely unmotivated.

Suggest how the firm could redesign Ms. Matthews’s job so it would increase her work motivation. Ms. Matthews may decide to stay at H&H if a more flexible work environment is created for her. Describe some alternative ways her job could be redesigned for greater flexibility.

Peter Krone is the chief financial officer (CFO) of Echo Inc. The firm was founded seven years ago to provide educational services for the rapidly expanding primary and secondary school markets. Although Echo Inc. has done well, the firm's founder believes that an industry shakeout is imminent. To survive, Echo Inc. must grab market share now, and this will require a large infusion of new capital. Because he expects earnings to continue rising sharply and looks for the stock price to follow suit, Mr. Krone does not think it would be wise to issue new common stock at this time. On the other hand, interest rates are currently high by historical standards, the interest payments on a new debt issue would be prohibitive. Thus, he has chosen to finance the needed capital using bonds with warrants. Mr. Krone estimates that Echo Inc. could issue a bond-with-warrants package consisting of a 20-year bond and 27 warrants. Each warrant would have a strike price of $25 and 10 years until expiration. It is estimated that each warrant, when detached and traded separately, would have a value of $5. The coupon on a similar bond but without warrants would be 10%.

1- what coupon rate should be set on the bond with warrants if the total package is to sell for $1,000 ?

2-if Echo inc. issues 100,000 bond with warrant packages how much cash will Echo Inc receive when the warrants are exercised ?

3- how much shares of stock will be outstanding after the warrants are exercised ? ( Echo Inc. currently has 20 million shares outstanding )

The Cicero Italian Restaurant was founded by Anthony Tanaglia in 1947 in Cicero, Illinois, a suburb of Chicago. He built the business with his family from a small pizza and pasta restaurant to 10 locations in the Chicago area. Michael Tanaglia, Anthony’s grandson, moved to Arizona to escape the cold Chicago winters and opened a restaurant in the Chandler area. The Arizona restaurant gained momentum thanks to the Chicago-style pizza and quality Italian dishes. Anthony decided to expand operations in Arizona, adding a second location in Glendale. The Glendale location was managed by Michael’s son Tony.

After a year of operations, Michael had some concerns with the Glendale location. Michael does not want his family’s business to fail, and he wants his grandfather’s legacy to last. Michael also understands how important an operational evaluation can be to identify the strengths and weaknesses of a business. Michael confides his concerns to you and asks if you will do him a favor and use your quantitative analytic expertise to help him evaluate the Glendale location’s operations in three key areas: customer satisfaction, customer forecasting, and staff scheduling. As his friend, you agree – though his offer to treat you to the large pizza of your choice did not hurt.

First Evaluation

The first evaluation required an understanding of the factors that contribute to customer satisfaction and spending. Refer to the data Michael provided in the Excel spreadsheet “Benchmark Assignment - Data Analysis Case Study Data.” Identify which variables are significant to predicting overall satisfaction. Develop and interpret the prediction equation and the coefficient of determination. Based upon the data in this evaluation, what areas should Michael and Tony Tanaglia focus on to improve customer satisfaction?

Second Evaluation

The second evaluation requires a forecast of customers based upon demand. Michael reviewed data for the previous 11 months to better forecast restaurant customer volume.

Which method should, the business owner use to yield the lowest amount of error and what would be the forecast for December? Refer to the Excel spreadsheet “Benchmark Assignment - Data Analysis Case Study Template.”

Third Evaluation

The third evaluation concerns staff scheduling. Some of the customers have complained that service is slow. The restaurant is open from 11:00 a.m. to midnight every day of the week. Tony divided the workday into five shifts. The table below shows the minimum number of workers needed during the five shifts of time into which the workday is divided.

The owners must find the right number of staff to report at each start time to ensure that there is sufficient coverage. The organization is trying to keep costs low and balance the number of staff with the size of the restaurant, so the total number of workers is constrained to 15.

1-Based on these factors, recommend the staff for each shift to accommodate the minimum requirements for customer service.

2-Refer to the Excel spreadsheet “Benchmark Assignment - Data Analysis Case Study Linear Programming Template.”

3-Linear, integer, and mixed integer programming with constraints for times with slacks

4-Regression

5-Forecasting/ 4 period moving average/exponential smoothing/weighting moving average

Case:

Delta's New Song:

A Case on Cost Estimation in the Airline Industry

INTRODUCTION

Founded in 1924, Delta Airlines is the third largest U.S. airline in operating revenues and revenue passenger miles flown. 1 Traditionally, Delta's primary competition came from the other full-service airlines, including United Airlines and American Airlines. However, in recent years, the major airlines have increasingly been forced to compete with low-cost, no-frill airlines pioneered by "fly for peanuts" Southwest Airlines. The significant downturn in passenger volume in the third quarter of 2001 (following the September 11 attacks) served only to increase the head-to-head competition between the majors and the low-cost competitors.

AIRLINE LABOR COSTS

Industry Challenges

Airlines must operate within a low-margin, high-fixed-cost environment, making profitability particularly sensitive to decreases in volume, either from environmental factors (e.g., the September 11,2001 attacks) or from competition. Moreover, the airline business is labor-intensive. Labor costs as a percentage of revenues ranges from a low of about 25 percent for the low-fare airlines to almost 50 percent for the large, full-service airlines such as United (see Exhibit 1).

For many airlines labor unions at various levels of the organization are strong, presenting an additional challenge in the management of costs. Labor union (re)negotiations were on the rise during 2003, as airlines tried to pass along an increasing share of the cost cutting to its employees. In the summer of 2002, US Airways won concessions from its workers corresponding to a 27 percent reduction from its prior year labor costs. Plans to terminate the airline's pilot pension plan, however, met with objections and will likely be resolved in US Airway's bankruptcy hearings. In January of 2003, American Airlines requested an $8 billion concession from the three labor unions representing its labor force. Northwest similarly argued for salary concessions as part of a $ 1 billion cutback (Gary and McCartney 2003).

"Labor costs, especially pilot-labor costs, are on the point of the spear again," Capt John Prater, chairman of the pilot union at Continental Airlines, recently wrote to his members. "Airline managements, Wall Street, the [Bush] administration and Congress are once again looking for a scapegoat to blame for the industry's ailments; so-called 'high-priced, under-worked' pilots have once again become their primary target." A senior pilot in the industry typically earns about $250,000 a year, while a senior mechanic would make about $70,000 and a senior flight attendant about $40,000. (Gary and McCartney 2003)

Delta Airlines

With over 81,000 employees, salaries are a significant component of Delta's cost structure, accounting for over 42 percent of the company's total operating expenses and over 46 percent of total revenues in fiscal year 2002 (see Exhibit 2). As with other airlines, Delta pilots and flight attendants are paid for hours flown. Contracts for unionized personnel guarantee a certain level of hours to unionized employees (with federal regulations providing caps on the number of hours that can be flown by an individual in a month). As a consequence, salaries are largely fixed in the short term for unionized employees. However, Delta is the least unionized of the major airlines. In fact, Delta's pilots are the only unionized employee group (with the exception of a very small contingency of flight operations personnel). Delta's flight attendants and ticket agents are not under union contract; consequently, their salaries, as well as hourly personnel (e.g., ticket counter and ramp operations personnel), represent salaries that are more variable in nature. Moreover, contracted maintenance work creates additional flexibility in salaries costs for Delta.

Since interim wage concessions by pilots of United Airlines (which also filed for bankruptcy protection in December 2002), Delta pilots are the highest paid in the industry with an average hourly wage rate for a Boeing 757 captain of $245. The same pilot would earn $178 per hour at Continental Airlines and only $172 per hour at United (post-concession) (Harris 2003b). In February 2003, the Airline Pilots Association (ALPA) successfully blocked Delta's plan to furlough an additional 1,700 pilots (Delta had already furloughed 1,600 pilots citing September 11 traffic declines as "circumstances beyond its control"). The ALPA, however, argued that the furloughs were in fact the result of the general economic difficulties the industry was experiencing and, therefore, were in violation of ALPA contracts that prohibit layoffs due to the company's economic

and financial situation. Delta representatives continue to assert the "continuing need to address overall pilot costs to enable Delta to return to a competitive cost structure and to preserve Delta's long-term future" (Setaishi 2003).

DELTA'S SONG

In November 2002, Delta Airlines announced that it would form a new low-cost carrier, Song. Song began service on April 15, 2003 with its first flight between John F. Kennedy International Airport in New York and West Palm Beach, Florida (Wong 2003). This was not Delta's first attempt to enter the low-fare market. A previous attempt, Delta Express, was initially profitable but eventually failed because of "a lack of a management team to fight budget wars, cost creep, and brand confusion" (Daniel 2003). Despite this prior unsuccessful attempt to operate a low-cost carrier under the Delta umbrella, Delta asserts its belief that Song will be able to successfully compete in the low-fare industry segment, a segment that has been relatively prosperous amid the industry downturn.

Song operations will be based on the low-cost model of Southwest Airlines (e.g., low fares, low frills, and quick turnarounds) and is targeted to compete with successful newcomer JetBlue. Song will be supported by a single-airliner fleet of 36 Boeing 757s and will provide service to Florida and the East Coast. Like JetBlue, Song flights will feature in-flight entertainment competitive with JetBlue's satellite televisions (Harris 2002).

Can Delta Succeed Where It Has Failed Before?

Overall, Delta expects cost per available seat mile to be about 20 percent lower for Song than it is for its current operations. John Selvaggio, Delta executive and future Song president indicates that airplane utilization will be increased and pilots and flight attendants will experience "more flying and less sitting time" (Harris 2002). What Delta won't do, however, is pay its Song pilots less than the current Delta pilots. Given that Delta pilots' per hour wage rates are, on average, $100 more than those of Southwest and JetBlue, industry analysts are skeptical of the ability of Delta to compete in the low-cost carrier segment. "It's very hard for me to see how they can come very close to the costs of JetBlue and Southwest without closing the labor-cost gaps," said Michael Roach, an associate with Unisys R2A Transportation Management Consultants in Hayward, California (Harris 2003a). In fact, Roach estimates that JetBlue and Southwest would still have 10 percent and 30 percent cost advantages, respectively, over Song.

Delta is in a position of evaluating entry into a new product market, namely, the low-cost carrier market. The question is, can Delta succeed where it has failed before? Can the airline create for itself a business model that can compete with the JetBlues and Southwest Airlines of the industry? Moreover, it may be that their options for operational investments are more limited than those of a brand new carrier such as JetBlue, thereby putting Song at a disadvantage. For example, they will be using their current airline fleet and, as a result, will be unable to take advantage of favorable lease terms offered to new carriers (Daniel 2003). The key to success for this endeavor lies in the ability to create a very different cost structure than the one under which it currently operates. Delta must understand how its current costs behave and, more importantly, anticipate how they will behave in the new business model outlined for Song. Can Delta rely on historical data to predict costs into the future for Delta and for Song? Or has the business model (and the environment) changed in such a fundamental way that Delta can no longer assume "business as usual"?

Questions:

What would be the effect of a sharp decline in passengers for a firm with a microeconomic structure such as the one Delta had in place during 2001? Is Delta’s operating leverage high or low?

Analyze the proposal to launch Song as a response to the situation the firm is facing.

Estimate the salary cost function for Delta. Despite the fact you can choose between some feasible drivers, please use Revenue Passenger Miles for this part of the case. Use the High Low method.

Estimate the salary cost function for JetBlue. Use the high low method.

What conclusion can you make out of the comparison of both cost functions?

Maybe it the method. Please redo 3 and 4 by using simple linear regression?

Did the result of your analysis change?

Can Delta be successful on the new segment? Is the strategy aligned with the microeconomic structure of Delta? (THIS IS A VERY RELEVANT QUESTION)

Some years after Delta’s case situation, salaries were no longer the highest cost for Delta. Fuel prices increased dramatically after 2001. How can you deal with this new profitability threat from a cost management perspective?

If costs cannot come down, how can we improve the profitability of a firm such as Delta? While answering this question remember the components of a profit function.

Benchmark Assignment - Data Analysis Case Study

The Cicero Italian Restaurant was founded by Anthony Tanaglia in 1947 in Cicero, Illinois, a suburb of Chicago. He built the business with his family from a small pizza and pasta restaurant to 10 locations in the Chicago area. Michael Tanaglia, Anthony’s grandson, moved to Arizona to escape the cold Chicago winters and opened a restaurant in the Chandler area. The Arizona restaurant gained momentum thanks to the Chicago-style pizza and quality Italian dishes. Anthony decided to expand operations in Arizona, adding a second location in Glendale. The Glendale location was managed by Michael’s son Tony.

After a year of operations, Michael had some concerns with the Glendale location. Michael does not want his family’s business to fail, and he wants his grandfather’s legacy to last. Michael also understands how important an operational evaluation can be to identify the strengths and weaknesses of a business. Michael confides his concerns to you and asks if you will do him a favor and use your quantitative analytic expertise to help him evaluate the Glendale location’s operations in three key areas: customer satisfaction, customer forecasting, and staff scheduling. As his friend, you agree – though his offer to treat you to the large pizza of your choice did not hurt.

First Evaluation

The first evaluation required an understanding of the factors that contribute to customer satisfaction and spending. Refer to the data Michael provided in the Excel spreadsheet “Benchmark Assignment - Data Analysis Case Study Data.” Identify which variables are significant to predicting overall satisfaction. Develop and interpret the prediction equation and the coefficient of determination. Based upon the data in this evaluation, what areas should Michael and Tony Tanaglia focus on to improve customer satisfaction?

Second Evaluation

The second evaluation requires a forecast of customers based upon demand. Michael reviewed data for the previous 11 months to better forecast restaurant customer volume.

Which method should, the business owner use to yield the lowest amount of error and what would be the forecast for December? Refer to the Excel spreadsheet “Benchmark Assignment - Data Analysis Case Study Template.”

Third Evaluation

The third evaluation concerns staff scheduling. Some of the customers have complained that service is slow. The restaurant is open from 11:00 a.m. to midnight every day of the week. Tony divided the workday into five shifts. The table below shows the minimum number of workers needed during the five shifts of time into which the workday is divided.

The owners must find the right number of staff to report at each start time to ensure that there is sufficient coverage. The organization is trying to keep costs low and balance the number of staff with the size of the restaurant, so the total number of workers is constrained to 15.

1-Based on these factors, recommend the staff for each shift to accommodate the minimum requirements for customer service.

Ragan, Inc. was founded nineteen years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc. has experienced rapid growth because of a proprietary technology that increases the energy efficiency of its units. The company is equally split between the two siblings. The original partnership agreement between them gave each 500,000 shares of stock. The company has since gone public. At that time, the siblings retained their shares and 1,000,000 shares of new stock were issued. The firm anticipates needing to raise a large amount of capital ($10 million) in the coming year to facilitate further expansion and are evaluating several financing options. The first option is to issue zero-coupon bonds that mature in 20 years. Similar zero-coupon bonds currently have a YTM of 4.5%. The second option is to issue 4% coupon bonds that mature in 20 years. Similar bonds have a YTM of 4%. The third option is to issue preferred stock with a fixed dividend of $0.85 per share. These preferred stock would have a required return of 7.5%. The firm currently has no preferred stock outstanding. The fourth option is to issue common stock.The stock is currently trading on the market for $20 per share. The firm most recently paid a dividend on common stock of $0.50 and plans to increase that dividend by 25% per year for the next five years. After that, the firm will level off at the industry average of 5% per year, indefinitely. Carrington and Genevieve estimate the required return on the stock to be 15%. 5. What do you think about the estimate of a 15% required return? What does the current stock price suggest about the required return? 6. If they can sell new shares of common stock at the current stock price of $20, how many would they have to issue? 7. Based on your answer above (#6), what would be the increase in the dividend expenses for the firm in future years?

Solve this following question:

Afia Agency was founded in January 2017. Presented below is the trial balance as of March 31, 2020, the end of the company’s fiscal year.

Instructions

a) Prepare the adjusting entries for these accounts:

- Art supplies (Supplies expense)

- Accumulated Depreciation – Printing Equipment

- Accumulated Depreciation – Building

- Allowance for doubtful Accounts (Bad debt expense)

- Notes receivable (Interest revenue)

- Notes payable (Interest expense)

- Salaries expense

- Rent Expense

- Unearned Advertising Revenue

You need to set your own assumptions in order to adjust the accounts. Those assumptions should be in consistency with your trial balance.

You need to do same for the other adjustments. You can follow the textbook pp 106-117.

b) Post the adjusting entries to the ledger

c) Prepare an adjusted trial balance

d) Prepare the worksheet

e) Prepare financial statements: Income statement, retained earnings statement, and statement of financial position

f) Journalize and post the closing entries

g) Prepare a post-closing trial balance

CASE

Delta's New Song:

A Case on Cost Estimation in the Airline Industry

INTRODUCTION

Founded in 1924, Delta Airlines is the third largest U.S. airline in operating revenues and revenue passenger miles flown. 1 Traditionally, Delta's primary competition came from the other full-service airlines, including United Airlines and American Airlines. However, in recent years, the major airlines have increasingly been forced to compete with low-cost, no-frill airlines pioneered by "fly for peanuts" Southwest Airlines. The significant downturn in passenger volume in the third quarter of 2001 (following the September 11 attacks) served only to increase the head-to-head competition between the majors and the low-cost competitors.

AIRLINE LABOR COSTS

Industry Challenges

Airlines must operate within a low-margin, high-fixed-cost environment, making profitability particularly sensitive to decreases in volume, either from environmental factors (e.g., the September 11,2001 attacks) or from competition. Moreover, the airline business is labor-intensive. Labor costs as a percentage of revenues ranges from a low of about 25 percent for the low-fare airlines to almost 50 percent for the large, full-service airlines such as United (see Exhibit 1).

For many airlines labor unions at various levels of the organization are strong, presenting an additional challenge in the management of costs. Labor union (re)negotiations were on the rise during 2003, as airlines tried to pass along an increasing share of the cost cutting to its employees. In the summer of 2002, US Airways won concessions from its workers corresponding to a 27 percent reduction from its prior year labor costs. Plans to terminate the airline's pilot pension plan, however, met with objections and will likely be resolved in US Airway's bankruptcy hearings. In January of 2003, American Airlines requested an $8 billion concession from the three labor unions representing its labor force. Northwest similarly argued for salary concessions as part of a $ 1 billion cutback (Gary and McCartney 2003).

"Labor costs, especially pilot-labor costs, are on the point of the spear again," Capt John Prater, chairman of the pilot union at Continental Airlines, recently wrote to his members. "Airline managements, Wall Street, the [Bush] administration and Congress are once again looking for a scapegoat to blame for the industry's ailments; so-called 'high-priced, under-worked' pilots have once again become their primary target." A senior pilot in the industry typically earns about $250,000 a year, while a senior mechanic would make about $70,000 and a senior flight attendant about $40,000. (Gary and McCartney 2003)

Delta Airlines

With over 81,000 employees, salaries are a significant component of Delta's cost structure, accounting for over 42 percent of the company's total operating expenses and over 46 percent of total revenues in fiscal year 2002 (see Exhibit 2). As with other airlines, Delta pilots and flight attendants are paid for hours flown. Contracts for unionized personnel guarantee a certain level of hours to unionized employees (with federal regulations providing caps on the number of hours that can be flown by an individual in a month). As a consequence, salaries are largely fixed in the short term for unionized employees. However, Delta is the least unionized of the major airlines. In fact, Delta's pilots are the only unionized employee group (with the exception of a very small contingency of flight operations personnel). Delta's flight attendants and ticket agents are not under union contract; consequently, their salaries, as well as hourly personnel (e.g., ticket counter and ramp operations personnel), represent salaries that are more variable in nature. Moreover, contracted maintenance work creates additional flexibility in salaries costs for Delta.

Since interim wage concessions by pilots of United Airlines (which also filed for bankruptcy protection in December 2002), Delta pilots are the highest paid in the industry with an average hourly wage rate for a Boeing 757 captain of $245. The same pilot would earn $178 per hour at Continental Airlines and only $172 per hour at United (post-concession) (Harris 2003b). In February 2003, the Airline Pilots Association (ALPA) successfully blocked Delta's plan to furlough an additional 1,700 pilots (Delta had already furloughed 1,600 pilots citing September 11 traffic declines as "circumstances beyond its control"). The ALPA, however, argued that the furloughs were in fact the result of the general economic difficulties the industry was experiencing and, therefore, were in violation of ALPA contracts that prohibit layoffs due to the company's economic

and financial situation. Delta representatives continue to assert the "continuing need to address overall pilot costs to enable Delta to return to a competitive cost structure and to preserve Delta's long-term future" (Setaishi 2003).

DELTA'S SONG

In November 2002, Delta Airlines announced that it would form a new low-cost carrier, Song. Song began service on April 15, 2003 with its first flight between John F. Kennedy International Airport in New York and West Palm Beach, Florida (Wong 2003). This was not Delta's first attempt to enter the low-fare market. A previous attempt, Delta Express, was initially profitable but eventually failed because of "a lack of a management team to fight budget wars, cost creep, and brand confusion" (Daniel 2003). Despite this prior unsuccessful attempt to operate a low-cost carrier under the Delta umbrella, Delta asserts its belief that Song will be able to successfully compete in the low-fare industry segment, a segment that has been relatively prosperous amid the industry downturn.

Song operations will be based on the low-cost model of Southwest Airlines (e.g., low fares, low frills, and quick turnarounds) and is targeted to compete with successful newcomer JetBlue. Song will be supported by a single-airliner fleet of 36 Boeing 757s and will provide service to Florida and the East Coast. Like JetBlue, Song flights will feature in-flight entertainment competitive with JetBlue's satellite televisions (Harris 2002).

Can Delta Succeed Where It Has Failed Before?

Overall, Delta expects cost per available seat mile to be about 20 percent lower for Song than it is for its current operations. John Selvaggio, Delta executive and future Song president indicates that airplane utilization will be increased and pilots and flight attendants will experience "more flying and less sitting time" (Harris 2002). What Delta won't do, however, is pay its Song pilots less than the current Delta pilots. Given that Delta pilots' per hour wage rates are, on average, $100 more than those of Southwest and JetBlue, industry analysts are skeptical of the ability of Delta to compete in the low-cost carrier segment. "It's very hard for me to see how they can come very close to the costs of JetBlue and Southwest without closing the labor-cost gaps," said Michael Roach, an associate with Unisys R2A Transportation Management Consultants in Hayward, California (Harris 2003a). In fact, Roach estimates that JetBlue and Southwest would still have 10 percent and 30 percent cost advantages, respectively, over Song.

Delta is in a position of evaluating entry into a new product market, namely, the low-cost carrier market. The question is, can Delta succeed where it has failed before? Can the airline create for itself a business model that can compete with the JetBlues and Southwest Airlines of the industry? Moreover, it may be that their options for operational investments are more limited than those of a brand new carrier such as JetBlue, thereby putting Song at a disadvantage. For example, they will be using their current airline fleet and, as a result, will be unable to take advantage of favorable lease terms offered to new carriers (Daniel 2003). The key to success for this endeavor lies in the ability to create a very different cost structure than the one under which it currently operates. Delta must understand how its current costs behave and, more importantly, anticipate how they will behave in the new business model outlined for Song. Can Delta rely on historical data to predict costs into the future for Delta and for Song? Or has the business model (and the environment) changed in such a fundamental way that Delta can no longer assume "business as usual"?

Questions:

What would be the effect of a sharp decline in passengers for a firm with a microeconomic structure such as the one Delta had in place during 2001? Is Delta’s operating leverage high or low?

Analyze the proposal to launch Song as a response to the situation the firm is facing.

Estimate the salary cost function for Delta. Despite the fact you can choose between some feasible drivers, please use Revenue Passenger Miles for this part of the case. Use the High Low method.

Estimate the salary cost function for JetBlue. Use the high low method.

What conclusion can you make out of the comparison of both cost functions?

Maybe it the method. Please redo 3 and 4 by using simple linear regression?

Did the result of your analysis change?

Can Delta be successful on the new segment? Is the strategy aligned with the microeconomic structure of Delta? (THIS IS A VERY RELEVANT QUESTION)

Some years after Delta’s case situation, salaries were no longer the highest cost for Delta. Fuel prices increased dramatically after 2001. How can you deal with this new profitability threat from a cost management perspective?

If costs cannot come down, how can we improve the profitability of a firm such as Delta? While answering this question remember the components of a profit function.

Case Study Deutche Bank

Deutsche Bank was founded in Berlin in 1870 as a specialist bank for foreign trade by Georg Siemens and L. Bambeger.  During the early years  major projects included the. Northern Pacific Railroad in the US and the Baghdad Railroad in Iraq.  During WWI the Deutsche Bank lost most of its foreign assets and had to sell of many holdings.  At the same time, however the bank helped to establishment of the film production company, UFA, and the merger of Daimler and Benz.Darker days fell upon the Deutsche Bank after Hitler came to power, instituting the and the Deutsche Bank dismissed its three Jewish board members, and in subsequent years, took part in the confiscation of Jewish-owned businesses.  The bank itself fell into German government hands during which time it provided banking for the Gestapo and loaned the funds used to build the Auschwitz and IG Farben facilities.  It later contributed to a $5.2 billion in compensation fund following lawsuits brought by Holocaust survivors. In October 2001, Deutsche Bank was listed on the New York Exchange.  It was later named one of the major dirvers of the collaterized debt obligation market during the 2004-2008 housing bubble.In spite of Deutsche Banks’ involvement in these historical issues, it has recently made a commitment to both social endeavors and to the environment.  Deutsche Bank has invested in social projects such as StreetSmart, a campaign to raise money for charities for the homeless in the UK, and Surviving Winter, a campaign to help older and vulnerable individuals stay warm and well. Deutsche Bank has a commitment to long-term environmental sustainability. This includes reducing waste and working towards becoming more carbon neutral, and supporting innovative new technology. Since 2008 all electricity needs in the UK were met with renewable energies, and  85% of Deutsche Bank staff are now part of the Bin the Bin recycling initiative, reducing unrecyclable waste by 72% in two years.   

Case Study The HCT Group

HCT Group is an established bus operation with services across the UK , running including ten red London bus routes, Park and Ride services, and NHS staff transport.  HCT was launched in the 1980 to provide community transport in Hackney, London. At that time it was just one of many small community transport organizations that provided low-cost minibus transportation for marginalized communities, non profit organizations and social clubs.  It also provided transportation for disabled persons who had difficulty using public transportation.  HCT relied on grans and donations to support the operation.   However, in 1993, HCT like many similar companies found it hard to get grans to support their service.  Since the need in the community was just as great, HCT set out to find bold, new ways to meet their financial needs. This required rethinking how they conducted business and developing a new business model that would not rely on grants but on winning commercial transport contracts. HCT believed that if they could win such contracts, they could reinvest the profits into projects for the community that would have strong social impacts.  Part of this model included training the disadvantaged people of the community to take on the roles of drivers, passenger assistants and other jobs that not only provided them with income but allowed them to gain life-changing skills. HCT develop their own training skills to pass on to their employees and landed their first contract.  They went on to become the only accredited center for passenger transpotation training in Hackney, training 392 long-term unemployed people who became qualified in 2010-2011. By 2001 HCT had developed their skills as leaders in the transportation business to the point where they could compete for contracts with major transportation companies and won their first red bus route, opening them up to rapid growth.  Partnerships with other organizations opened up new depots and routes.  HCT now provides over 12 million passenger trips every year.  All profits are reinvested into the communities they service and fund training for long-term unempolyed.  At HCT it is not shareholders who reap the benefits but the skateholders.

Case Study:  Coca Cola

Coca Cola was invented by Doctor John Pemberton, a pharmacist, in 1886 in his back yard in Atlanta, Georgia.   His bookkeeper, Frank Robinson came up with the name and the flowing letters that don coke cans until this day.  The drink was initially sold at one soda fountain in Atlanta, bring in about $50 a day in revenue, while production costs equaled over $70, obviously operating at a loss.  A year after its inception, another pharmacist, Asa Candler bought the formula from Pemberton and through aggressive marketing made Coca Cola one of the most popular fountain drinks in America.  As the soda fountain era came to an end, the era of bottled soft drinks and fast food restaurants began to rise and opened up a new distribution channel for Coca Cola.  Today more than 1.4 billion drinks are consumed per day around the world in over 200 countries. The Coca-Cola Company is currently the world's largest beverage company, with more than 500 brands. They are the number one provider of sparkling beverages, ready-to-drink coffees, and juices and juice drinks in the world.According to Coca Cola’s 2012-2013 Sustainability Report, “At Coca-Cola, sustainability is a critical component of our business strategy. It is about improving lives, creating jobs, increasing opportunity, preserving resources and meeting needs for the communities we proudly serve around the globe,” said Muhtar Kent, Chairman and CEO, The Coca-Cola Company. “There are no issues that will more shape or define the 21st century than the global empowerment of women; the management of the world’s precious water resources; and the well-being of the world’s growing population.”Coca Cola’s sustainability focus is based on a framework of “Me, We, World” and has three leadership priorities:  Women, Water, and Well-being.  The focus on women addresses women entrepreneurs to help them overcome barriers to starting and operating businesses from fruit farmers to artisans in 22 countries.   In the area of sustainability, Coca Cola’s water initiative with companies and organizations throughout the world to reduce water use and deliver safe drinking water to communities in need. Coca Cola partnered with DEKA to provide Slingshot ™, a vapor compression water purification machine that can produce about 30 liters of water an hour on minimal energy usage, to communities in need of clean water in rural parts of Latin America and Africa.  In the area of well-being Coca Cola has focused on addressing obesity through production of low or no calorie products and has decreased its average calories per serving in its drinks by nine percent.   In addition, they support healthy living programs in many countries.Coca Cola maintains a philanthropic arm of the company that supports many community based initiatives, investing over $101.6 million in 2012 alone.  They have maintained their policy not to market to children, and address global climate issues through an ambitious goal of reducing their carbon footprint by 25% by 2020.

Case Study:  Intel and Corporate Social Responsibility

Intel Corporation is a semiconductor chip maker corporation headquartered in Santa Clara, California. Based on revenue, Intel is one of the world's largest semiconductor chip makers with an multinational presence. Intel Corporation was founded in 1968,  by semiconductor pioneers Robert Noyce and Gordon Moore under the executive leadership and vision of Andrew Grove. Intel makes motherboards, network interface controllers, integrated circuits, flash member, graphic chips, and processors, combining advanced chip design capability with a leading-edge manufacturing capability. Until 1981 the majority of its business was devoted to SRAM and DRAM memory chip manufacturing.  Currently Intel is actively developing the 3-D transitor and 4th generation core processors.  As a socially responsible corporation, Intel is actively involved in improving lives, the community, and the environment.  In 1988 Intel established the Intel Foundation to fund educational and charitable endeavors.  Intel corporate leadership has a history of investment and engagement in programs to support social issues that has generated significant value both for Intel and for their stakeholders.  Intel is especially active in developing “conflict free” mineral products. Many product made by Intel, as well as countless others in the marketplace, contain tin, tantalum, tungsten, or gold, that are know as "conflict minerals". These minerals are often sold by rebels to fund violent conflict.  Intel is partnering with other organizations to find conflict free smelters for its resource supplies.Intel supported Mike Mick Ebeling’s Not Impossible Lab’s to develop Project Daniel that initially set to provide a boy with new arms and his village in South Sudan with the Intel® technology, Ultrabooks™, using 3-D printing to develop prosthetics to help other civil war victims.  In other areas, Intel’s She Will Connect program strives to close the Internet gender gap for girls and women that excludes them from 21^st century jobs and opportunities. This is especially critical in sub-Saharan Africa.  The project is intended to empower women, improve digital literacy training, provide online peer interaction, and gender relevant content.  It is expected to transform African economy and families.  Additionally, Intel supports educational projects especially for girls in Egypt, Tanzania, and 65 other developing countries through project such as Smart Girls and Girls Rising. Intel emphasizes the benefits communities and developing countries obtain when girls are educated leading to healthier and safer people, and less child marriage.  Intel India’s Empowering Women in Jharkhand, provides education and local economic support, Into empower underserved tribal women with education to start prosperous micro-businesses. Intel’s corporate culture has as its foundation a value for its people, the environment, human rights, and empowering the next generation.  Their commitment to the environment includes projects to improve energy efficiency, reduce emissions, conserve resources, and use innovative ways for sustainability.

Work through the Case Studies on Coca Cola, Intel, Deutsch Bank, HTC Group

For each company, analyze:

• How do each of these companies address sustainability?
• How does the focus on sustainability provide a strategic position for the company, if any?
• Analyze why the company engages in social activities.
• What form of corporate governance best fits a sustainable company?