1. Carolyn Fulton, the CFO of Nuts and Bolts Inc. is considering a proposed project to launch an on-line catalog that would allow customers to by-pass the retail store and have items delivered directly to their homes.

Nuts and Bolts Retail got its start as modest Do-it-yourself (DIY) supply store in 1985. It grew from one store, in Charlotte, North Carolina, to over 1000 stores nationwide with revenues over

$20 billion and net profit over $250 million.  The explosive growth began to slow in the late

1990s, but the firm has remained profitable.  To re-ignite revenue growth, management is currently evaluating an on-line sales channel. Studies done by the firm’s marketing department indicate that a large component of the customer base are buying DIY products on-line from other sources, or would like to buy DIY products if available from a reliable retailer.

The design and the development of the web infrastructure would cost an estimated $10 million at time 0 and an additional $10 million at time 1 to acquire and integrate the hardware and software (these are capital expenditures).  Estimated depreciation for the equipment is included below. Start-up expenses would be $2 million plus an investment in inventory of $10 million. The entire net working capital investment will be an additional $5 million in year 1, and the NWC balance would then grow by 15% each year in years 2 through 5. All NWC will be recovered at the end of the project. The on-line catalog is expected to generate new sales of $100 million in the first year and then sales would grow by 15% per year. However the marketing department estimated that the on-line sales would cut into sales at the existing retail stores by as much as $15 million in the first year and this cannibalization would grow by 15% each year in years 2 through 5. Additionally the company would have to hire additional staff to manage the website and shipping logistics, and incur additional cost to configure warehouse operations to efficiently process on-line orders. Operating margins excluding depreciation (the EBITDA margin) on the on-line sales were expected to be the same as retail sales: 8% for the first two years, then 10% thereafter. After 5 years it is expected that the technology will become obsolete and it will have no residual value.

Carolyn wants to determine whether or not to proceed. When analyzing an investment of this risk, the firm assumes a hurdle rate (cost of capital) of 10%.  Assume the effective tax rate is 40%.

EstimatedDepreciationExpense(000’s)

What is the Net Present Value of the proposed project?

Illness and the Uninsured

Evelyn (Eve) O’Conner, 30, has been a graduate student at a prestigious state school on the West Coast, studying for her master's degree in Health Psychology. She has attended school part-time because she must also work and allow enough time for all the hours of fieldwork mandated by her program. Due to a chronic health condition, Eve must be cautious about not overworking or overstressing herself, another reason for not attending school full-time. As a junior in high school, Eve was diagnosed with Crohn's disease, a chronic inflammatory disease of the gastrointestinal tract. While there is no cure for Crohn's, there are several medications and life style modifications that can keep the disease in remission the majority of the time. It is normal for patients to experience cycles of remission and relapse and to go through the periods of flare-up with relatively few severe consequences. Without proper care, however, patients are more likely to experience flareups. The more severe and the more frequent the flare-ups, the higher the chances that the patient will require surgery because of permanent damage to the intestinal tract. Until a few years ago, Eve had only experienced a few minor flare-ups of her disease. She had taken control of her health from the time of her diagnosis and was able to keep herself relatively healthy by seeing her Crohn's specialist regularly, taking the necessary medications, eating healthily, and exercising frequently. Since graduating from college, however, Eve's health has been declining. No longer covered under her father's PPO (preferred provider organization) health insurance, she stopped going for regular check-ups with her IBD (inflammatory bowel disease) doctor and could rarely afford the out-of-pocket expenses for medications. She had been able to continue her healthy eating habits and activity level while living at home, but since starting graduate school and moving away from home, that has not been the case. Time and money constraints do not allow Eve to properly care for herself, and the stresses of school and her disease have contributed to her worsening flareups. In the past year she has been experiencing shorter and shorter periods of remission followed by longer periods of relapse. Unable to continue at the same pace, last month Eve had to take a leave of absence from school, so that she could continue her job as a waitress and support herself. Last week, Eve began to experience excruciating lower back pain, chills, fever, malaise, and fatigue. Eve had suspected kidney stones as this was a periodic occurrence; she had developed kidney stones in the past and assumed that these would pass just as the others had. She resisted going to the doctor because of her lack of health insurance. While it is not unusual for patients with Crohn's disease to develop kidney stones, because of Eve's severe flare-ups, her body was so dehydrated and malnourished that the stones couldn't pass and only grew larger. She had eventually come to the point of being unable to eat or drink anything. When her friends saw how rapidly she was declining they stepped in and brought her to the emergency room where routine blood and urine tests were done, and an abdominal x-ray was ordered. Based on her symptoms and health history, dehydration was suspected and nurses immediately started Eve on IV fluids while they waited for all the test results to come in. Eventually, doctors determined that Eve needed to be admitted. Not only was she dehydrated, but she was also severely malnourished. In addition, she had two very large kidney stones, which had caused an infection. Once she was admitted, nurses continued the IV fluids, started Eve on IV antibiotics, and inserted an NG (nasogastric) feeding tube. Eve spent five days in the hospital until doctors were convinced that she could keep enough food and fluid in her system to remain sufficiently nourished. It was no mystery to Eve why this crisis happened; she knew as well as the doctors that she needed to start taking her Crohn's medications again. She was discharged with strict instructions to follow up with her Crohn's specialist within the next few days and to start treatment accordingly. The nurses at the hospital also set up a pre-op appointment for surgery to remove the kidney stones. Because of the size and location of the stones, and the infection, the stones must be removed by percutaneous nephrolithotomy. In this procedure, a surgeon would make a small incision in Eve's back, insert a hollow tube into her kidney, and remove the stones through the tube. Doctors had wanted to do the surgery while she was in the hospital, but Eve refused, knowing that she could not afford to pay for the surgery. While the procedure is relatively minor, it does require anesthesia and a hospital stay of two or three days. It also requires a catheter be inserted into the kidney to allow it to drain and heal. Without health insurance, Eve knew that covering the costs would be impossible, and she chose to leave AMA (against medical advice) to take some time to figure out a plan and decide what options were available to her, if any. As she had already taken a leave of absence from school, given her current condition, Eve decided to take some time off work and go home to stay with her family for a while. Although Eve is close to her family, she has not told them about recent occurrences, and they have no idea that she spent several days in the hospital. Eve's father recently lost his job, and her mom has only been able to find part-time work. They have been struggling for the past eight months to make ends meet, trying to raise their two other children on a part-time salary without any benefits. Eve has been aware of the situation, and for that reason, has not wanted to bother her family with her situation. With nowhere else to turn, however, she now decides to go home to focus on recovering and figuring out what do from here.

Reflection Questions

1. What is the responsibility of Eve’s Crohn's disease specialist?

2. What is the hospital's ethical obligation in this situation? Could the hospital have done anything differently?

3. Do Eve's friends have an ethical obligation to inform her parents, the physicians, or the hospital staff about Eve's circumstances?

4. Do we as a society have an ethical obligation to provide access to health care to Eve and persons in her situation? Expert Answer

1) Parramatta Scenic Cruises Pty Ltd (PSC) is a family-owned ferry business that operates on Sydney’s Parramatta River. Jane Jetson founded the company when she arrived in Australia and remains the Chief Executive Officer. Jane’s two children, Judy and Elroy, occupy key management roles in PSC. Judy Jetson is the Chief Financial Officer and Elroy Jetson is the tax accountant. PSC reported sales of $11 million for the 2017 financial year.

2) PSC is investigating a proposal to renew part of their fleet that involves replacing an existing ferry with a new, faster, 330-seat ferry costing $3 million. Judy is concerned that the net profit of the new ferry won’t generate a fast enough payback period. Therefore, she has discussed her concerns with Jane. Jane carefully explains to Judy the many reasons that profitability is not a good measure of financial success. Judy then prepares to conduct a rigorous cost-benefit analysis to ensure that the new ferry is financially viable.

3) Last month, Judy and Jane paid for a study by SeaWay Consulting P/L at a cost of $487,000 and the study concluded that the large and growing tourism market will generate sufficient demand for a new ferry. Today, PSC must decide if they will proceed with the investment in the new ferry and the associated sale of their existing ferry.

4) Elroy is really excited about the new ferry. It is a 34-metre, 119 tonnes displacement ferry capable of 35 knots with two cabins and four outside decks with a capacity for 330 passengers. According to the Australian Taxation Office (ATO) the new ferry has a sixteen-year life for taxation purposes.

5) NSW Maritime requires that all vessels have a Certificate of Operation that indicates that the vessel has been inspected and found to comply with the minimum standards set out in NSW maritime legislation. The compulsory certificate is required before PSC commences operations with the new ferry. Certification requires PSC to spend $200,000 on safety equipment. The certificate expires four years later at which time the ferry must be recertified and the safety equipment replaced at an estimated cost of $200,000. Recertification must occur every four years.

6) Because of limitations on the number of vessels at particular wharves on the Parramatta River the new ferry will replace an existing ferry. Even though the new ferry has an effective life of fifteen years, the Jetson family will operate the ferry for ten years only. Jane has arranged for the sale of the existing ferry for $300,000 today. If they don’t proceed with the new ferry PSC will continue to operate the existing ferry for ten years. The existing ferry was purchased six years ago for $2 million. Elroy states that the annual depreciation expense of $200,000 per annum is based on the ten-year tax life at the time of purchase. The existing ferry has a current book value of $800,000.

7) Elroy has suggested that because the new ferry is analysed over a ten-year time period they need to ensure that they recover all the costs they have incurred to date. Therefore, he recommends the $487,000 SeaWay Consulting fee be allocated equally over the ten-year analysis period.

8) PSC will borrow $2 million using a secured ten-year interest-only loan at an interest rate of 5% per annum to partly finance the new ferry. The loan requires annual interest payments of $100,000 starting in one year’s time. Today, inventory will need to increase by $110,000 to $610,000. Accounts receivable will increase to $750,000 from the current figure of $660,000.

9) At the moment PSC is leasing their Harris Park wharf facility to an unrelated entity for $85,000 p.a. The introduction of the new ferry will require that PSC use the wharf on a full-time basis. In this case, PSC must terminate the lease agreement. There is debate among the family members if this lease agreement is an example of a sunk cost or not.

10) At the moment, the existing ferry generates annual cash sales of $1,400,000. This sales figure is predicted to remain constant for each of the next ten years. The new ferry is predicted to generate cash sales in year one of $1.8 million in year 1 and this sales forecast is anticipated to increase by 4% per annum for the foreseeable future.

11) Judy has gathered some information regarding current and expected costs. At the moment, fixed costs are $400,000 per annum. Fixed costs would rise to $500,000 in year one with the new ferry. PSC is confident that they can reduce the increase in fixed costs by 2% p.a. after the first year. Wages expense is currently $900,000 each year and is predicted to increase to $1.4 million with the introduction of the new ferry. Judy reminds the family about the importance of incremental cash flow items when performing a financial analysis.

12) The current annual maintenance cost of the existing ferry is $63,000. The new ferry will require no maintenance in the first three years of its life because it is covered by a manufacturer’s three-year warranty. However, after the warranty expires in year 4 the annual maintenance expense will be $87,000. Jane has advised that PSC has an insurance policy that will insure any number of the company’s vessels at a fixed annual fee of $145,000.

13) It costs $175,000 a year to operate PSC’s head office and marina on the Parramatta River at Harris Park. With careful management PSC believes they will not require any additional personnel in headquarters if they purchase the new ferry. In any case, the annual head office operating expense will increase by just 2% each year.

14) The ATO classifies the safety equipment required for the Certificate of Operation as a business expense, and that expenses incurred in running PSC are tax deductible in the year the expense is incurred.

15) SeaWay Consulting’s report estimates that the new ferry will have a market value of $1 million in ten years’ time. The existing ferry has a book value of $800,000 today and can be sold for $300,000 today. PSC will use these sale proceeds to distribute a $300,000 dividend to its shareholders today. SeaWay Consulting advises that in ten years’ time the existing ferry would be worthless.

16) The company tax rate is 30% and the required rate of return is 12%.

REQUIREMENTS

Questions 1 to 4 require information relating to the capital budgeting decision of the new ferry. The remaining questions will help guide PSC on two aspects of debt capital, and provide an understanding of listing on the ASX. All answers must be entered into the pre-formatted EXCEL spreadsheet

Present an itemised breakdown (and the total) for each of the following: 1. The cash flows at the start. 2. The cash flows over the life. 3. The cash flows at the end. 4. The NPV of the new ferry and an explanation of your recommendation.

5. At 30 June 2017 PSC had a $5 million secured bank loan with a maturity of 30 June 2022 and an interest rate of 6% p.a. compounded quarterly. The scheduled repayments are $100,000 every three months with the initial $100,000 payment due on 30 June 2018 and the final $100,000 payment due on 30 June 2021. What is the amount of the final one-off repayment that is due on 30 June 2022 to fully pay off the loan? 6. Judy has been studying the 2017 Annual Report of Sealink Travel Group Limited (Sealink) to understand the financing strategies used one of PSC’s largest competitors. What is one reason for the following statement on page 32 of the Sealink Annual Report: “The Group’s policy is to maintain a gearing ratio at less than 60%.”? (1 mark) 7. Judy is considering listing PSC on the ASX. According to the ASX Listing Rules one requirement is for a minimum spread of shareholders. What is one reason for this requirement? (1 mark)

Can anyone help with this sequence rather than other format?

1.Cash flow at the start, 2. Cash flow over the life and 3. Cash flow at the end

Luxury and Speed at Louis Vuitton

This activity is important because agile organizations rely on uniquely flexible, organic structures that can respond quickly to customer and market needs. Managers should be aware of this type of structure, as it is increasingly needed in global markets where the time from manufacturing to stores is faster than ever.

The goal of this activity is to demonstrate your understanding of organizational structure by reading a case and answering questions that follow.

Read the following case about Louis Vuitton and choose the best answer to each question.

Agile production is the application of advanced technology, processes and employee training that allow a company to respond quickly and efficiently to market needs, while maintaining quality.

Louis Vuitton, a private $50 billion company founded in 1854, is a “suborganization” of Louis Vuitton Moët Hennessy (LVMH), a public company. LVMH has a decentralized structure that allows its sub-organizations to operate independently.

Quality is synonymous with Louis Vuitton (LV) luxury leather goods, but certainly not what you think of when hearing “agile production.” However, Louis Vuitton is a leader in luxury goods time-to-market manufacturing, with low production quality defects and work processes that rely on highly skilled workers.

How can it be possible to combine speed, quality, and changing trends? Louis Vuitton credits agile production. With 460 stores in 50 countries in 2018, the newest 2019 manufacturing sites in France have natural light, fewer supervisors and modular workstations. Along with the fast-to-market, high-quality processes, the company reduces waste and meets environmental protection standards.

Hiring highly skilled employees is very important because workers may complete any part of the product. The company states that it hires only 10% of applicants and that they must have “superior skills.” Even then, the new employees take part in six months of training. It’s not just the employees who are highly skilled. The high-tech machines easily switch modes to adapt to the stage of production. The gains are not just in speed but in lower defects and fewer returns.

The parent company LVMH states that its goal is for Louis Vuitton to “strive to master their distribution: in this way, they offer their clientele unique purchasing experiences.”

Question 1: Louis Vuitton would be considered what type of organization?

a. Hierarchical

b. Mechanistic

c. Matrix

d. Multicultural

e. Organic

Question 2: The business environment for Louis Vuitton would be considered ________ and, therefore, needing ________.

a. Stable; low-cost

b. Dynamic; Stability

c. Low-cost; stability

d. Dynamic; Flexibility

e. Stable; Stability

Question 3: A key part of agile work at Louis Vuitton is having employees who are?

a. Not too specialized and can work at different stages of the production process.

b. Able to train other employees in their specialization.

c. From other industries from which they can bring ideas for new products.

d. Able to work in a highly centralized, formalized environment.

e. Highly specialized and experts in one area of production.

Question 4: The Louis Vuitton new manufacturing sites in France are not consolidated into one very large factory, so the smaller size will help?

a. Increase centralization.

b. Decrease organic nature.

c. Increase formalization

d. Lower formalization.

e. Increase span of control.

In 2001, the turnaround was largely complete. Minoli’s focus shifted to future growth. Minoli announced ambitious growth targets. What should Ducati do next? What strategic directions are available to Minoli in 2001? (financial perspective)

The Turnaround Program
Ducati was founded on July 4, 1926, when Antonio Cavalieri Ducati and his three sons established
one of the first Italian operations of radios and electrical components. In 1935 Ducati started
production at a new factory in Borgo Panigale, just outside Bologna, at the heart of what later became
the most extensive Italian mechanical district. Not until the post-war period did Ducati’s first
motorcycle appear. The bike, “il Cucciolo,” soon became a blockbuster. The 1950s witnessed the
introduction of a series of increasingly sophisticated and powerful bikes, and particularly the
appearance of Ducati’s technical signature: the Desmodromic valve distribution system. This
innovation, developed by the celebrated Ducati engineer Fabio Taglioni, was a sophisticated
mechanical system allowing the engine to achieve more revolutions per minute and greater “usable”
power. The Desmo system could still be found in 2001 on every motorcycle produced, representing
the soul of all Ducatis: the deep intoxicating noise made by the desmo engine was music to the ears of
purists.
Thanks to their technical superiority, Ducati motorcycles rapidly achieved success in the
international racing circuit. This success fueled growth throughout the sixties and the seventies, and
the development of a strong reputation in the performance segment of the motorcycle industry. In
1972, a Ducati 750 Super Sport prototype won a dramatic victory in the Imola 200cc race. This
motorcycle, which was configured with an L-shape desmo engine (two cylinders mounted at a 90-
degree angle) and a Formula Uno-derived tubular trestle frame, inspired the production of a new line
of larger displacement motorcycles that represented the stylistic and technical foundation of modern
Ducatis.

Despite the innovativeness and technical excellence of its product lines, Ducati’s fortunes declined
sharply in the early 1980’s, primarily due to the decision of its major shareholder at that time (IRI, a
State holding company) to refocus the company on products other than motorcycles. In 1985 IRI
decided to sell its motorcycle assets, and Cagiva, an Italian manufacturing conglomerate and
producer of small displacement motorcycles, acquired Ducati. Under Cagiva, Ducati suddenly
recovered its reputation for on and off-track excellence. An impressive series of victories in the
World Superbike Championship where, for the first time, a Ducati two-cylinder engine defeated a
four-cylinder engine produced by Japanese competitors, was paralleled by the introduction of a new
series of stunningly beautiful street performance bikes. However, towards the mid nineties, liquidity
problems at the larger Cagiva group deprived Ducati of the necessary working capital funding,
which, in turn, delayed its payment terms to some key suppliers, resulting in significant production
delays.
Ducati was one step from going bankrupt when, in September 1996, a majority stake in the
company was acquired by the Texas Pacific Group, an American private equity firm. Abel Halpern,
HBS ’93 and TPG partner was the driving force behind the deal. He had a passion for high-end,
“nichey” businesses, and was driven by the firm belief that Ducati had enormous potential that was
largely unexploited due to poor management. For this reason, he needed a first-class, highly
committed management team, and TPG appointed Halpern’s friend and former colleague at Bain &
Co., Federico Minoli, as CEO of Ducati.

Building a Balanced Scorecard

Hit-n-Run Inc. owns and operates 10 food trucks (mobile kitchens) throughout metropolitan Los Angeles. Each food truck has a different food theme, such as Irish-Mexican fusion, traditional Mexican street food, Ethiopian cuisine, and Lebanese-Italian fusion. The company was founded three years ago by Juanita O’Brien when she opened a single food truck with a unique menu. As her business has grown, she has become concerned about her ability to manage and control the business. O’Brien describes how the company was built, its key success factors, and its recent growth.

“I built the company from the ground up. In the beginning it was just me. I drove the truck, set the menu, bought the ingredients, prepared the meals, served the meals, cleaned the kitchen, and maintained the equipment. I made unique meals from quality ingredients, and didn’t serve anything that wasn’t perfect. I changed my location daily and notified customers of my location via twitter.

As my customer base grew, I hired employees to help me in the truck. Then one day I realized that I had a formula that could be expanded to multiple trucks. Before I knew it, I had 10 trucks and was hiring people to do everything that I used to do by myself. Now, I work with my team to build the menu, set daily locations for the trucks, and manage the operations of the business.

My business model is based on providing the highest quality street food and charging more for it than other trucks. You won’t get the cheapest meal at one of my trucks, but you will get the best. The superior quality allows me to price my meals a little bit higher than the other trucks. My employees are critical to my success. I pay them a better wage than they could make on other food trucks, and I expect more from them. I rely on them to maintain the quality that I established when I opened my first truck.

Things are going great, but I’m feeling overwhelmed. So far, the growth in sales has led to a growth in profitability—but I’m getting nervous. If quality starts to fall off, my brand value erodes, and that could affect the prices that I charge for my meals and the success of my business.”

Create balanced scorecard measures for Hit-n-Run Inc. Identify whether these measures best fit the innovation, customer, internal process, or financial dimension of the balanced scorecard.

Write a generic method mergeSort based on the sort program of Fig. 19.6 (the source code is given as a separate file along with this final document, and also appended at the end of this document). Test your program that prints before sorting, sorts, and prints after sorting an Integer array, a Double array, and a String array as follows:

      Integer[] dataInt = {63, 19, 65, 38, 26, 74, 27, 25, 70, 38};

      Double[] dataDouble = {102.5, 1.98, -3.12, 45.23, 4.5, -56.78, 38.24, 12.34, -105.23, 77.39};

     String[] dataString = {"zebra", "wolf", "panda", "octopus", "monkey", "fox", "elephant", "dog", "cat", "allegator"};

// Fig. 19.6: MergeSortTest.java
// Sorting an array with merge sort.
import java.security.SecureRandom;
import java.util.Arrays;

public class MergeSortTest {
   // calls recursive sortArray method to begin merge sorting
   public static void mergeSort(int[] data) {
      sortArray(data, 0, data.length - 1); // sort entire array
   }                                  

   // splits array, sorts subarrays and merges subarrays into sorted array
   private static void sortArray(int[] data, int low, int high) {
      // test base case; size of array equals 1     
      if ((high - low) >= 1) { // if not base case
         int middle1 = (low + high) / 2; // calculate middle of array
         int middle2 = middle1 + 1; // calculate next element over     

         // output split step
         System.out.printf("split:   %s%n", 
            subarrayString(data, low, high));
         System.out.printf("         %s%n", 
            subarrayString(data, low, middle1));
         System.out.printf("         %s%n%n",
            subarrayString(data, middle2, high));

         // split array in half; sort each half (recursive calls)
         sortArray(data, low, middle1); // first half of array       
         sortArray(data, middle2, high); // second half of array     

         // merge two sorted arrays after split calls return
         merge (data, low, middle1, middle2, high);             
      }                                            
   }                               
   
   // merge two sorted subarrays into one sorted subarray             
   private static void merge(int[] data, int left, int middle1, 
      int middle2, int right) {

      int leftIndex = left; // index into left subarray              
      int rightIndex = middle2; // index into right subarray         
      int combinedIndex = left; // index into temporary working array
      int[] combined = new int[data.length]; // working array        
      
      // output two subarrays before merging
      System.out.printf("merge:   %s%n", 
         subarrayString(data, left, middle1));
      System.out.printf("         %s%n", 
         subarrayString(data, middle2, right));

      // merge arrays until reaching end of either         
      while (leftIndex <= middle1 && rightIndex <= right) {
         // place smaller of two current elements into result  
         // and move to next space in arrays                   
         if (data[leftIndex] <= data[rightIndex]) {       
            combined[combinedIndex++] = data[leftIndex++]; 
         } 
         else {                                                 
            combined[combinedIndex++] = data[rightIndex++];
         } 
      } 
   
      // if left array is empty                                
      if (leftIndex == middle2) {                             
         // copy in rest of right array                        
         while (rightIndex <= right) {                        
            combined[combinedIndex++] = data[rightIndex++];
         } 
      } 
      else { // right array is empty                             
         // copy in rest of left array                         
         while (leftIndex <= middle1) {                        
            combined[combinedIndex++] = data[leftIndex++]; 
         } 
      } 

      // copy values back into original array
      for (int i = left; i <= right; i++) { 
         data[i] = combined[i];          
      } 

      // output merged array
      System.out.printf("         %s%n%n", 
         subarrayString(data, left, right));
   } 

   // method to output certain values in array
   private static String subarrayString(int[] data, int low, int high) {
      StringBuilder temporary = new StringBuilder();

      // output spaces for alignment
      for (int i = 0; i < low; i++) {
         temporary.append("   ");
      } 

      // output elements left in array
      for (int i = low; i <= high; i++) {
         temporary.append(" " + data[i]);
      } 

      return temporary.toString();
   }

   public static void main(String[] args) {
      SecureRandom generator = new SecureRandom();

      // create unordered array of 10 random ints
      int[] data = generator.ints(10, 10, 91).toArray(); 

      System.out.printf("Unsorted array: %s%n%n", Arrays.toString(data));
      mergeSort(data); // sort array
      System.out.printf("Sorted array: %s%n", Arrays.toString(data));
   } 
} 

Sam Smith, the laundry supervisor of the Toronto Street Shelter, stared at the memo that had just reached his desk:

The shelter had adopted a responsibility accounting system. From now on you will receive quarterly reports comparing the costs of operating your department with budgeted costs. The reports will highlight the differences (variances) so that you can zero in on the departure from budgeted costs. (This is called management by exception.) Responsibility accounting means you are accountable for keeping the costs in your department within budget. The variances from the budget will help you identify which costs are out of line, and the sizes of the variances will indicate the most important ones. Your first such report accompanies this announcement. [Exhibit 1]

As this report indicates, your costs are significantly above budget for the quarter. You need to pay particular attention to labor, supplies and maintenance. Please get back to me by the end of this week with a plan for making the needed reductions

Mr. Smith knew that he needed a plan, yet midwinter was the busiest time of the year at the shelter, and the laundry was piling up faster than his staff could wash it.

Background

Toronto Street Shelter was located in the heart of Toronto. Founded in the late 1800’s, it had been serving the homeless every since, providing hot meals, shelter, and companionship. Situated on a busy urban thoroughfare, it was a have of last resort for many of the city’s indigent, and “home” for many others. As might be expected, the demand for its services was especially high in the winter, when temperatures frequently dropped to below freezing, and life on the street became unbearable.

The shelter provide three services. Its most significant service activity was the Hot-Meal Program, where it served hundreds of meals a day. A meal of hot soup and a sandwich was available to anyone who arrived between the hours of noon and 2 pm and 5pm to 7pm. Its second program was its Overnight Hostel, where it had 150 beds that were available on a first-come, first-served basis. The linen was changed daily, and fresh towels were always available, so that the shelter’s clients could look forward to clean sheets and a hot shower. Finally, it had a counseling program, in which a staff of three full-time social workers assisted clients to cope with the difficulties that had brought them to the shelter, and in establishing themselves in a more self-sufficient lifestyle.

System Changes

In March, the shelter had hired a new administrator to improve it business activities. A business school graduate with prior experience in manufacturing and service companies in the private sector, one of his first steps had been to introduce what he called “responsibility accounting”. He had instituted a new budgeting system, along with the provision of quarterly cost reports to the shelter’s department heads. Previously, cost data had been presented to the department heads on a yearly basis.

The annual budget for the current fiscal year had been constructed by the new administrator, based on an analysis of the three prior year’s costs. The analysis show that all costs increased each year, with more rapid increases between the second and third year. He considered establishing the budget at an average of the three prior years’ costs hoping that the installation of the system would reduce costs to this level. However, in view of the rapidly increasing prices, he finally chose the prior fiscal year’s costs less 3% for the current year’s budget. He decided to measure activity by client nights, and to set the budget for pounds of laundry processed at last year’s level, which was approximately equal to the volume of the past three years.

Quarterly budgets were compiled as one-fourth of the annual budget. Mr. Smith had received the report show in Exhibit 1 in mid-January. He reflected on its content:

A lot of my costs don’t change, even if the number of pounds of laundry changes. I suppose laundry labor, supplies, water-related items, and maintenance vary with changes in pounds, but that’s about all. Nevertheless, shouldn’t my budget reflect those changes? Also, I hadn’t planned for the fact that I was given a salary increase as of October 1 – was I supposed to refuse it to help keep my budget in balance?

Finally, I think that it’s important to note that I had to pay overtime to the staff because the department became inundated with laundry during the cold snap we had back in mid-December. Because of this, my average hourly rate for the whole three months was $10.20 instead of the $9.00 that was in my budget. In fact, and maybe this is a little picky, the average number of minutes it took my staff to wash a pound of laundry actually dropped from $0.48, which was my budget target, to $0.47 for the quarter. Somehow, even though it’s pretty small, I think that should be taken into consideration.

Assignment

What is your assessment of the method the administrator used to construct the budget?

Prepare a flexible budget for the laundry department. What are the volume and spending variances?

What should you acting as Mr. Smith tell his boss about the budget variances by the end of the week?

Exhibit 1

QUESTION 1
Rockwater, a wholly owned subsidiary of Brown & Bread, a global engineering and construction company, is a worldwide leader in underwater engineering and construction. Norman Chambers, hired as CEO in late 2019, knew that the industry’s competitive world had changed dramatically. “In the 1990s, we were a bunch of guys in wet suits diving off barges into the North Sea with burning torches,” Chambers said. But competition in the subsea contracting business had become keener in the 2000s, and many smaller companies left the industry. In addition, the focus of competition had shifted. Several leading oil companies wanted to develop long-term partnerships with their suppliers rather than choose suppliers based on low-price competition.
With his senior management team, Chambers developed a vision: “As our customers’ preferred provider, we shall be the industry leader in providing the highest standards of safety and quality to our clients.” He also developed a strategy to implement the vision. The five elements of that strategy were: services that surpass customers’ expectations and needs; high levels of customer satisfaction; continuous improvement of safety, equipment reliability, responsiveness, and cost effectiveness; high-quality employees; and realization of shareholder expectations. Those elements were in turn developed into strategic objectives. If, however, the strategic objectives were to create value for the company, they had to be translated into tangible goals and actions.
Rockwater’s senior management team transformed its vision and strategy into the balanced scorecard’s four sets of performance measures. One perspective included three measures of importance to the shareholder. Return-on-capital-employed and cash flow reflected preferences for short-term results, while forecast reliability signaled the corporate parent’s desire to reduce the historical uncertainty caused by unexpected variations in performance. Rockwater management added two financial measures. Project profitability provided focus on the project as the basic unit for planning and control, and sales backlog helped reduce uncertainty of performance. Rockwater wanted to recognize the distinction between its two types of customers: Tier I customers, oil companies that wanted a high value-added relationship, and Tier II customers, those that chose suppliers solely on the basis of price. A price index, incorporating the best available intelligence on competitive position, was included to ensure that Rockwater could still retain Tier II customers’ business when required by competitive conditions. The company’s strategy, however, was to
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emphasize value-based business. An independent organization conducted an annual survey to rank customers’ perceptions of Rockwater’s services compared to those of its competitors. In addition, Tier I customers were asked to supply monthly satisfaction and performance ratings. Rockwater executives felt that implementing these ratings gave them a direct tie to their customers and a level of market feedback unsurpassed in most industries. Finally, market share by key accounts provided objective evidence that improvements in customer satisfaction were being translated into tangible benefits.
From another perspective, Rockwater executives defined the life cycle of a project from launch (when a customer need was recognized) to completion (when the customer need had been satisfied). Measures were formulated for each of the five business-process phases in this project cycle: Identify: number of hours spent with prospects discussing new work; Win: tender success rate; Prepare and Deliver: project performance effectiveness index, safety/loss control, rework; and Closeout: length of project closeout cycle. Formerly, the company stressed performance for each functional department. The new focus emphasized measures that integrated key business processes. The development of a comprehensive and timely index of project performance effectiveness was viewed as a key core competency for the company. Rockwater felt that safety was also a major competitive factor. Internal studies had revealed that the indirect costs from an accident could be 5 to 50 times the direct costs. The scorecard included a safety index, derived from a comprehensive safety measurement system that could identify and classify all undesired events with the potential for harm to people, property, or process. The Rockwater team deliberated about the choice of metric for the identification stage. It recognized that hours spent with key prospects discussing new work was an input or process measure rather than an output measure. The management team wanted a metric that would clearly communicate to all members of the organization the importance of building relationships with and satisfying customers. The team believed that spending quality time with key customers was a prerequisite for influencing results. This input measure was deliberately chosen to educate employees about the importance of working closely to identify and satisfy customer needs.
At Rockwater, improvements came from product and service innovation that would create new sources of revenue and market expansion, as well as from continuous improvement in internal work processes. The first objective was measured by percent revenue from new services and the
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second objective by a continuous improvement index that represented the rate of improvement of several key operational measures, such as safety and rework. But in order to drive both product/service innovation and operational improvements, a supportive climate of empowered, motivated employees was believed necessary. A staff attitude survey and a metric for the number of employee suggestions measured whether or not such a climate was being created. Finally, revenue per employee measured the outcomes of employee commitment and training programs.
The balanced scorecard has helped Rockwater’s management emphasize a process view of operations, motivate its employees, and incorporate client feedback into its operations. It developed a consensus on the necessity of creating partnerships with key customers, the importance of order-of-magnitude reductions in safety related incidents, and the need for improved management at every phase of multiyear projects. Chambers sees the scorecard as an invaluable tool to help his company ultimately achieve its mission: to be number one in the industry.
Required:
a) According to Kaplan and Norton, what characteristics/features make the balanced scorecard so special for its worldwide adoption?
b) Outline the five-pronged strategy crafted by Rockwater in developing the scorecard.

c) Using the balanced scorecard (tabular format), translate Rockwater’s strategy into tangible goals and actions.
d) Outline the importance of the balance score card to Rockwater’s.
e) What factors aided Rockwater in its smooth switch to the balanced Score card?
f) How beneficial can the scorecard be to UPSA Graduate School?

If $500 of new reserves generates $1000 of new money in the economy, then the money multiplier is