Chapter 12: Chapter 12

Stanmore Corporation makes a special-purpose machine, D4H, used in the textile industry. Stanmore has designed the D4H machine for 2017 to be distinct from its competitors. It has been generally regarded as a superior machine. Stanmore presents the following data for 2016 and 2017 $$\begin{array}{lrr} & 2016 & 2017 \\ \hline \text { 1. Units of D4H produced and sold } & 200 & 210 \\ \text { 2. Selling price } & \$ 40,000 & \$ 42,000 \\ \text { 3. Direct materials (kilograms) } & 300,000 & 310,000 \\ \text { 4. Direct material cost per kilogram } & \$ 8 & \$ 8.50 \\ \text { 5. Manufacturing capacity in units of D4H } & 250 & 250 \\ \text { 6. Total conversion costs } & \$ 2,000,000 & \$ 2,025,000 \\ \text { 7. Conversion cost per unit of capacity (row 6 \div row 5) } & \$ 8,000 & \$ 8,100 \\ \text { 8. Selling and customer-service capacity } & 100 \text { customers } & 95 \text { customers } \\ \text { 9. Total selling and customer-service costs } & \$ 1,000,000 & \$ 940,500 \\ \text { 10. Selling and customer-service capacity cost per customer } & \$ 10,000 & \$ 9,900 \\ \text { (row 9 \div row 8) } & & \end{array}$$ Stanmore produces no defective machines, but it wants to reduce direct materials usage per D4H machine in \(2017 .\) 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 Stanmore can support, not the actual number of customers it serves. Stanmore has 75 customers in 2016 and 80 customers in 2017 1\. Is Stanmore's strategy one of product differentiation or cost leadership? Explain briefly. 2\. Describe briefly key measures that you would include in Stanmore's balanced scorecard and the reasons for doing so.

As a result of the actions taken, quality has significantly improved in 2017 while rework and unit costs of the Orlicon have decreased. Scott has reduced manufacturing capacity because capacity is no longer needed to support rework. Scott has also lowered the Orlicon's selling price to gain market share and unit sales have increased. Information about the current period (2017) and last period (2016) follows. $$\begin{array}{lrr} & 2016 & 2017 \\ \hline \text { 1. Units of 0rlicon produced and sold } & 16,000 & 22,000 \\ \text { 2. Selling price } & \$ 95 & \$ 80 \\ \text { 3. Direct materials used (kits*) } & 20,000 & 22,000 \\ \text { 4. Direct material cost per kit* } & \$ 32 & \$ 32 \\ \text { 5. Manufacturing capacity in kits processed } & 28,000 & 26,000 \\ \text { 6. Total conversion costs } & \$ 560,000 & \$ 520,000 \\ \text { 7. Conversion cost per unit of capacity (row 6 \div row 5) } & \$ 20 & \$ 20 \\ \text { 8. Selling and customer-service capacity } & 180 \text { customers } & 180 \text { customers } \\ \text { 9. Total selling and customer-service costs } & \$ 27,000 & \$ 32,400 \\\ \text { 10. Selling and customer-service capacity cost per customer } & \$ 150 & \$ 180 \\ \text { (row 9 \div row 8) } & \text { } \end{array}$$ Conversion costs in each year depend on production capacity defined in terms of kits that can be processed, not the actual kits started. Selling and customer-service costs depend on the number of customers that Scott can support, not the actual number of customers it serves. Scott has 140 customers in 2016 and 160 customers in 2017 1\. Calculate operating income of Scott Company for 2016 and 2017 . 2\. Calculate the growth, price-recovery, and productivity components that explain the change in operating income from 2016 to 2017 3\. Comment on your answer in requirement 2. What do these components indicate?

Following is a random-order listing of perspectives, strategic objectives, and performance measures for the balanced scorecard. $$\begin{array}{ll} \text { Perspectives } & \text { Performance Measures } \\ \hline \text { Internal business process } & \text { Percentage of defective- product units } \\ \text { Customer } & \text { Return on assets } \\ \text { Learning and growth } & \text { Number of patents } \\ \text { Financial } & \text { Employee turnover rate } \\ \text { Strategic 0bjectives } & \text { Net income } \\ \hline \text { Acquire new customers } & \text { Customer profitability } \\ \text { Increase shareholder value } & \text { Percentage of processes with real-time feedback } \\ \text { Retain customers } & \text { Return on sales } \\ \text { Improve manufacturing quality } & \text { Average job-related training-hours per employee } \\ \text { Develop profitable customers } & \text { Return on equity } \\ \text { Increase proprietary products } & \text { Percentage of on-time deliveries by suppliers } \\ \text { Increase information-system capabilities } & \text { Product cost per unit } \\ \text { Enhance employee skills } & \text { Profit per salesperson } \\ \text { 0n-time delivery by suppliers } & \text { Percentage of error-free invoices } \\ \text { Increase profit generated by each salesperson } & \text { Customer cost per unit } \\ \text { Introduce new products } & \text { Earnings per share } \\ \text { Minimize invoice-error rate } & \text { Number of new customers } \\ & \text { Percentage of customers retained } \end{array}$$ For each perspective, select those strategic objectives from the list that best relate to it. For each strategic objective, select the most appropriate performance measure(s) from the list

Balanced scorecard. (R. Kaplan, adapted) Petrocal, Inc., refines gasoline and sells it through its own Petrocal gas stations. 0 n the basis of market research, Petrocal determines that \(60 \%\) of the overall gasoline market consists of "service-oriented customers," medium- to high-income individuals who are willing to pay a higher price for gas if the gas stations can provide excellent customer service, such as a clean facility, a convenience store, friendly employees, a quick turnaround, the ability to pay by credit card, and high-octane premium gasoline. The remaining \(40 \%\) of the overall market are "price shoppers" who look to buy the cheapest gasoline available. Petrocal's strategy is to focus on the \(60 \%\) of service-oriented customers. Petrocal's balanced scorecard for 2017 follows. For brevity, the initiatives taken under each objective are omitted. $$\begin{array}{lccc} & \text { Target } & \text { Actual } \\ \text { 0bjectives } & \text { Measures } & \text { Performance } & \text { Performance } \\ \hline \text {Financial Perspective} & & & \\ \text { Increase shareholder value } & \text { Operating-income changes from } & & \\ & \text { price recovery } & \$ 80,000,000 & \$ 85,000,000 \\ & \text { Operating-income changes from } & & \\ & \text { growth } & \$ 60,000,000 & \$ 62,000,000 \\ \text {Customer Perspective} & & & \\ \text { Increase market share } & \text { Market share of overall gasoline } & & \\ & \text { market } & 4 \% & 3.8 \% \\ \text { Internal-Business-Process Perspective} & & & \\ \text { Improve gasoline quality } & \text { Quality index } & \text { 92 points } & \text { 93 points } \\ \text { Improve refinery performance } & \text { Refinery-reliability index (\%) } & 91 \% & 91 \% \\ \text { Ensure gasoline availability } & \text { Product-availability index (\%) } & 99 \% & 99.5 \% \\ \text { Learning-and-Growth Perspective } & & & \\ \text { Increase refinery process capability } & \text { Percentage of refinery processes } & & \\ & \text { With advanced controls } & 94 \% & 95 \% \end{array}$$ 1\. Was Petrocal successful in implementing its strategy in \(2017 ?\) Explain your answer. 2\. Would you have included some measure of employee satisfaction and employee training in the learning-and-growth perspective? Are these objectives critical to Petrocal for implementing its strategy? Why or why not? Explain briefly. 3\. Explain how Petrocal did not achieve its target market share in the total gasoline market but still exceeded its financial targets. Is "market share of overall gasoline market" the correct measure of market share? Explain briefly. 4\. Is there a cause-and-effect linkage between improvements in the measures in the internal-businessprocess perspective and the measure in the customer perspective? That is, would you add other measures to the internal-business- process perspective or the customer perspective? Why or why not? Explain briefly. 5\. Do you agree with Petrocal's decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecard? Explain briefly.

What is a customer preference map, and why is it useful?

Gardini Chocolates makes custom-labeled, high-quality, specialty candy bars for special events and advertising purposes. The company employs several chocolatiers who were trained in Germany. The company offers many varieties of chocolate, including milk, semi-sweet, white, and dark chocolate. It also offers a variety of ingredients, such as coffee, berries, and fresh mint. The real appeal for the company's product, however, is its custom labeling. Customers can order labels for special occasions (for example, wedding invitation labels) or business purposes (for example, business card labels). The company's balanced scorecard for 2017 follows. For brevity, the initiatives taken under each objective are omitted. $$\begin{array}{lccc} & \text { Target } & \text { Actual } \\ \text { 0bjectives } & \text { Measures } & \text { Performance } & \text { Performance } \\ \hline \text {Financial Perspective} & & & \\ \text { Increase shareholder value } & \text { Operating-income changes from } & & \\ & \text { price recovery } & \$ 1,000,000 & \$ 1,500,000 \\ & \text { Operating-income changes from } & & \\ & \text { growth } & \$ 200,000 & \$ 250,000 \\ & \text { cost savings due to reduced } & & \\ & \text { packaging size } & \$ 40,000 & \$ 50,000 \\ \text { Customer Perspective} & & & \\ \text { Increase market share } & \text { Market share of overall candy bar } & & \\ & \text { market } & 8 \% & 7.8 \% \\ \text { Increase the number of new } & \text { Number of new product offerings } & & \\ \text { product offerings } & & & \\ \begin{array}{c} \text { Increase customer acquisitions } \\ \text { due to sustainability efforts } \end{array} & \begin{array}{c} \text { Percentage of new customers } \\ \text { surveyed who required recycled } \end{array} \\ \text { Internal-Business-Process Perspective } & \text { paper options } & 35 \% & 40 \% \\ \begin{array}{c} \text { Reduce time to customer } \\ \text { Increase quality } \end{array} & \begin{array}{c} \text { Average design time } \\ \text { Internal quality rating (10-point } \\ \text { scale) } \end{array} & \begin{array}{c} \text { Recycled materials used as a } \\ \text { percentage of total materials used } \end{array} & \text { points } \\ \begin{array}{c} \text { Increase use of recycled as } \\ \text { materials } \end{array} & \begin{array}{c} \text { Leaction of the ore of the paction of the some } \\ \text { Learning-and-Growth Perspective } \end{array} \\ \begin{array}{l} \text { Increase number of professional Number chocoration } \\ \text { chocolatiers } \end{array} \end{array}$$ 1\. Was Gardini successful in implementing its strategy in \(2017 ?\) Explain your answer. 2\. Would you have included some measure of customer satisfaction in the customer perspective? Are these objectives critical to Gardini for implementing its strategy? Why or why not? Explain briefly. 3\. Explain why Gardini did not achieve its target market share in the candy bar market but still exceeded its financial targets. Is "market share of overall candy bar market" a good measure of market share for Gardini? Explain briefly. 4\. Do you agree with Gardini's decision not to include measures of changes in operating income from productivity improvements under the financial perspective of the balanced scorecard? Explain briefly. 5\. Why did Gardini include balanced scorecard standards relating to environmental and social performance? Is the company meeting its performance objectives in these areas?

Comtex Company provides cable and Internet services in the greater Boston area. There are many competitors that provide similar services. Comtex believes that the key to financial success is to offer a quality service at the lowest cost. Comtex currently spends a significant amount of hours on installation and post-installation support. This is one area that the company has targeted for cost reduction. Comtex's balanced scorecard for 2017 follows. $$\begin{array}{lccc} & & \text { Target } & \text { Actual } \\ \text { 0bjectives } & \text { Measures } & \text { Performance } & \text { Performance } \\ \hline \text {Financial Perspective} & & & \\ \text { Increase shareholder value } & \text { Operating-income changes from } & & \\ & \text { productivity } & \$ 2,400,000 & \$ 800,000 \\ & \text { 0perating-income changes from } & & \\ & \text { growth } & \$ 520,000 & \$ 250,000 \\ & \text { Increase in revenue from new } & & \\ & \text { customer acquisition } & \$ 50,000 & \$ 24,000 \\ \text { Customer Perspective} & & & \\ \text { Increase customer satisfaction } & \text { Positive customer survey } & & \\ & \text { responses } & 70 \% & 65 \% \\ \text { Increase customer acquisition } & \text { New customers acquired through } & & \\ & \text { company sponsored } & & \\ & \text { community events } & 475 & 350 \\ \text { Internal-Business-Process Perspective } & & & \\ \text { Develop innovative services } & \text { Research and development } & & \\\ & \text { costs as a percentage } & & \\ \text { Increase installation efficiency } & \text { of revenue } & 5 \% & 6 \% \\ \text { Increase community involvement } & \text { Installation time per customer } & 5 \text { hours } & 4.5 \text { hours } \\ & \text { Number of new programs with } & & \\ \text { Decrease workplace injuries } & \text { community organizations } & 12 & 15 \\ & \text { Number of employees injured } & & \\ \text { Learning-and-Growth Perspective } & & & \\ \text { Increase employee competence } & \text { in the workplace } & <3 & 7 \\\ \text { Increase leadership skills } & \text { Number of annual training-hours } & & \\ \text { Increase employee safety } & \text { per employee } & 10 & 11 \\ \text { awareness } & \text { Number of leadership workshops } & & \\ & \text { fffered } & 2 & 1 \\ & \text { Percent of employees who have } & & \\ & \text { completed safety certification } & & \\ & \text { training } & 100 \% & 95 \% \end{array}$$ 1\. Was Comtex successful in implementing its strategy in \(2017 ?\) Explain. 2\. Do you agree with Comtex's decision to include measures of developing innovative services (research and development costs) in the internal-business- process perspective of the balanced scorecard? Explain briefly. 3\. Is there a cause-and-effect linkage between the measures in the internal- business-process perspective and the customer perspective? That is, would you add other measures to the internal-business-process perspective or the customer perspective? Why or why not? Explain briefly. 4\. Why do you think Comtex included balanced scorecard measures relating to employee safety and community engagement? How well is the company doing on these measures?

Gable Company manufactures wallets from fabric. In 2016 , Gable made 2,160,000 wallets using 1,600,000 yards of fabric. In \(2016,\) Gable has capacity to make 2,448,000 wallets and incurs a cost of \(\$ 8,568,000\) for this capacity. In \(2017,\) Gable plans to make 2,203,200 wallets, make fabric use more efficient, and reduce capacity. Suppose that in 2017 Gable makes 2,203,200 wallets, uses 1,440,000 yards of fabric, and reduces capacity to 2,295,000 wallets at a cost of \(\$ 7,803,000\) 1\. Calculate the partial-productivity ratios for materials and conversion (capacity costs) for 2017 , and compare them to a benchmark for 2016 calculated based on 2017 output. 2\. How can Gable Company use the information from the partial-productivity calculations?

What is reengineering?

What are four key perspectives in the balanced scorecard?