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Question;76.;The King Mattress;Company had the following operating results for 2009-2010. In addition, the;company paid dividends in both 2009 and 2010 of $60,000 per year and made;capital expenditures in both years of $30,000 per year. The company's stock;price in 2009 was $8 and $7 in 2010. The industry average earnings multiple for;the mattress industry was 9 in 2010 and the free cash flow and sales multiples;were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000;shares of outstanding stock at the end of 2010.;The value of the;company, calculated using the sales multiple for 2010 is;A.;$1,220,000;B.;$1,620,000;C.;$2,520,000;D.;$8,400,000;E.;$7,125,000;77.;The King Mattress;Company had the following operating results for 2009-2010. In addition, the;company paid dividends in both 2009 and 2010 of $60,000 per year and made;capital expenditures in both years of $30,000 per year. The company's stock;price in 2009 was $8 and $7 in 2010. The industry average earnings multiple for;the mattress industry was 9 in 2010 and the free cash flow and sales multiples;were 18 and 1.5, respectively. The company is publicly owned and has 1,200,000;shares of outstanding stock at the end of 2010.;The market value;of the company's equity for 2011 is;A.;$1,220,000;B.;$1,620,000;C.;$2,520,000;D.;$8,400,000;E.;$7,125,000;78.;Cost Allocation and;CompensationPerformance of divisional managers;at Leakproof Faucet Corporation is judged by an evaluation ofthe;operating incomes of the divisions. Abbreviated income statements for the year;ending 2010 are shown below for the three divisions of Leakproof Faucet Corp;*;Total Corporate Overhead is allocated to each division based on the division's;proportion of total revenues. The manager of the Newton division, through;increases in manufacturing efficiency, created some additional capacity in;2010. The only way he could have utilized this capacity would have been to;manufacture a model J-5 faucet, which would have had the following impact on;the Newton division: Increase in annual revenues (in thousands) of $750.;Increase in cost of goods sold of $600. Increase in divisional overhead of;$100. Mr. Garrett, the Newton division manager, chose not to manufacture the;J-5 faucets, therefore, the additional capacity went unused. Required;(1)Prepare revised income statements for the three divisions for 2010;assuming that Mr. Garrett had chosen instead to utilizethe additional;capacity to manufacture the model J-5. (2) Calculate the contribution;margin of the Newton division if J-5 is manufactured and if it is not;manufactured. (3) Why did Mr. Garrett choose not to manufacture the J-5?;(4) Would Leakproof Faucets have benefited from the manufacture of the;J-5? (5) Identify an advantage and a disadvantage of not allocating any;corporate overhead to the divisions.;79. Choosing;Between Incentive PlansBrogdon is a ski;instructor looking for employment in the Oregon mountains. He has received;full-time job offers from two ski lodges, and must choose between them. The two;jobs seem equally attractive, so Brogdon wants to choose the lodge which will;pay him the higher compensation. Running Elk Lodge offers a wage of $8.00 per;hour for a 40 hour week, plus 30% of the fees paid by walk-on pupils desiring;private lessons, plus 40% of fees from pupils who specifically request a;private lesson from Brogdon. Blustery Ridge Lodge offers a wage of only $6.00;per hour, plus 25% of walk-on private fees, 45% of request private fees, and;15% of the fees paid by walk-on groups. Both lodges charge skiers $50 for;private lessons and $100 per 5-person group for group lessons. Brogdon's;previous experience leads him to expect weekly volume of 15 walk-on privates, 6;request privates, and 20 walk-on groups. Required: Which job should;Brogdon accept? What factors should Brogdon consider in making his choice?;80. Compensation;Review of Chapter 19Products Inc.;manufactures furniture and is organized into three large divisions: bedroom;livingroom, and dining room furniture. The following information;presents operating revenues, operating incomes and invested assets of the;company over the last three years. (all figures in 000s);The following;table shows the number of managers covered by the current compensation package;of Products Inc.;The current compensation package is an;annual bonus award. The managers share in the bonus pool. The pool is;calculated as 12% of the annual residual income of the company. The residual;income is defined as operating income minus an interest charge of 15% of;invested assets. Required: (1) Use investment turnover, return on sales;and ROI to explain the differences in profitability of the three divisions.;(2) Compute the;bonus amount to be paid during each year. Also, compute the (average);individual executive bonus amounts. (3) If the bonus were calculated by;divisional residual income what would be the bonus amounts (4) Discuss the;benefits and problems of basing the bonus on residual income of a company;compared to using divisional residual income.;81. Choosing;Bonus PlansMobile Business Incorporated (MBI);is a worldwide manufacturing company that specializes in high technologyproducts;for the aerospace, automotive and plastics industries. The state-of-the-art;technology and business innovation have been key to MBI's success over the last;ten years. After a meeting of the board of directors, there was some feeling;that the company was moving away from its goal of striving to maintain and;expand its global position through innovative management teams. One area of;concern was with the company's bonus compensation package. The company's;current bonus plan focuses on giving reward based on the utilization of capital;within the company, i.e. management of inventory, collection of receivables and;use of physical assets. Even with such a state-of-the-art bonus plan, the board;of directors is concerned with the short-term focus of the compensation;package. MBI's basis in current financial standards suggests that the future;period consequences of managerial actions will not be reflected when presenting;bonus compensation. Required: Help MBI solve the problem of basing;bonuses on short-term decisions. Develop a bonus package that takes into;consideration the long-term financial position of MBI.;82. Evaluating;an Incentive SystemHarold Small joined;Morton Electric Company eight months ago as Vice President of PersonnelAdministration.;Morton Electric Company is a small regional public utility serving 50,000;customers in three communities and the surrounding rural area. Electricity is;generated at a central plant, but each community has a substation and its own;work crew. The total labor force at the central plant and three substations;exclusive of administrative and clerical personnel, numbers 180 people.;Small;designed and introduced a Performance Evaluation and Review System (PERS);shortly after joining Morton. This system was based upon a similar system he;had developed and administered in his prior position with a small company. He;thought the system had worked well and that it could be easily adapted for use;at Morton. The purpose of PERS, as conceived by Small, is to provide a positive;feedback system for evaluating employees that would be uniform for each class;of employees. Thus, the system would indicate to employees how they were;performing on the job and help them correct any shortcomings. The Plant;Supervisors and Field Supervisors are responsible for administering the system;for the plant workers and the substation crew workers respectively. The General;Supervisors are responsible for the Plant/Field Supervisors. Employees get;personal PERS Reports monthly informing them of their current status, and there;is a review and evaluation every six months. PERS is based on a point system in;an attempt to make it uniform for all workers. There are eight categories for;evaluation with a maximum number of points for each category and a total of 100;points for the system. The eight categories for the plant and crew workers and;the maximum number of points in each category are as follows.;The;list of categories used to evaluate the Plant/Field Supervisors is slightly;different. Each employee begins the year with 100 points. If an infraction in;any of the categories is observed, one to five penalty points can be assessed;for each infraction. Notification is given to the employee indicating the;infraction and the points to be deducted. A worker who is assessed 25 points in;any one month or loses all the points in any category in one month is subject;to immediate review. Likewise, anytime an employee drops below 40 points, a;review is scheduled. The General Supervisor meets with the individual employee;and the employee's Plant/Field Supervisor at this review. If an employee has no;infractions during the month, up to 12 points can be restored to the employee's;point total - two points each for Categories 1-4 and one point each for;Categories 5-8. However, at no time can a worker have more than the maximum;allowed in each category or more than 100 points in total. When Small first;introduced PERS to the General Supervisors, they were not sure they liked the;system. Small told them how well it had worked where he had used it before.;Small's enthusiasm for the system and his likeable personality convinced the;General Supervisors that the system had merit. There were a few isolated;problems with the system in the first two months. However, Ray Meyers, a crew;worker, is very unhappy with the new system as evidenced by his conversation;with Dan Jenkins, a fellow crew worker. Meyers: "Look at this;notice of infraction - I have lost 22 points! I can't believe it!" Jenkins;How did your supervisor get you for that many points in such a short;period?" Required: (1) What are the strengths and weaknesses of the;Performance Evaluation and Review system (PERS) in terms of the design for a;review and evaluation system and for the expected motivational effects? (2);What problems might occur in the administration of the PERS system?;83. Business;AnalysisAvantronics is a manufacturer of;electronic components and accessories with total assets of $20,000,000.;Selectedfinancial ratios for Avantronics and the industry averages for;firms of similar size are presented below.;Avantronics;is being reviewed by several entities whose interests vary, and the company's;financial ratios are a part of the data being considered. Each of the parties;listed below must recommend an action based on its evaluation of Avantronics;financial position. ? Mid Coastal Bank. The bank is processing Avantronic's;application for the new five-year term note. MidCoastal has been Avantronics;banker for several years, but must re-evaluate the company's financial position;for each major transaction. ? Ozawa Company. Ozawa is a new supplier to;Avantronics, and must decide on the appropriate credit terms to extend to the;company. ? Drucker & Denon. A brokerage firm specializing in the stock of;electronics firms that are sold over-the- counter, Drucker & Denon must;decide if it will include Avantronics in a new fund being established for sale;to Drucker & Denon's clients. ? Working Capital Management Committee. This;is a committee of;Avantronics' management personnel;chaired by the chief operating officer. The committee is charged with the;responsibility of periodically reviewing the company's working capital;position, comparing actual data against budgets, and recommending changes in;strategy as needed. Required: (1) Describe the analytical use of each of;the four ratios presented above. (2) For each of the four entities described;above, identify one or two financial ratios, from those ratios presented, that;would be most valuable as a basis for its decision regarding Avantronics.(3);Discuss what the financial ratios presented in the question reveal about;Avantronics. Support your answer by citing specific ratio levels and trends as;well as the interrelationships between these ratios.;84. Wilson;Associates is a medium-size marketing organization specializing in;professional promotion and publicity services. The firm's top management;believes that it provides quality service as evidenced by the high level of;customer satisfaction. The organization consists of three departments: print;media, audio media, and visual media, each of which has a senior director in;charge. The company employs 80 clerical staff who are paid on an hourly basis;and 30 professional staff who are salaried. A large majority of the employees;have an excellent rating in their job skills, and all employees demonstrate;above average performance in their job responsibilities. The employees take;pride in their achievements, and morale is very good. Salary ranges are;established for different job classifications within the clerical staff (i.e.;clerk, clerk typist, secretary, and administrative assistant) and the;professional staff (i.e., analyst, manager, and director). A fixed-rate;structure is used for all salaries. The company offers no commissions because;it does not want its professional staff applying undue sales pressure on its;customers. Company management is proud that it does not have to resort to a;salary plus commission structure for its professionals to generate sales.;Employees are recognized for superior performances through salary increases and;promotions. Management believes that salary increases should be based on merit;and open positions are filled from within whenever possible. Top management;contends that highly skilled and motivated employees will improve productivity it;they are rewarded with annual merit pay raises and if promotions are based on;performance. Top management announced in November that the amount available for;pay increases would be 10 percent of the actual total salary expenditures for;2011. All salary increases would be effective January 1, 2010. The print media;department consists of 20 clerical and eight professional employees on January;1, 2011. Six clerical employees were added during the year at the rate of about;one every two months. Two professionals were added, one on March 1 and one on;August 1. Three employees were promoted during the year: two secretaries to;administrative assistants and one manager to director. The total actual salary;expense for the department without regard for employee benefits and employer;tax contributions was $548,000. Therefore, the total amount allocated for wage;increases for the print media department in 2010 is designated to be $54,800.;Shortly after the merit pay program was announced, the print media department;employees received their year-end evaluation conducted by the employee's;supervisor. The senior director met with each supervisor and received all;performance reports and then announced the merit pay increase for each;employee. Upon completion of this entire process, several employees complained;individually about the inequities of the merit pay program. The senior director;was concerned about the employee discontent because the people complaining were;some of the highest achievers on the staff. They tended to be at the lower;classification levels and were relatively new employees, having been with the;company for one to two years. The individuals showed potential and were highly;motivated, often working extra hours and assuming additional responsibilities.;The new employees' behavior differed slightly from the employees who had been;with the department for a longer period of time. Although highly skilled and;competent in their jobs, the veteran employees tended to be reluctant to accept;additional responsibility or to work extra hours on a regular basis. Required;1) Review Wilson and Associates' wage and compensation plan. a. Identify and;discuss the general strength of the wage and compensation plan. b. Identify and;explain the shortcomings in the administration of the merit pay increases that;are to become effective in 2010, and discuss what effect these shortcomings;could have on the group of discontent employees in the print media department.;2) Explain how this compensation program should be revised, if at all.;85. Topaz;Industries operates several large plants that provide the packaging for many;consumer products. The company has a progressive compensation system that is;market-based and competitive with that of similar companies. Every position;within Topaz is assigned a grade level from 1 to 30, with 30 being the;company's chairman and 1 the lowest-level unskilled position. In assigning the;grade levels, Topaz uses the following methodology: 1. The higher-level;positions are classified according to the exact titles used by similar firms.;2. The lower-level positions are classified on the following factors: a. Formal;education attained. b. Amount of responsibility. c. Complexity of tasks. d.;Effects of mistakes. e. Physical difficulty or amount of effort. 3. Salary ranges;increase annually according to the rate of inflation.;When;Topaz hires employees, they are generally offered a starting salary at the;lower end of the position grade level. For an individual with exceptional;skills or experience, the offer could be closer to the top of the level.;Employees can move through the levels on the basis of performance and merit;increases, a promotion moves the employee into a new position level with a;higher salary range. Topaz provides various in-house educational programs for;its employees and has a tuition reimbursement program. Jill Simon, assistant;controller for one of Topaz's plants, was hired a year ago at the top level for;her position because of her extensive experience in the field. She has just;learned that her annual increase will be 3 percent of her salary, the same;percentage used to increase all position levels in the current year. Jill;believes that her performance merits a larger increase but knows that as long;as she remains an assistant controller at the top level, her future salary;increases will be similar. Jon Russell is an administrative secretary reporting;to Topaz's treasurer. Jon has been with the company for several years, earning;his current position two years ago through above-average performance. Because;Jon has proved to be reliable and efficient, his boss has transferred;responsibility for many routine tasks to him. Jon believes that his position;should be reevaluated because of these increased duties, but he has not;received any encouragement from his boss concerning this. Billy Hampton was;recently promoted to supervisor in one of the packaging plants, directing the;work of 15 employees. He started at Topaz as a shipping clerk after completing;high school and has learned the packaging business on the job by holding;increasingly important positions over the years. Many of Billy's co-supervisors;are better educated than he is, but lack his experience and frequently turn to;him for solutions to their problems. Billy knows that these less-experienced;supervisors earn more than he does because of their educational qualifications.;Although he is confident that his salary will catch up with the others through;merit increases, he does not believe that the company has been entirely fair;with him.;Required;1) Describe the incentive effects that Topaz Industries' job evaluation and;compensation program is likely to have on JillSimon, Jon Russell, and;Billy Hampton. 2) Recommend several ways that the firm could improve its;evaluation and compensation program to avoid situations similar to those;described here. 3) Describe the general conditions that must be present for;employees to be motivated to improve their performance under a merit pay;system.;86. Boating;Inc. manufactures water vessels and is organized into three large divisions;jet skis, fishing boats and yachts. The following information presents;operating revenues, operating incomes and invested assets of the company over;the last three years;(All figures in 000s.);The following table shows the number of;managers covered by the current compensation package of Boating Inc.;The;current compensation package is an annual bonus award. The managers share in;the bonus pool. The pool is calculated as 10% of the annual residual income of;the company. The residual income is defined as operating income minus an;interest charge of 14% of invested assets. Required: (1) Compute the;bonus amount to be paid during each year. Also, compute the (average);individual executive bonus amounts. (2) If the bonus was calculated by;divisional residual income, what would be the bonus amounts?;87.;Ginyard Company;has the following financial statements for the year ended December 31, 2010.;Some;additional information about 2010 includes;Required;1. Complete a business analysis of Ginyard Company for 2010. 2. Complete a;business valuation for Ginyard Company for2010.;88.;Jackson Manufacturing has the following operating results for 2010.;In;addition, the company paid dividends in both 2009 and 2010 of $100,000 per year;and made capital expenditures in both years of $45,000 per year. The company's;stock price in 2009 was $10 and $12 in 2010. The industry average earnings;multiple for the industry was 10 in 2010 and the free cash flow and sales;multiples were 20 and 2, respectively. The company is publicly owned and has;1,050,000 shares of outstanding stock at the end of 2010. The industry average;ratios for Jackson's industry were as follows in the most recent year. Exhibit;A: Industry Ratios for the Jackson Company;Required;1. Calculate the ratios In Exhibit A for Jackson Company for 2010, group them;by category (liquidity, profitability) anddevelop a brief overview for;the liquidity and profitability of the Jackson Company at the end of 2010. 2.;Complete a Business Valuation

 

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