Finance Case Study Integrated Lighting Case Study

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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.

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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......

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