case study 2

Finance Case Study

Integrated Lighting Technologies (Canada) Inc.

Assume 2007 expected hours has been the expected hours over the past 5 years

Expected Shipping Hours (2007)

Expected Receiving Hours (2007)

Total Expected Hours (2007)

Actual Shipping Hours

Actual Receiving Hours

Total Hours

Shipping Overtime Hours

Receiving Overtime Hours

Total Excess Hours Worked - Overtime

Expected Shipping Wages (Long-time employees) ($)

Expected Receiving Wages (Long-time employees) ($)

Total Wages (Long-time employees) ($)

1,072,500.00

1,104,950.00

1,172,050.00

1,207,250.00

Market-related Shipping Wages ($)

Market-related Receiving Wages ($)

Total Market-related Wages ($)

880,000.00

Actual Shipping Wages ($)

1,027,056.06

1,104,922.30

1,192,288.92

1,281,401.64

1,361,884.03

Actual Receiving Wages ($)

217,442.94

223,877.94

235,100.59

245,810.56

252,232.46

Total Wages ($)

1,244,499.00

1,328,800.24

1,427,389.51

1,527,212.19

1,614,116.49

Shipping Wages - Overtime

149,556.06

200,872.30

261,238.92

322,451.64

374,134.03

Receiving Wages - Overtime

22,442.94

22,977.94

28,200.59

32,710.56

32,732.46

Total Excess Wages - Overtime (against expected)

171,999.00

223,850.24

289,439.51

355,162.19

406,866.49

16%

20%

25%

30%

34%

Shipping Wages - Overtime (2007 only)

641,884.03

Receiving Wages - Overtime (2007 only)

92,232.46

Total Excess Wages - Overtime (against market-related benchmark)

734,116.49

83%

Question 2

Major issues uncovered in financial workings include the following:

The Board is correct in their assessment that Wayne McBride is not suitable to run the Canadian operation as the overtime problem has exacerbated over the five years when compared to the standard expected hours of work.

2003

2004

2005

2006

2007

Shipping Overtime Hours

7,669.54

9,998.62

12,626.34

15,131.47

17,044.83

Receiving Overtime Hours

1,150.92

1,143.75

1,363.01

1,534.99

1,491.23

Total Excess Hours Worked - Overtime

8,820.46

11,142.37

13,989.34

16,666.46

18,536.06

Overtime ratio to expected

16%

20%

25%

30%

34%

Although Jason Cameron is responsible for the Distribution Division, he is newly hired and cannot be blamed for a problem that has taken five years to escalate. Instead, the fault should lay squarely on Wayne McBride's shoulders as he is supposed to be knowledgeable in the business and yet he has not picked up the problem over time.

In line with the greater overtime, the wages bill has climbed up at the same rate. With the wage rate increasing over time, the company has suffered losses by paying out higher wages on overtime. Once again, it is unacceptable that the wage bill could have crept up in this manner and only be addressed in 2007 when the problem was escalating over the past five years.

2003

2004

2005

2006

2007

Shipping Wages - Overtime

149,556.06

200,872.30

261,238.92

322,451.64

374,134.03

Receiving Wages - Overtime

22,442.94

22,977.94

28,200.59

32,710.56

32,732.46

Total Excess Wages - Overtime (against expected)

171,999.00

223,850.24

289,439.51

355,162.19

406,866.49

Wages ratio to expected

16%

20%

25%

30%

34%

Relative to the market, the wages are totally out of line with the market norms. In fact they are 83% higher than the market related wages.

2007

Shipping Wages - Overtime (2007 only)

641,884.03

Receiving Wages - Overtime (2007 only)

92,232.46

Total Excess Wages - Overtime (against market-related benchmark)

734,116.49

83%

With the labour rate per hour increasing to $22.72 in 2008 with the long-time employees, the business will struggle to contain this problem if there is no further change to the modus operandi. The number of long time employees is affecting the businesses ability to deliver on sound performance and this will need to change by switching long time employees with new staff on lower wage rates. The business has other divisions which could possibly absorb the long time employees and making them more productive elsewhere. Lay-offs may be necessary so that there can be an eventual replacement with cheaper labour. The only concern with lay-offs is that those who are left will be pressured to do more work and there is already a morale issue. Lay-offs may however be counterproductive.

It is clearly evident that there is no controlled action on overtime controls and no link to productivity and profitability and this will adversely affect the company into 2008 if there is no significant change. It is inexcusable that no action was taken during the five years to contain overtime.

The excessive overtime may be directly linked to the morale issue and this will need intervention in order to understand the core of issues.

Sales revenue is in fact in decline and this is resulting in a declining gross margin percentage from 40% in 2003 to 31% in 2007. This is not sustainable arrangement as this means that the profitability of the company is in danger having lost 9% over five years; with excessive overtime, the net profit of the company will be adversely affected.

The average number of staff has increased without a commensurate increase in sales or gross margin. There is no justification for the higher staff numbers.

Question 3

Refer Question 1 workings for formula amounts below.

Labour rate and Labour Efficiency Variances for 2007:

Variances from Standards

Direct labour variances:

a. (Actual Hours x Actual Rate) -- (Standard Hours x Standard Rate) = Total Labour Variance (TLV).

b. (Actual Hours x Actual Rate) -- (Actual Hours x Standard Rate) = Labour Price Variance (LPV).

c. (Actual Hours x Standard Rate) -- (Standard Hours x Standard Rate) = Labour Quantity Variance (LQV).

a)

Total Labour Variance (TLV)

734,116.49

Labour Price Variance (LPV)

437,539.55

c)

Labour Quantity Variance (LQV)

296,576.94

2003

2004

2005

2006

2007

Standard Labour Rate (2007) ($)

16.00

16.00

16.00

16.00

16.00

Actual Labour Rate (2007) ($)

19.50

20.09

20.69

21.31

21.95

Overpayment on Labour Rate ($)

3.50

4.09

4.69

5.31

5.95

37%

Revenue per Full Time Employee ($)

6,481,481.48

6,717,407.41

6,697,735.00

6,800,668.60

6,880,557.86

% change in Revenue per FTE (year on year)

3.64%

-0.29%

1.54%

1.17%

Lines Shipped per Full Time Employee

21,929.68

23,574.41

24,894.58

26,667.00

29,623.11

% change in Lines Shipped per FTE (year on year)

7.50%

5.60%

7.12%

11.09%

Lines Received per Full Time Employee

7,270.40

7,488.60

7,148.36

7,613.09

8,336.36

% change in Lines Received per FTE (year on year)

3.00%

-4.54%

6.50%

9.50%

Total Lines per Full Time Employee

19,215.00

20,595.56

21,408.71

22,989.93

25,585.97

% change in Total Lines per FTE (year on year)

7.18%

3.95%

7.39%

11.29%

Assume rate has remained static over past 5 years

Question 4

Recommendations for Management for improvement include the following:

1. Production, Management Change, Performance Balanced Scorecard and Management Monitoring all need to be addressed.

2. Daily, weekly and monthly variance reports on key statistics (overtime vs. expected; budget vs. actual) must be implemented and a red flag system introduced where there is a variance greater than the accepted norm.

3. Training days to be reduced with level of experience -- all Logistics employees are long-time employees who would not need the standard three days a new recruit would need.

4. Report to Board on key statistics from each segment -- "no surprises" operation model on a monthly basis; full disclosure is required to demonstrate management controls are effective.

5. Identify who is directly responsible for the problem (i.e. Wayne or Jason). Jason is newly appointed therefore his probation period must be extended to ensure that the company's options are kept open in the event he does not manage to turn the situation around; Wayne will be held accountable ultimately.

6. Address morale issue amongst existing employees. It could be that employees are being overworked and are over tired and therefore not as productive as they should be.

7. Consider changing the staff shifts so that they are short enough for employees to be productive during the time they are at work.

8. Address balance of long-time employees -- the high level of long time employees is what is pushing the wages away from expectation; where possible replace long time employees with newer employees on lower wages.