Tutorial Questions Week 6

15.20 Balanced scorecard

Pineway Electric Limited (PEL) makes electric motors. It competes and plans to grow by selling
high quality motors at a low price and delivering them to customers quickly after receiving
customers’ orders. There are many other manufacturers who produce similar motors. PEL
believes that continuously improving its production processes and having satisfied employees
are critical to implementing its strategy in 2019.

Required
1. Identify and briefly explain PEL’s 2019 strategy.
2. Ramsey Ltd, a competitor of PEL, produces electric motors with more features and
design combinations than PEL at a higher price. Ramsey’s motors are of high quality but
require more time to produce and so have longer delivery times. Draw a simple
customer preference map for PEL and Ramsey using the attributes of price, delivery
time, quality and design.
3. Indicate two measures that you would expect to see under each perspective in PEL’s
balanced scorecard for 2019. Explain your answer using a strategy map.

Solution:
Balanced scorecard
1. PEL uses a cost-leadership strategy. They plan to grow by selling high-quality motors at a
low price and speedy delivery.

3. Financial perspective
 Operating profit from growth
 Operating profit from productivity gain
 Cost reductions in key areas.
Customer perspective
 Market share in motor market
 Number of new customers

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  Customer satisfaction index.
Internal business processes perspective
 Productivity
 Order delivery time
 On time delivery.
Learning and growth perspective
 Percentage of employees trained in process and quality management
 Employee satisfaction ratings.

Increase
Grow
FINANCIAL Reduce operating
operating
PERSPECTIVE Costs income from
income
productivity

Increase
Increase Increase
CUSTOMER market share in
customer new
PERSPECTIVE corrugated
satisfaction customers
boxes market

Improve Improve
INTERNAL- productivity quality
BUSINESS-
PROCESS
PERSPECTIVE
Improve
Deliver
manufacturing
on-time
processes

Align
LEARNING-
employee and Develop
AND GROWTH-
organization process skill
PERSPECTIVE
goals

15.22 Strategy, balanced scorecard

Winslow Ltd makes a special-purpose machine, D4H, used in the textile industry. Winslow Ltd
has designed the D4H machine for 2019 to be distinct from its competitors. It has been generally
regarded as a superior machine. Winslow Ltd presents the following data for 2018 and 2019:

2018 201
9
1. Units of D4H produced and sold 200 210
2. Selling price $40 000 $42 000
3. Direct materials (kilograms) 300 000 310 000
4. Direct materials cost per kilogram $8.80 $9.35
5. Production capacity in units of D4H 250 250
6. Total conversion costs $2 000 000 $2 025 000
7. Conversion cost per unit of capacity (row 6 ÷ row 5) $8 000 $8 100

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 8. Selling and customer-service capacity 100 customers 95 customers
9. Total selling and customer-service costs $1 000 000 $940 500
10. Selling and customer-service capacity cost per $10 000 $9 900
customer (row 9 ÷ row 8)

Winslow Ltd produces no defective machines but it wants to reduce direct materials usage per
D4H machine in 2019. Conversion costs in each year depend on production capacity defined in
terms of D4H units that can be produced, not the actual units produced. Selling and customer-
service costs depend on the number of customers that Winslow can support, not the actual
number of customers it serves. Winslow has 75 customers in 2018 and 80 customers in 2019.

Required
1. Identify and briefly explain Winslow’s strategy.
2. Describe briefly key elements that you would include in Winslow’s balanced scorecard
and the reasons for doing so.

Solution:
Strategy, balanced scorecard

1. Winslow Ltd follows a product differentiation strategy in 2019. Winslow’s D4H machine is
distinct from its competitors and generally regarded as superior to competitors’
products. To succeed, Winslow must continue to differentiate its product and charge a
premium price.

2. Balanced scorecard measures for 2019:

Financial Perspective

(1) Increase in operating profit from charging higher margins

(2) Price premium earned on products.

These measures indicate whether Winslow has been able to charge premium prices and
achieve operating profit increases through product differentiation.

Customer Perspective

(1) Market share in high-end special-purpose textile machines

(2) Customer satisfaction
(3) New customers.

Winslow’s strategy should result in improvements in these customer measures

that help evaluate whether Winslow’s product differentiation strategy is
succeeding with its customers. These measures are leading indicators of
superior financial performance.

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 Internal Business Process Perspective

(1) Manufacturing quality and reduced wastage of direct materials

(2) New product features added
(3) Order delivery time.

Improvements in these measures are expected to result in more distinctive

products delivered to its customers and in turn superior financial performance.

Learning and Growth Perspective

(1) Development time for designing new machines

(2) Improvements in manufacturing processes
(3) Employee education and skill levels
(4) Employee satisfaction.

Improvements in these measures are likely to improve Winslow’s capabilities to produce

distinctive products that have a cause-and-effect relationship with improvements in
internal business processes, which in turn lead to customer satisfaction and financial
performance.

15.23 Strategic analysis of operating profit (continuation of 15.22)

Required
1. Calculate the operating profit of Winslow Ltd in 2018 and 2019.
2. Calculate the growth, price-recovery and productivity components that explain the
change in operating profit from 2018 to 2019.
3. Analyse and comment on your answer to Requirement 2.

Solution:
Strategic analysis of operating profit (continuation of 15.22)

1. Operating profit for each year is as follows:

2018 2019

Revenue ($40 000  200; $42 000  210) $8 000 000 $8 820 000
Costs
Direct materials costs $2 640 000 $2 898 500
($8.80  300 000; $9.35  310 000)
Manufacturing conversion costs $2 000 000 $2 025
000
($8 000  250; 8 100  250)
Selling & customer service costs $1 000 000
500
($10 000  100; $9 900  95)

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 Total costs $5 640 000 $5 864 000
Operating profit $2 360 000 $2 956
000
Change in operating profit $596 000 F

2. The Growth Component

 Actual units Actual units of  Selling
Revenue effect  of output sold  output sold   price
of growth =  in 2019 in 2018 
 in 2018
= (210  200)  $40 000 = $400 000 F

 Units of Actual units 

 input required of inputs 
Cost effect of to produce 
 2019 used to  Input
growth for  output produce  price
variable costs =  in 2018 2018 ouput   in 2018

 Actual units of capacity in Actual 

Cost effect of  2018 because adequate  units of  Price per unit
growth for  capacity exists to produce capacity  of capacity
fixed costs =  2019 output in 2018 in 2018  × in 2018

Kilograms of direct materials that would be required in 2019 to produce 210 units instead
of the 200 units produced in 2018, assuming the 2018 input-output relationship continued
 300 000 
  210 
into 2019, equal 315 000 kilograms  200  . Manufacturing conversion costs
and selling and customer-service capacity will not change since adequate capacity exists in
2018 to support year 2019 output and customers.

The cost effects of growth component are:

Direct materials costs (315 000  300 000)  $8.80 = $132 000 U
Manufacturing conversion costs (250  250)  $8 000 = 0
Selling & customer-service costs (100  100)  $25 000 = 0
Cost effect of growth $132 000

In summary, the net increase in operating profit as a result of the growth component
equals:
Revenue effect of growth $400 000 F
Cost effect of growth $132 000 U
Change in operating profit due to growth $268 000 F

The Price-Recovery Component

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  
Actual units
Revenue effect of = Selling price - Selling price × of output
in 2019 in 2018 sold in 2019
price - recovery
= ($42 000  $40 000)  210 = $420 000 F

Units of input
Cost effect of  Input Input  required to
price - recovery for  price in - price in  produce 2019
variable costs 2019 2018 
= × output in 2018

 Price per Price per  Actual units of capacity in

Cost effect of  unit of  unit of  2018 because adequate
price - recovery for  capacity capacity  capacity exists to produce
fixed costs
=  in 2019 in 2018  × 2019 output in 2018

Direct materials costs ($9.35  $8.80)  315 000 = $173 250 U

Manufacturing conversion costs ($8 100  $8 000)  250 = $25 000 U
Selling & customer-service costs ($9 900  $10 000)  100 = $10 000 F
Cost effect of price-recovery $188 250 U

In summary, the net increase in operating income as a result of the price-recovery

component equals:

Revenue effect of price-recover $420 000 F

Cost effect of price-recovery $188 250 U
Change in operating profit due to price-recovery $231 750 F

The Productivity Component

 Actual units of Units of input 

Cost effect of  input used  required to  Input
productivity for  to produce produce 2019  price
variable costs =  2019 output ouput in 2018   in 2019

 Actual Actual units of capacity in  Price per

Cost effect of  units of  2018 because adequate  unit of
productivity for  capacity capacity exists to produce  capacity
fixed costs =  in 2019 2019 output in 2018   in 2019

The productivity component of cost changes are

Direct materials costs (310 000  315 000)  $9.35 = $46 750 F
Manufacturing conversion costs (250  250)  $8 100 = 0
Selling & customer-service costs (95  100)  $9 900 = $49 500 F
Change in operating profit due to productivity $96 250 F

The change in operating profit between 2018 and 2019 can be analysed as follows:

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 Revenue and Revenue and Income
Income Cost Effects Cost Effects of Cost Effect of Statement
Statement of Growth Price-Recovery Productivity Amounts in
Amounts Component Component Component 2019
in 2018 in 2019 in 2019 in 2019 (5) = (1) + (2) +
(1) (2) (3) (4) (3) + (4)

Revenues $8 000 000 $400 000 F $420 000 F  8 820 000

Costs 5 640 000 132 000 188 250 U $96 250 5 864 000

Operatin $2 360 000 $268 000 $231 750 F $96 250 $2 956 000
g profit

$596 000 F
Change in operating profit

3. The analysis of operating profit indicates that a significant amount of the increase in
operating profit resulted from Winslow’s product differentiation strategy. The company
was able to continue to charge a premium price while growing sales. Winslow was also
able to earn additional operating profit by improving its productivity. The productivity
gains may be important from the standpoint of funding the product differentiation
strategy and innovation (as has been the case with the pharmaceutical industry in recent
years) but Winslow’s strategic focus has to be on differentiating its products.

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