We are evaluating a project that costs $604,100, has a seven-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 90,000 units per year. Price per unit is $44, variable cost per unit is $31, and fixed costs are $710,000 per year. The tax rate is 23 percent, and we require a return of 12 percent on this project.

   

a-1.	Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
a-2.	What is the degree of operating leverage at the accounting break-even point? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.)
b-1.	Calculate the base-case cash flow and NPV. (Do not round intermediate calculations. Round your cash flow answer to the nearest whole number, e.g., 32. Round your NPV answer to 2 decimal places, e.g., 32.16.)
b-2.	What is the sensitivity of NPV to changes in the quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
c.	What is the sensitivity of OCF to changes in the variable cost figure? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.

c) A firm has the following capital structure: 100 million shares outstanding, trading at £1.5 per share, and £100 million of debt. The beta of the firm’s stock is 1.5. The firm’s cost of equity is 10 percent, and the yield on riskless bonds is 2.5 percent. There is no tax. Assuming that the firm can borrow at the risk free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions.

iv) Suppose the firm changes its capital structure so that its debt increases to £150 million, and the equity decreases by £50 million. What should be the firm’s cost of equity after the change?

*Different question*

c) A firm has the following capital structure: £100 million of equity (market value) with 100 million shares outstanding, and £100 million of debt. The beta of the firm’s stock is 1.6. The firm’s cost of equity is 10 percent, and the yield on riskless bonds is 2 percent. There is no tax. Assuming that the firm can borrow at the risk free rate and that both CAPM (Capital Asset Pricing Model) and the Modigliani-Miller theorem hold, answer the following questions

iv) Suppose the firm changes its capital structure so that its debt increases to £140 million, and the equity decreases to £60 million. What should be the firm’s cost of equity after the change?

Zemfira Inc., EBIT and Leverage. (Ross #1 ch.13) Zemfira Inc., has no debt outstanding and a total market value of $125,000. Earnings before interest and taxes are projected to be $10,400 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 35 percent lower. Zemfira is considering a $42,000 debt issue with a 6 percent interest rate. The proceeds will be used to repurchase shares of stock. There are currently 6,250 shares outstanding. Ignore taxes for part a and b. a. Calculate EPS under each of three economic scenarios before any debt is issued. Also, calculate the percentage changes in EPS when the economy expands or enters a recession. b. Repeat part (a) assuming that Zemfira goes through with recapitalization. c. Repeat parts (a) and (b) assuming Zemfira has a tax rate of 35 percent. Will the percentage change in EPS be the same both with and without taxes? d. Suppose the company has a market-to-book ratio of 1.0 i. Calculate ROE under each of three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming no taxes. ii. Repeat part (a) assuming the firm goes through with proposed recapitalization. iii. Repeat parts (a) and (b) assuming the firm has a tax rate of 35 percent.

19. Under sum-of-the-years’-digits depreciation . . .

a. the book value remains the same each year.

b. the depreciation rate changes each year.

c. the denominator of the SYD fraction changes each year.

d. all of the above.

20. For assets acquired during the year, the sum-of-the-years’-digits method requires that the same depreciation rate be used . . .

a. for the remaining months of the year of acquisition, then again in the final year of the asset’s estimated life for any months not depreciated in Year 1.

b. for 12 consecutive months, even if that results in the same rate being used in two different calendar years.

c. throughout the life of the asset.

d. until the end of the calendar year, then recomputed for the next calendar year.

21. Company records show that an employee provided with a company car drove it 80% for business and 20% for personal use. The company reports the personal use as income on the employee’s W-2. As a result . . .

a. the company can depreciate 80% of the car’s cost basis.

b. the company cannot depreciate the car.

c. the company can depreciate 100% of the car’s cost basis.

d. the company can depreciate the car without IRS limits on annual depreciation.

22. On which of the following assets can a company take a Sec. 179 deduction?

a. a warehouse

b. a computer

c. a rental apartment building

d. an office building

Case study: Chapter 2- The Environment- Labour Relations textbook

Armand, Bob, and Courtney worked as customer service representatives at a company that managed a toll road. Employees at the company are represented by a union. All three employees worked at the front counter, and their duties included issuing transponders, receiving payments, receiving faxes to provide service to customers, and assisting in the company’s call center when call volumes were high. In order to do their jobs, the customer service representatives on the front counter were required to go to a fax machine in another area of the building and also to escort customers to other areas of the complex several times a day. Security was a concern at the company because of expensive equipment on the premises, client information that was held, and possible hostile customers. The company had a security system in place that required employees to use a swipe card and enter a password to gain entry at various points in the building. The company encountered problems with the misuse and loss of swipe cards. The employer proposed a new biometric scanning system that relied upon the measurement of the right hand when it was placed on a screenArmand, Bob, and Courtney worked as customer service representatives at a company that managed a toll road. Employees at the company are represented by a union. All three employees worked at the front counter, and their duties included issuing transponders, receiving payments, receiving faxes to provide service to customers, and assisting in the company’s call center when call volumes were high. In order to do their jobs, the customer service representatives on the front counter were required to go to a fax machine in another area of the building and also to escort customers to other areas of the complex several times a day. Security was a concern at the company because of expensive equipment on the premises, client information that was held, and possible hostile customers. The company had a security system in place that required employees to use a swipe card and enter a password to gain entry at various points in the building. The company encountered problems with the misuse and loss of swipe cards. The employer proposed a new biometric scanning system that relied upon the measurement of the right hand when it was placed on a screen.

The system would also work with employees swiping a card and entering a password instead of a hand measurement; however, the employer wanted to incorporate the hand scanning as part of the system to facilitate its attendance management program. Scanning devices would be placed at numerous locations in the complex to control and monitor access to various departments. Eight employees who were members of the Pentecostal faith objected to the proposed scanning system because of their religious beliefs. Although the Pentecostal church is not specifically opposed to biometric scanning, the employees felt that the system was counter to their religious beliefs because it would impose “the mark of the beast” upon them as prophesied in the Book of Revelation. The religious objection related to using measurements of portions of the body for the purposes of identification where such measurements have a number associated with them, the number becomes part of a system of numbers, and that system is involved in the ability to earn a living. The concerns are heightened for some individuals when the measurements are derived from the right hand. When the employees objected to the new system, the employer proposed that they use their left hands and also proposed the employees be allowed to wear a glove over their hand. (The system relied upon a hand measurement, not fingerprints.) Five employees were satisfied with the changes proposed by the employer and dropped their objection to the scanning devices. When Armand, Bob, and Courtney continued to refuse to use the new system, the employer proceeded to apply its progressive discipline policy. The employer did not meet with the union or the employees other than through the disciplinary process. The employees were given warnings, formal letters, and subsequently terminated when they refused to take part in the new system.

Questions:

1. Is there any discrimination in this situation? If so, what type of discrimination is involved?

2. What is the obligation of the employer?

3. If this case proceeded to a hearing, explain the outcome you expect.

The Orthotic Group case study demonstrates how performance management is important to continuously improve. As you read the case, think about the balanced scorecard approach and how you would set metrics for your team to generate the results needed to remain competitive. The Orthotic Group, located in Ontario, Canada, prides itself on providing superior service to healthcare professionals globally. A custom manufacturer of orthotics that can be inserted into footwear, the company also supplies compression hosiery and footwear. Healthcare professionals can order online through the website, through two technological options, Gaitscan or OHI1Scan or by sending foot impression forms through the postal service. With a strong customer base, The Orthotic Group is considered a leader in the industry as a result of their quality, order cycle time, and problem resolution process. In 2017, after a competitive analysis, it was determined that delivery times from order placement to delivery in the industry had become more competitive. Along with this new competitive requirement, performance metrics for the past 6 months had been slipping from their previous norms. While there had been some minor turnover amongst the production staff, the turnover was no more than previous years. A new manager had been hired who had been making changes. Some of these changes were popular with the production workers, while others were not. Work-in-Process (WIP) inventory began to pile up in key areas of the production line. The new manager left the organization 3 months prior to the busy fall season. The Vice-President Operations thought it would be a good opportunity to embark upon a Lean Process Improvement initiative with the employees. The goal was to reduce the turn-around-time (TAT) and work-in-process inventory (WIP), while maintaining and improving the quality of their orthotics. The Production Supervisor compiled a team of workers from production to gain their insights into what was slowing the team down. Through observations and collaboration with the team it was noted that the following conditions were preventing The Orthotic Group from achieving their targets: While the company had a metric board on the T.V. screen posted above the production line, the first production step, the Technician cell, did not know how many orthotics they produced as a team. Results were provided the next day as a component of the daily stand-up, Workers were processing orders in batches of 10 or more, There was a high degree of variability in worker productivity, First-in-First-Out (FIFO) priority system was not being maintained as workers would work on “easy” orders first instead of higher difficulty orders to push the orders through. At this point the Production Supervisor is preparing a report to discuss priorities with the Vice President – Operations.

The Orthotic Group case study demonstrates how performance management is important to continuously improve. As you read the case, think about the balanced scorecard approach and how you would set metrics for your team to generate the results needed to remain competitive.

Questions:1 Explain what a Lean Process Improvement plan is? What is involved in this type of initiative? (15%) Please use your original words and thoughts and only use direct quotes to prove a point in your arguments. References may be required if you are utilizing outside resources. Copying word for word or paraphrasing can lead to Academic Misconduct. This applies to all questions.

Question: 2 From a functional perspective, which category(ies) of performance metrics are likely currently in use at the manufacturing center prior to the Lean Improvement Process. Explain why you believe this? Is this the right approach going forward given the Lean Improvement initiative? (20%) See warning in Question 1.

Question: 3 What role does IT have in the company when it comes to performance measurement? In your opinion is the Information Technology resources being employed effectively? What are your recommendations? (20%) See warning in Question 1.

Question: 4 Develop 5-6 key metrics (for the balanced scorecard) the company should measure in the manufacturing environment as a result of a lean Improvement initiative. Why are these important? What purpose do they serve? Try to look beyond the textbook for key ideas of what will influence world-class performance for the company. (20%) See warning in Question 1.

Question: 5 Your group represents the team that has been operating the Lean Improvement Process and you are writing a short executive summary (1 page minimum) to the VP Operations so the VP can show the executive group the recommendations. Based on questions 1-4, and the problems they have identified, write up the executive summary with your conclusions and supporting rationale for these improvements. (25%) See warning in Question 1, and the problems they have identified, write up the executive summary with your conclusions and supporting rationale for these improvements. (25%) See warning in Question

Income from operations is one of the most important items reported by a company. Depending on the decision-making needs of management, income from operations can be determined using absorption costing or variable costing.

Choose whether the following characteristics are most often associated with absorption costing or variable costing.

	Absorption Costing	Variable Costing
Required under generally accepted accounting principles (GAAP)
Often used for internal use in decision making
Cost of goods manufactured includes only variable manufacturing costs
Used in reports prepared for external users
Fixed factory overhead costs are not part of cost of goods manufactured
Both fixed and variable factory costs are included in cost of goods sold and inventory

Method Comparison

Review the income statements on the Absorption Statement and Variable Statement panels, then complete the following table. The company’s sales price per unit is $75.00, and the number of units in ending inventory is 5,000.

Item	Amount
Number of units sold
Variable sales and administrative cost per unit
Number of units manufactured
Variable cost of goods manufactured per unit
Fixed manufacturing cost per unit

Absorption Statement

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc.

Absorption Costing Income Statement

For the Year Ended December 31

1	Sales		$1,125,000.00
2	Cost of goods sold:
3	Beginning inventory	$0.00
4	Cost of goods manufactured	840,000.00
5	Ending inventory	(210,000.00)
6	Total cost of goods sold		630,000.00
7	Gross profit		$495,000.00
8	Selling and administrative expenses		275,000.00
9	Income from operations		$220,000.00

Variable Statement

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc.

Variable Costing Income Statement

For the Year Ended December 31

1	Sales		$1,125,000.00
2	Variable cost of goods sold:
3	Beginning inventory	$0.00
4	Variable cost of goods manufactured	600,000.00
5	Ending inventory	(150,000.00)
6	Total variable cost of goods sold		450,000.00
7	Manufacturing margin		$675,000.00
8	Variable selling and administrative expenses		210,000.00
9	Contribution margin		$465,000.00
10	Fixed costs:
11	Fixed manufacturing costs	$240,000.00
12	Fixed selling and administrative expenses	65,000.00
13	Total fixed costs		305,000.00
14	Income from operations		$160,000.00

Manufacturing Decisions

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing income from operations, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement panel and the Variable Statement panel, he notices that the net income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company’s capacity for manufacturing, in the coming year. He reasons that this will boost net income and satisfy the company’s owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".

1. Use the income statements on the Absorption Statement and Variable Statement panels to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Income From Operations
Original	Original	Additional	Additional
Production	Production	10,000	10,000
Level-Absorption	Level-Variable	Units-Absorption	Units-Variable

2. What is the change in net income from producing 10,000 additional units under absorption costing?

3. What is the change in net income from producing 10,000 additional units under variable costing?

4. What would be your recommendation to the production manager?

Produce the extra 10,000 units. Net income will be increased, and the production manager will receive praise for creating higher profits.

Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold.

Do not produce the extra 10,000 units. Net income does not change under absorption costing when the additional units are produced.

Do not produce the extra 10,000 units. The increase in net income under absorption costing is due to fixed manufacturing costs being held in inventory, and the additional inventory will lead to higher handling, storage, financing, and obsolescence costs.

Contribution Margin Data

For planning and control purposes, managers often compare planned and actual contribution margin. Variable costing is used as a basis for such analyses.

Examine the following contribution margin data, and then complete the Contribution Margin Analysis panel.

Saxon, Inc.
Contribution Margin Data Schedule
	Actual	Planned
Sales	$1,125,000	$1,190,000
Variable cost of goods sold	$450,000	$462,000
Variable selling and administrative expenses	210,000	154,000
Total	$660,000	$616,000
Contribution margin	$465,000	$574,000
Number of units sold	15,000	14,000
Per unit:
Sales price	$75.00	$85.00
Variable cost of goods sold	30.00	33.00
Variable selling and administrative expenses	14.00	11.00

Contribution Margin Analysis

Contribution margin analysis focuses on explaining the differences between planned and actual contribution margins, considering the quantity factor and the unit price factor.

After reviewing the data on the Contribution Margin Data panel, complete the following contribution margin analysis. For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Saxon, Inc.

Contribution Margin Analysis

For the Year Ended December 31

1	Planned contribution margin
2	Effect of changes in sales:
3	Sales quantity factor
4	Unit price factor
5	Total effect of changes in sales
6	Effect of changes in variable cost of goods sold:
7	Variable cost quantity factor
8	Unit cost factor
9	Total effect of changes in variable cost of goods sold
10	Effect of changes in selling and administrative expenses:
11	Variable cost quantity factor
12	Unit cost factor
13	Total effect of changes in selling and administrative expenses
14	Actual contribution margin

Final Questions

After reviewing your work on the Contribution Margin Analysis panel, answer the following three questions.

1. Explain the total effect of changes in sales on the contribution margin.

Lowering the sales price caused sales to be lower, decreasing overall contribution margin.

Actual total units sold was lower than planned, causing a decrease in contribution margin.

The reduction in sales price lowered contribution margin, but the increased quantity of sales more than made up for it.

The reduction in sales price caused higher sales, but contribution margin was nevertheless negative overall.

2. Explain the total effect of changes in variable cost of goods sold.

More units were sold and so the variable cost of goods sold was higher, even though the per unit variable cost of goods sold was less than planned.

Overall, the effect of changes in variable cost of goods sold increased contribution margin.

Variable cost of goods sold negatively affected contribution margin because of an increase in per unit costs.

The reduction in per unit variable cost of goods sold negatively affected contribution margin, but the increased sales overcame this effect.

3. Explain the total effect of changes in selling and administrative expenses.

Due to increased sales there was an increased contribution margin due to increased selling and administrative expenses.

Contribution margin went up because of a decrease in selling and administrative expenses.

Because the per unit variable selling and administrative expenses increased, contribution margin was greater.

The per unit variable selling and administrative expense was higher than planned, and more units were sold, yielding a negative effect on contribution margin.

Where in the World Is Timbuk2?

Outsourcing, Offshoring, and Mass Customization1Brennan Mulligan paused to admire the San Francisco skyline before entering the leased building that housed all of Timbuk2’s activities, from management to manufacturing (Figure 1). Who would imagine that anyone could profitably manufacture a textile product in San Francisco in 2002? With competition not only from lower-cost centers in the United States but also from China and other places in the Far East, a converted warehouse building in San Francisco was an unlikely location for this manufacturing business. Yet Brenna n was not sure Timbuk2 could continue indefinitely to produce everything in San Francisco. While the pride and satisfaction of producing in San Francisco were ingrained in Timbuk2’s culture, and moving production elsewhere would be a huge change for a small company with local roots, Timbuk2 needed to remain profitable. Hence, Brennan knew there was no easy answer to the question on the table: Should Timbuk2 outsource some (or all) of its production to a Chinese firm?

History and processesTimbuk2 were founded in 1989 by Rob Honeycutt, aSan Francisco bicycle messenger with an old sewing machine. The Timbuk2 Web site (www.timbuk2.com) describes Rob’s goal, “to make a messenger bag rugged enough for real bicycle messengers, yet stylish enough to appeal to a broader market of young, hip urbanites as an alternative to the traditional two-strap daypack. Our catchy name, three-panel design, distinctive ‘swirl’ logo, and the fact that we’re ‘Madein San Francisco’ added to our cachet.”

2At one time Timbuk2’s Web site claimed that its bags were “messenger-designed, civilian-approved, and guaranteed to wear like hell.”Early on, Rob became interested in lean manufacturing and mass customization and hired Brennan Mulligan, then a young graduate from the University of California at Berkeley, to take up the cause. Brennan joined the firm in 1993to help Rob implement his vision. Rob and Brennan managed the company for its first seven years. By 2002 the management team included four other guys, who, together with Rob and Brennan, ran the show at Timbuk2. Collegiality and informality characterized the work environment, where shaving and closed-toe shoes were generally optional for the management team. The name of one of their early successful products, “El Ocho,” was born one-night in Mexico when the VP of marketing woke up to find himself in jail “Number Eight.” (The circumstances shall remain undisclosed.)By 1996, Timbuk2 was a smooth-running operation selling a variety of bicycle messenger bags and similar products whose manufacturing process was first characterized by lean manufacturing and then, once leanness was achieved, by mass customization. Brennan reflected on the many changes they had implemented on their path through lean manufacturing and on to mass customization, and the many decisions the team members had to consider. If the company had not pursued lean manufacturing, Brennan believed that it would not have been able to deliver a product customized to a mass market. Lean manufacturing’s emphasis on eliminating waste and improving quality through smaller batch sizes and streamlined product and information flows had been particularly critical. Brennan recalled that the efforts to reduce batch sizes were much more difficult than they had made it sound in business school. After much analysis and experimentation, the team purchased many additional sewing machines, greatly reduced setups at nearly every step of the manufacturing process, and altered the layout and organization of the factory floor in order to handle batch sizes as small as one item. In addition, they altered the process so that the information associated with a specific order, such as colors and add-on options, was available to workers as they worked on individual bags. A customer order was printed for each bag to accompany it through the manufacturing process. Through experimentation, Timbuk2 found that it was most effective to have work cells of five employees manufacture bags from start to finish as they filled individual customer orders. As each cell operated, there would be five bags in the process, one for each worker. Each employee was trained to perform all of the tasks to produce a bag, and a “bump-back” process was used to balance the workload. When the worker assigned to the last position finished her bag (sending it off to the shipping area), she would “bump back” to the next-to-last position and take over production of that bag, wherever it was in the process. The person in that position would then “bump back” to the previous person, and so on until the person at the beginning of the process would go to the order backlog and begin producing the bag associated with the next order in the queue. Brennan was amazed at the dexterity, speed, and accuracy of the cutters and sewers, all of whom were women, mostly of Asian descent. Figures 3-6 in the Appendix show some of the processes and inventory locations at Timbuk2.After Timbuk2 had successfully implemented a relatively lean manufacturing process with batch sizes as small as one, it was in a position to mass-customize bags. Many new issues had to be worked through to implement mass customization, however, including decisions about product offerings, pricing, delivery, and order processing.The decisions about product offering were especially critical. How many choices should the company provide customers? While every bag had three panels that could be customized according to the customer’s choice of colors, how many colors should be allowed? Each additional color meant more fabric to stock. What other options should the company offer? For example,if Timbuk2 offered a bag with a handle, the management team would need to configure the machines and processes and then train the sewers how to make a bag with this option. If they allowed customers the choice of panel size (in addition to color) the issues would be even more complex, in that equipment able to customized pieces of fabric with little setup time was very expensive, among other issues.Timbuk2’s process for determining which choices to offer customers was based on management intuition. Options were added if they seemed relatively straightforward to offer (in the sense that they would be easy to manufacture with processes currently in place and perceived to be attractive to the customer. For example, they would typically offer between 12 and 16 color choices for the material—enough to cover most of the color palette, but still manageable for stocking and managing inventory.A nice feature of mass customization was that the company could temporarily delete a color from the product offering if it was out of stock.By 1997, Timbuk2 was able to produce bags in batches of one with its signature three-panel, tri-color messenger bag design. Bags could be made in multiple sizes, fabrics, and colors, andTimbuk2 was also capable of adding other options to individual bags such as center dividers, reflector tabs, and tails, grab straps (handles), and even a variety of logo colors.In 2000, Timbuk2 launched it's “Build Your Own Bag” page on its Web site (Figure 2), allowing customers to configure and order individual bags to their own specifications. Customers could see the bag they were configuring on the computer screen and experiment with different colors and options. The customer was offered different colors for the three panels at no extra cost, but most other options, such as the alternate logo color, came at a price. Spools of different colored thread were mounted on the machine that embroidered the logo on the bag. The worker would specify which color should go on the bag and the machine would use the thread from the appropriate spool. While producing a bag with the customer’s chosen logo colors cost no more than producing one with the standard logo color, Timbuk2 charged an additional $5 for a non-standard color. “Pure profit,” Brennan remarks, as he noted that many customers chose an

alternate color.By March 2002, Timbuk2 was shipping more than 200 bags per day through multiple channels.

Question

What criteria Timbuk2 should use for selecting which options to

offer in the e-commerce channel? Please discuss the impacts of each of the following options (i.e. a-c) on 1) the order

placement (i.e. the web design that enables consumers’ ordering of the option), 2)manufacturing processes, 3) facility layout, and 4) added value to customers:

a)an added handle;

b)different color logos; and

c)different size panels—means customers can specify panel sizes, which may be non-standard. You need to discuss how each of a), b) and c) affects items 1)—4).

CASE CHAPTER 15: QUANTITATIVE DATA ANALYSIS: HYPOTHESIS TESTINGPERCEPTIONS OF ORGANIZATIONAL ATTRACTIVENESSINTRODUCTION When Song Mei Hui moved from being Vice President for Human Resources at Pierce & Pierce in Shanghai to her international assignment in New York, she was struck by the difference in perception of Pierce & Pierce as an employer in China and the United States. Pierce & Pierce in China stands for an attractive and popular place to work, as opposed to its image as an employer in the United States, which was one of an unattractive, traditional, and uninspiring place of work. This difference in perception was bothering Song Mei Hui, because a strong and appealing ‘employer brand’ has the capacity to attract (and retain) talent as denoted by the number of university graduates aspiring to work for companies such as SAS, Google, Cisco, and the Boston Consulting Group.According to Song Mei Hui, the drivers of employer attractiveness have evolved into a complex and challenging set in this day and age. Even though she believes that the success of the organization itself is at the cornerstone of being an attractive employer (and Pierce & Pierce is flourishing indeed), she feels that a wide variety of factors contribute to being successful in attracting and retaining talent. “For many employees, being a part of a profitable, thriving corporation is a reward on its own,” she says. “However, this is obviously not enough. Opportunities for empowerment, a feeling of achievement, a substantial compensation package, and a culture of grooming and development also play a major role in the decision making process of today’s young professionals. Job candidates are looking for a career, and not just for a job.”Song Mei Hui has hired a graduate student in management, Timothy Brice, to develop and test a model of employer attraction. The results of Timothy’s study should help Pierce & Pierce to become more popular as an employer in the United States and hence to attract and retain talented young professionals. Timothy has conducted a literature review and in-depth interviews with graduate students and young professionals who have just started their careers in order to establish the drivers of employer attractiveness. Based on the results of the literature review and the qualitative study, he has developed the following model. CONCEPTUAL MODEL AND HYPOTHESESFigure 1: A conceptual model of employer attraction EMPLOYER BRAND IMAGE From this model, Timothy has derived the following hypotheses. The effect of Brand Image on Employer attraction Employer brand image can be defined as the potential applicants’ perceptions of instrumental and symbolic attributes of an organization (cf. Backhaus and Tikoo, 2004; Lievens and Highhouse, 2003; Lievens, 2007; Martin, Beaumont, Doig and Pate, 2005). The instrumental dimension includes tangible attributes related to the job and/or the organization such as ‘job opportunities’, whereas the symbolic dimension includes (the perception of) intangible attributes of an employer (as if it were a person) such as ‘sincerity’ and ‘being exciting’. Both instrumental and symbolic attributes have been found to affect applicant attraction to an employer (Backhaus and Tikoo, 2004; Cable and Turban, 2001; Turban and Greening, 1997). Therefore, the following hypotheses are proposed:H1a: The more positive the perception of instrumental attributes of an employer, the stronger applicant attraction to the organization. H1b: The more positive the perception of symbolic attributes of an employer, the stronger applicant attraction to the organization. Feelings of significant others.If significant others in someone‘s surrounding (e.g., family and friends) tell this person that a company is a much better employer than other employers, someone’s level of attraction to Instrumental attributes:-Workplace atmosphere-Job opportunities-Industry characteristicsEmployer attractionSymbolic attributes:-Excitement-Sincerity-PrestigeSubjective normsCONCEPTUAL MODEL AND HYPOTHESESFigure 1: A conceptual model of employer attraction EMPLOYER BRAND IMAGE From this model, Timothy has derived the following hypotheses. The effect of Brand Image on Employer attraction Employer brand image can be defined as the potential applicants’ perceptions of instrumental and symbolic attributes of an organization (cf. Backhaus and Tikoo, 2004; Lievens and Highhouse, 2003; Lievens, 2007; Martin, Beaumont, Doig and Pate, 2005). The instrumental dimension includes tangible attributes related to the job and/or the organization such as ‘job opportunities’, whereas the symbolic dimension includes (the perception of) intangible attributes of an employer (as if it were a person) such as ‘sincerity’ and ‘being exciting’. Both instrumental and symbolic attributes have been found to affect applicant attraction to an employer (Backhaus and Tikoo, 2004; Cable and Turban, 2001; Turban and Greening, 1997). Therefore, the following hypotheses are proposed:H1a: The more positive the perception of instrumental attributes of an employer, the stronger applicant attraction to the organization. H1b: The more positive the perception of symbolic attributes of an employer, the stronger applicant attraction to the organization. Feelings of significant others.If significant others in someone‘s surrounding (e.g., family and friends) tell this person that a company is a much better employer than other employers, someone’s level of attraction to Instrumental attributes:-Workplace atmosphere-Job opportunities-Industry characteristicsEmployer attractionSymbolic attributes:-Excitement-Sincerity-PrestigeSubjective norms that particular organization will grow. It is generally recognized that potential applicants often consult other people (e.g., family, friends, and/or acquaintances) about jobs and organizations(e.g., Van Hoye and Lievens, 2007)”. What’s more, Turban (2001) found that university personnel’s beliefs about organizations affect students’ attraction to that organization. Kilduff (1990) also found that in the early stages of job search, college students are heavily influenced by the beliefs of their friends and classmates. These findings all point at the relevance of social influences to potential applicants in influencing the level of employer attraction. Hence, the following hypothesis is proposed: H2: The more positive significant others are about an organization, the stronger applicant attraction to the organization. To test these hypotheses, Timothy has undertaken a quantitative field study. He has collected data using a questionnaire measuring the variables in his model and a couple of respondent characteristics such as age, gender, and level of education with closed-ended questions. The results of this study are provided next. RESULTSTable 1 provides the means and standard deviations of the variables of interest to this studyand the results of a multiple regression analysis that was conducted to test the hypotheses of this study. Table 1 Summary statistics and results of the regression analysis Adjusted R2dfFMSDBSEtpRegression.3657, 897.304-----.000aConstant--2.213.5224.238.000Instrumental attributesWorkplace atmosphere4.32.75.088.152.577.565Job opportunities4.73.75.390.1362.868.005Industry characteristics4.24.74.275.1861.473.144Symbolic attributesExcitement3.78.91.071.149.474.637Sincerity5.13.80.109.137.794.429Prestige4.05.81.146.1151.268.208Subjective norm4.981.13.317.1003.169.002 Employer attraction3.711.23----Note. df = degrees of freedom; F = F-statistic; M = Mean; SD = Standard deviation; B = Unstandardized beta coefficient; SE = standard error; t = t-statistic; p = significance level; Scale 1-7 a. Predictors: (Constant), Workplace atmosphere, Job opportunities, Industry characteristics, Excitement, Sincerity, Prestige, Subjective norm.b. Dependent Variable: Employer Attraction.N= 197 (88 men and 109 women). QUESTIONS1. a. Discuss the following statement: “One of the most important issues in regression analysis concerns model specification (the determination of which independent variables should be included in or excluded from a regression equation).” b. Do you like Timothy’s model? Is it, for example, in line with Song Mei Hui’s ideas? 2. What’s the difference between simple regression analysis and multiple regression analysis?3. Why can’t Timothy run a series of simple regressions (for instance three or seven) to test the hypotheses of his study? 4. Provide the equation of Timothy’s model. 5. Interpret the results of the regression analysis. Discuss: a. the model fit; b. the significance of the model; c. the constant; d. the statistical validity of the beta coefficients; e. the face validity of the results.6. A common problem encountered in regression analysis is multicollinearity. a. What is multicollinearity and how does it affect the estimates of the regression coefficients?b. Describe two ways to test for multicollinearity. Which one do you prefer?c. Suppose that multicollinearity is a problem in this study. What can Timothy do about it? d. Do you expect that multicollinearity is a problem in this study? Explain.7. Timothy suggests that Pierce & Pierce should create more exciting jobs to attract more employees since the mean of the independent variable “excitement” is relatively low. Do you agree?8. What managerial conclusions can you draw based on the results of the regression analysis? 9. Song Mei Hui believes that the gender of potential employees may affect the original relationship between prestige and employer attraction. She asks Timothy to test this idea.a. How can Timothy test this idea? b. Provide a new equation of the model: include Song’s ideas about the moderating effect of gender on the relationship between prestige and employer attraction.10. Discuss the following statement: “Regression analysis does not address the issue of causality.”