Analysing the strategic options You have now reached the assessment for 'Analysing the strategic options'. The following 6 options have been identified by the Strategy Development sub-committee. You are now required to calculate the effect on net profit (to the nearest $M’000) of implementing each of the 6 options, as independent strategies. The following exercise is better performed on a laptop or desktop. You need to download a spreadsheet which is to be used with Excel or other compatible spreadsheet software. The information you need to answer the following questions will be available to you within the spreadsheet. You will need to use this information and the downloaded spreadsheet to do carry out relevant calculations to arrive at your answers.
Please treat each strategic option as totally independent of any other option and use the following profit or loss statement as the basis for your analysis. Assume that all costs are fixed apart from materials which are a variable cost, dependent on the volume of sales.
Analysing the 6 strategic optionsScreen 1 of 6 As a result of MEXIT, Telford Engineering had lost 30% of its pre-MEXIT export sales to CETA customers, due to increased trade and tariff barriers with CETA. (See P/L account before MEXIT in the spreadsheet). A new opportunity has now been negotiated to sell the original 30% post-MEXIT loss in CETA exports to a range of customers in alternative export markets on another continent. These can be sold at the same price, bringing the factory back to full capacity. The materials cost of these additional sales, as a percentage of sales to the nearest whole percentage, will be the same as it is currently (See P/L account one year after MEXIT under the outsource option in the spreadsheet). $M'000 Strategic planning : Analysing the 6 strategic options
Analysing the 6 strategic optionsScreen 2 of 6 After MEXIT the exchange rate value of $M fell from $C1.40 to the current rate of $C1.12. This has meant that the material imports from CETA have become significantly more expensive. The translated cost of these imported materials from CETA in the current P/L account is $M’1,100,000. The purchasing team have identified an alternative domestic supplier source for all of the imported materials from CETA, who will charge Telford Engineering the same amount as it originally cost the company to import these materials at the pre-MEXIT exchange rate. $M'000 Strategic planning : Analysing the 6 strategic options
Analysing the 6 strategic optionsScreen 3 of 6 Non-core functions in the General Administration department can be outsourced, saving 20% of the staff costs and other costs, included immediately below under the general admin heading, as stated in the current P/L account. $M'000 Strategic planning : Analysing the 6 strategic options
Analysing the 6 strategic optionsScreen 4 of 6 Following an innovative business process improvement proposal in manufacturing at no extra development cost, it is possible to reduce the current staff costs in production, by 40%. $M'000 Strategic planning : Analysing the 6 strategic options
Analysing the 6 strategic optionsScreen 5 of 6 An option to repurpose the main product of Telford Engineering can now be explored. This option is to construct steel reinforcement frames for factory construction in countries vulnerable to earthquakes. This would mean that all current spare capacity could be committed to this additional product. This will increase the current sales value by 10% and the materials costs will remain at 30% of sales for this additional output. $M'000 Strategic planning : Analysing the 6 strategic options
Analysing the 6 strategic optionsScreen 6 of 6 One of the Strategy and Development sub-committee members suggested that as Telford Engineering has core capability in constructing steel frames for bridge building, all the spare capacity could be used to fabricate a completely new, but similarly constructed product using the same process of manufacture. The proposal is to start producing ‘booms’ or ‘jibs’ for large crane manufacturers. This would cost $240,000 in additional development costs to convert and create spare capacity, but will open a completely new higher value market for Telford Engineering, increasing the current sales value by 20%. The higher sales margin would mean that the total cost of materials for this product will only be 25% of sales. $M'000 Strategic planning : Analysing the 6 strategic options
TELFORD ENGINEERING P/L account: "Menai $,000 P/L (before MEXIT)" "Menai $,000 Actual P/L (one year after MEXIT under outsource option)" Sales 8,000 7,200 * Note: Exports to CETA based customers pre-MEXIT = 40% and the volume of these fell by 30% post-MEXIT Costs Production costs Materials ** -2,000 -2,160 ** Note: 50% of imports Pre-MEXIT are from CETA based suppliers Staff costs -1,500 -1,800 Overheads -300 -300 Distribution costs Staff costs -600 -680 Other costs -160 -160 Gen Admin costs Staff costs -900 -1,000 Other costs -200 -200 Accounting costs * -800 -700 Finance costs -100 -100
Net profit 1,440 100 Exchange rate: C$/M$ 1.40 1.12
I know how to calculate three of these which are NO3/4/5 Analysing the 6 strategic optionsScreen 3 of 6 Non-core functions in the General Administration department can be outsourced, saving 20% of the staff costs and other costs, included immediately below under the general admin heading, as stated in the current P/L account. $M'000 About the staff costs and other costs of the outsourced is 1000 plus 200, so total of them is 1200 and if this strategic applied ,then will save 20% of this amount which is 240 Analysing the 6 strategic optionsScreen 4 of 6 Following an innovative business process improvement proposal in manufacturing at no extra development cost, it is possible to reduce the current staff costs in production, by 40%. $M'000 this one just think it simply to manufacturing staff costs is 1800, save 40% is 720 Analysing the 6 strategic optionsScreen 5 of 6 An option to repurpose the main product of Telford Engineering can now be explored. This option is to construct steel reinforcement frames for factory construction in countries vulnerable to earthquakes. This would mean that all current spare capacity could be committed to this additional product. This will increase the current sales value by 10% and the materials costs will remain at 30% of sales for this additional output. $M'000 Current sales is 7200, so increased by 10% will be 720, materials cost will remain 30% of sales which is 720*0.3=216, so the influence will be 720-216=504
the other three I didn't figure them out yet, hope you already did it and share to me, too
Analysing the 6 strategic optionsScreen 6 of 6
One of the Strategy and Development sub-committee members suggested that as Telford Engineering has core capability in constructing steel frames for bridge building, all the spare capacity could be used to fabricate a completely new, but similarly constructed product using the same process of manufacture. The proposal is to start producing ‘booms’ or ‘jibs’ for large crane manufacturers. This would cost $240,000 in additional development costs to convert and create spare capacity, but will open a completely new higher value market for Telford Engineering, increasing the current sales value by 20%. The higher sales margin would mean that the total cost of materials for this product will only be 25% of sales. $M'000
Increasing the current sales value by 20%, so 720020 = 1440, total material cost will be 25% of sale= 14400.25=360, The profit will be 1440-360-240( given)=840
The rest of the 2 I also can't figure out , please share with us if you know how to calculate
Translated cost of these imported materials from CETA in the current P/L account is $M’1,100,000. At current exchange rate C/M$ 1.12, we only can buy C$ 1,232 stock ($M1,100 x 1.12). Purchasing team found a supplier can allow Telford buy C$ 1,232 value of stock by using pre-MEXIT exchange rate C/M$ 1.40. It means Telford only need to use M$ 880 to buy C$ 1,232 value stock (C$1,232 / 1.40). The impact to P&L is only 220 (current cost M$1,100 – new cost M$880).
