B. Compare and contrast these two case studies:

The first one we discussed in class, General Motors (GM), which decided to offshore production from the USA to Mexico. When GM began this in the late 70s, it was a relatively new idea for a major American producer, and was highly controversial, but the trend has grown over the decades, and nowadays other major car companies, including European and Asian giants like BMW and Honda, have followed the same strategy to close plants in their homelands and reopen in Mexico where labor is much cheaper. In 1978, there were 80,000 GM employees in the Flint, Michigan area, and today there are around 7,000. As those plants closed, the consequences have been very destructive for the surrounding towns, where unemployment skyrocketed (and with it crime, gangs and drugs), and areas have become like ghost towns where people have been evicted from their homes, and apartment buildings and businesses have been abandoned. As GM first began this offshoring in the late 70s they were enjoying a 49% share of the American car market, but changes in the market were showing that they would soon be losing this high position. By the mid 80’s they were down to 40% and this downward trend has continued (not only for them but for other American car manufacturers as well). Today, they stand at 15%.

The second one involves Malden Mills, a textile company (fabrics and clothing) in Lawrence, Massachusetts, near the city of Boston in the USA. In the 80s, other textile companies in the region had closed their Boston area factories to relocate to where labor was cheaper, often to Asia and Mexico, but Malden Mills decided to stay. During the 80s they survived near-bankruptcy and decided to gamble and re-focus their production on high-end, high-priced specialty fabrics, especially Polartec, a lightweight, fleecy material that turned out to be very popular with brands like L. L. Bean and Ralph Lauren. The gamble paid off and the Polartec profits rose from $5 million in 1982 to $200 million in 1995. The company was quite strong and successful when a crisis hit in December of 1995—an accidental industrial fire completely destroyed the factory. Everyone in the industry expected Malden Mills to do the only ‘smart’ thing at this point and take the $100 million insurance money and reopen in a developing country where labor would be cheaper. But they shocked everyone by announcing that they would rebuild in Lawrence, and also they would pay full salaries to their 3,000 employees for 3 months and continued health insurance for 6 months. Rebuilding in Lawrence ended up costing the company around $450 million and keeping the laid-off workers on salary and health benefits cost $20 million more, but the company gained a national reputation as a business ‘with a heart’ and enjoyed a very positive boost to their brand. They reopened in 1996, and most of the original employees were hired back, as their jobs were held for them. As the years went by, however, the company fell upon hard times. Perhaps due to the amount of money they spent on rebuilding, or perhaps it was mostly due to changes in the marketplace, but Malden Mills had to declare bankruptcy in 2007. The family that had run the plant for generations was forced out as another company took over, changed the name to Polartec, reduced the staff to 800, and moved most of the operations to other countries.

As you compare and contrast these two case studies, make sure you apply contrasting theories as well, such as Shareholder vs Stakeholder, or perhaps Social Darwinism vs. Ethic of Care. Since this is an essay, make sure you have a central point that you are developing along the way, which will be important to your conclusion.

B. Compare and contrast these two case studies: (350 words)

The first one we discussed in class, General Motors (GM), which decided to offshore production from the USA to Mexico. When GM began this in the late 70s, it was a relatively new idea for a major American producer, and was highly controversial, but the trend has grown over the decades, and nowadays other major car companies, including European and Asian giants like BMW and Honda, have followed the same strategy to close plants in their homelands and reopen in Mexico where labor is much cheaper. In 1978, there were 80,000 GM employees in the Flint, Michigan area, and today there are around 7,000. As those plants closed, the consequences have been very destructive for the surrounding towns, where unemployment skyrocketed (and with it crime, gangs and drugs), and areas have become like ghost towns where people have been evicted from their homes, and apartment buildings and businesses have been abandoned. As GM first began this offshoring in the late 70s they were enjoying a 49% share of the American car market, but changes in the market were showing that they would soon be losing this high position. By the mid 80’s they were down to 40% and this downward trend has continued (not only for them but for other American car manufacturers as well). Today, they stand at 15%.

The second one involves Malden Mills, a textile company (fabrics and clothing) in Lawrence, Massachusetts, near the city of Boston in the USA. In the 80s, other textile companies in the region had closed their Boston area factories to relocate to where labor was cheaper, often to Asia and Mexico, but Malden Mills decided to stay. During the 80s they survived near-bankruptcy and decided to gamble and re-focus their production on high-end, high-priced specialty fabrics, especially Polartec, a lightweight, fleecy material that turned out to be very popular with brands like L. L. Bean and Ralph Lauren. The gamble paid off and the Polartec profits rose from $5 million in 1982 to $200 million in 1995. The company was quite strong and successful when a crisis hit in December of 1995—an accidental industrial fire completely destroyed the factory. Everyone in the industry expected Malden Mills to do the only ‘smart’ thing at this point and take the $100 million insurance money and reopen in a developing country where labor would be cheaper. But they shocked everyone by announcing that they would rebuild in Lawrence, and also they would pay full salaries to their 3,000 employees for 3 months and continued health insurance for 6 months. Rebuilding in Lawrence ended up costing the company around $450 million and keeping the laid-off workers on salary and health benefits cost $20 million more, but the company gained a national reputation as a business ‘with a heart’ and enjoyed a very positive boost to their brand. They reopened in 1996, and most of the original employees were hired back, as their jobs were held for them. As the years went by, however, the company fell upon hard times. Perhaps due to the amount of money they spent on rebuilding, or perhaps it was mostly due to changes in the marketplace, but Malden Mills had to declare bankruptcy in 2007. The family that had run the plant for generations was forced out as another company took over, changed the name to Polartec, reduced the staff to 800, and moved most of the operations to other countries.

As you compare and contrast these two case studies, make sure you apply contrasting theories as well, such as Shareholder vs Stakeholder, or perhaps Social Darwinism vs. Ethic of Care. Since this is an essay, make sure you have a central point that you are developing along the way, which will be important to your conclusion.

Please prepare a PowerPoint presentation of the following case.

During the late 1980s, the decline in Akron’s tire industry, inflation, and changes in governmental priorities almost resulted in the permanent closing of the Akron Children’s Zoo. Lagging attendance and a low level of memberships did not help matters. Faced with uncertain prospects of continuing, the city of Akron opted out of the zoo business. In response, the Akron Zoological Park was organized as a corporation to contract with the city to operate the zoo.

The Akron Zoological Park is an independent organization that manages the Akron Children’s Zoo for the city. To be successful, the Zoo must maintain its image as a high-quality place for its visitors to spend their time. Its animal exhibits are clean and neat. The animals, birds, and reptiles are carefully looked after. As resources become available for construction and continuing operations, the Zoo keeps adding new exhibits and activities. Efforts seem to be working, because attendance increased from 53,353 in 1989 to an all-time record of 133,762 in 1994.

Due to its northern climate, the Zoo conducts its open season from mid-April until mid-October. It reopens for one week at Halloween and for the month of December. Zoo attendance depends largely on the weather. For example, attendance was down during the month of December 1995, which established many local records for the coldest temperatures and the most snow. Variations in weather also affect crop yields and prices for fresh animal foods, thereby influencing the costs of animal maintenance.

In normal circumstances, the zoo may be able to achieve its target goal and attract an annual attendance equal to 40% of its community. Akron has not grown appreciably during the past decade. But the Zoo became known as an innovative community resource, and as indicated in the table, annual paid attendance has doubled. Approximately 35% of all visitors are adults. Children account for one-half of the paid attendance. Group admissions remain a constant 15% of zoo attendance.

The Zoo does not have an advertising budget. To gain exposure in its market, the Zoo depends on public service announcements, its public television series, and local press coverage of its activities and social happenings. Many of these activities are but a few years old. They are a strong reason that annual zoo attendance has increased. Although the Zoo is a nonprofit organization, it must ensure that its sources of income equal or exceed its operating and physical plant costs. Its continued existence remains totally dependent on its ability to generate revenues and to reduce its expenses.

Source: Professor F. Bruce Simmons III, University of Akron.

Questions

1. The president of the Akron Zoo asked you to calculate the expected gate admittance figures and revenues for both 1999 and 2000. Would simple linear regression analysis be the appropriate forecasting technique?
2. What factors other than admission price influence annual attendance and should be considered in the forecast?

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.4 million on an after-tax basis. In five years, the after-tax value of the land will be $4.8 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $37 million to build. The following market data on DEI’s securities are current: Debt: 210,000 6.4 percent coupon bonds outstanding, 25 years to maturity, selling for 110 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 8,300,000 shares outstanding, selling for $68 per share; the beta is 1.3. Preferred stock:450,000 shares of 4.5 percent preferred stock outstanding, selling for $79 per share. Market: 6 percent expected market risk premium; 3.5 percent risk-free rate. DEI uses HSOB as its lead underwriter. Wharton charges DEI spreads of 10 percent on new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. HSOB has included all direct and indirect issuance costs (along with its profit) in setting these spreads. HSOB has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 32 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally. Calculate the project’s initial Time 0 cash flow, taking into account all side effects. (This includes an adjustment for the flotation costs described in the above paragraph.The total costs will be the opportunity cost of the land, the cost of the building and the cost of the working capital.The cost of the building and working capital will require new financing and therefore finance costs.Thus the building and working capital must be adjusted for the flotation costs as discussed in section 14-7 of the 11th edition and 14-6 of the 10th edition of the text.It is not necessary to adjust the land costs since we already own the land.) The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.1 million. What is the after-tax salvage value of this plant and equipment? The company will incur $6,700,000 in annual fixed costs. The plan is to manufacture 15,300 RDSs per year and sell them at $11,450 per machine; the variable production costs are $9,500 per RDS. What is the annual operating cash flow (OCF) from this project? Remember in year 5 that besides the cash flows from operation, you also get the salvage, tax benefit, land and the working capital back. Note that while the WC outlay includes the financing costs, the amount back in time 5 will only be the WC amount. So the outlay for WC is 1,300,000 plus financing costs, but you only recover the $1,300,000 since the financing costs have been paid out to your underwriter. Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. What will you report? 1. The cost of common stock is: (enter decimal answer to 4 decimals) 2. The market value of preferred stock in dollars is: (enter answer without commas, $ sign and NO decimals) 3. The weight or proportion of debt is: (enter as a decimal to 4 places) 4. The weighted average cost of capital without the 2% adjustment is: (enter as a decimal to 4 places) 5. The total financing cost (total cost - original cost) for the just the plant is: Enter the data without commas, $ signs or decimals) 6. The net cash flow for periods 1 to 4 is: (Enter the data without commas, $ signs or decimals) 7. The total outlay in Time 0 including flotation costs is: (Enter the data without commas, $ signs or decimals) 8. Using your final WACC what is the NPV of the project? (Enter the data without commas, $ signs or decimals) I need answers to 1-8 to verify I did the work correctly.

Case: Titan Electric Company

The Titan Electric Company (TEC) manufactures and distributes electronic transformers used to distribute electric power throughout the US. The company started with a small manufacturing plant in Reno and gradually built a customer base throughout the Southwest. A distribution center was established in Denver, and later, as business expanded, their second and third distribution centers were established in Tucson and Sacramento. To date, the company operates two plants, three distribution centers and nine warehouse locations. Manufacturing costs differ between the company’s production plants. The cost of each transformer produced at the Reno plant is $1200. The newer Las Vegas plant utilizes more efficient equipment; as a result, manufacturing costs $1050 per transformer.

The cost of shipping a transformer from each of the two plants to each of the three distribution centers is shown in Table 1, below. Note that due to lack of Interstate highways, no shipments are allowed from Reno plant to the Tucson distribution center. The annual production capacity is 30,000 transformers at the Reno plant and 20,000 at the Las Vegas plant.

The company serves their nine warehouses from the three distribution centers. The forecast of the number of meters needed in each warehouse for the next quarter is shown in Table 2, below.

The cost per unit of shipping from each distribution center to each warehouse is given in Table 3, below. Note that some distribution centers cannot serve certain warehouses. These are indicated by a dash, “—”. Titan is interested in developing manufacturing plans for its plants, and shipping plans for its distribution centers that result in the lowest overall costs.

Assignment Questions

1. With the current supply chain design, how many transformers are produced at each plant and how many are shipped from each distribution center?
   
2. What is Titan’s total manufacturing costs for the year? What is Titan’s total distribution costs for the year?
   
3. How much could Titan save if they could produce more transformers at the Las Vegas plant? How many more transformers could they produce and ensure that the same set of binding constraints remain binding?
   
4. Which warehouse is the most expensive to stock one additional transformer?
   
5. Over the next five years, Titan is anticipating moderate growth in demand of 5000 transformers. Would you recommend that Titan consider plant expansion at this time? If so, at which plant and why?
   

6.Titan is considering a proposal to ship up to 2000 transformers directly from its Las Vegas plant to the Salt Lake City warehouse. The cost of shipping directly is estimated to be $50 per transformer, with no change in manufacturing costs. Under this new plan, what are the new manufacturing and shipping plans? How much would Titan save?

If there is an increase in the popularity of laptops and the cost of making laptop becomes cheaper also for the sellers, then what will happen to the New Equilibrium price and quantity sold (using Supply and Demand curve):

what are implicit and explicit cost for an airline industry?