simulation

of
General Management

CERES
Instruction Manual

Section I

CERES: OVERVIEW
CERES is a business simulation, in other words a dynamic description of a business
environment which evolves partly as a result of external economic factors and partly as the
outcome of decisions made by yourself and your competitors. Together with the other
members of your team you will decide how to assign the resources of your company in the
light of objectives and according to strategic choices in the face of fierce competition.
At the end of each quarter you will know the results of your company and you will
receive information on the market, the economy and the competition, enabling you to modify
the resource allocation for the next period, in accordance with your strategy. The simulation
unfolds over several years but you do not know in advance its precise duration.
CERES is an interactive simulation, that is to say that any decision made by any
company will affect not only the result of that firm but also those of its competitors. CERES is
based on a fixed parametric model which cannot be changed by your instructor once the
simulation is started. However, the instructor can, and usually will, introduce changes in the
economic environment: the level of economic activity, the interest rate, the inflation rate, and
the country economy.
At the end of each period (or quarter), each team will receive the following information:
The Marketing Report
It contains sales and market share information for each company in all segments. In
addition, it has a section showing confidential marketing data on your company.
The Financial Report
It contains an income statement of your company, a balance sheet and a statement of
funds and cash flow. Accounting and financial results are presented according to NorthAmerican standards.
The Manufacturing Report
It analyses the structure of your production cost and compares your costs with industry
standards.
The Warehousing & Industrial Relations Report
The first section describes the evolution of your inventories during the period and
compares your inventory cost with industry standards.
The Management Planning & Control Report ($20,000 per quarter)
It compares the actual result of your company with what you had planned. You are
charged to obtain this report when the other four are free.
Market Studies ($36,000 per quarter)
The report presents marketing information about your competitors including market
share, advertising expenditures, sales force allocation, and R&D expenses.

Section II

YOUR PRODUCT AND YOUR MARKETS

Your company operates in a dynamic environment, constantly modified by your
competitors decisions and by changing economic conditions. The model which simulates
economic scenarios integrates economic indicators which have been observed over a long
period of time in an industrialized country.
In CERES some variables are affected by the economic situation. For instance, changes
in the cost of raw materials, in labor costs, in the sales forces compensation or in the index of
economic activity, will modify the standards.
The standards that appear in the R&D Manufacturing Report and in the Warehousing
And Industrial Relations Report are based upon the economic environment. They arent an
average company data nor competitors data. Thus standards for the workers hourly
wages are not necessarily equal to the average wages paid by all competitors.
A dynamic environment is by definition unstable. Everything may change. The total
demand may increase or decrease. Prices and costs go up and down. The economy is subject
to long term trends, to seasonal variations, and to various discontinuities due to political
incidents or catastrophes.
YOUR MARKETS
CERES simulates an industry in a country where competitors sell essentially the same
product in two distinct regions: East and West. Two types of buyers are to be found in each
region: Industrials and Consumers. Thus your company manages four segments:
PRODUCTS
Industrial
Consumer
A
R
E
A
S

East

I.E.

C.E.

West

I.W.

C.W.

Each segment reacts differently to changes in economic conditions, in your competitors

strategies, and in your own marketing mix. Your product is viewed as equipment by
industrial buyers and as consumer goods by the consumer customers.

The total demand in each segment is a function of four variables:

Average price
Total orders vary as a function of the arithmetic mean of all competitors prices.
Demand in each segment is more or less price elastic1. The industrial segment is more
price elastic than the consumer segment. This does not mean that price increases will
automatically result in a slowdown of demand. In fact, if your price increase reflects
higher factor costs, it is only an adjustment for inflation and does not constitute a real
price increase in constant $.
WARNING
You will receive no order in a segment if your price is over:
10 % of the average price in industrial segments
20 % of the average price in consumer markets
Advertising
Advertising improves the brand awareness and pulls the customers towards your
product. Advertising enlarges the market but the effect of advertising expenditures is
subject to the law of diminishing returns, as potential customers become more and more
resistant to advertising stimuli. Advertising has delayed effects. A spot advertising
campaign will be less effective than a continuous advertising policy. The consumer
segment is more sensitive to advertising than the industrial segment. Increases in sales
personnel should always parallel increases in advertising: there would be no point in
generating more demand if you did not have the staff to close the sales.
Sales force
Salesmen push the product and close the sale. You can allocate your sales force as you
want among the four segments. It will result in different levels of sales force hours per
segment. If you increase your personal selling effort in a segment, it will usually
stimulate demand. New sales force will canvas new sparsely populated territories or will
be given smaller and smaller territories. As a result your sales effort is also subject to
the law of diminishing returns. Your sales force must be trained. New sales force will
span half their time in training during their first quarter of employment, and they will be
only half as effective as your other sales force.
Personal selling is more effective in the industrial segment than in the consumer
segment. However if personal selling is not supported by advertising, its impact will be
limited.
A balanced marketing mix between advertising and selling effort is essential for
optimizing your sales, subject to the behavior of the segment. The allocation to each
segment should be expressed as a percentage of the total number of sales hours available.

The price elasticity tells how much change in demand comes from a change in price n = (Q/Q)/(P/P) or
(Q/P) * [(P1+P2)/(Q1+Q2)]. A price elasticity of | 2 |, as an example, means that 1% in price increase leads to a 2%
decrease in demand (every thing being equal)

Research & Development

In your industry R&D is a strategic variable. It affects the production process, the
product itself, and the total demand for the product sold. As accumulated R&D
expenditures increase, the concept of the product and its quality improve. It gains easier
overall acceptance in the marketplace. R&D expenditures have long-term effects,
especially if you show continuity in your R&D policy.
The following table summarizes and compares the sensitivity of total demand in each segment
to the functional policies of the firm:
Segments Sensitivity
HIGH

LOW

____________________________________________________
Price:
IW
IE
CW
CE
Sales:
IW
IE
CW
CE
Advertising *:
CW
CE
IW
IE
R&D*:
uniform and moderate in all segments
____________________________________________________
* Lagged response
YOUR PRODUCT
You are manufacturing an industrialized product with the following characteristics:
The basic product is the same for both the industrial and the consumer segments. All
competitors manufacture and sell equivalent products. The difference that may exist
pertain to the quality and image of products offered.
The basic product is sold as such in industrial segments. However the consumer
segment requires an attractive casing to market it (casing). These additional casings
can be purchased, or you can decide to manufacture them in your plant. If you buy
them outside they will cost you $12 initially but their price may fluctuate.
YOUR FACTORY
Your plant is located in the west side of the country. All products sold to the east part
of the country are subject to a transportation costs of $4 per unit. This cost is subject to
change over time. The manufacturing capacity of your plant depends only on the nominal
capacity and the age of the equipment. The production level depends on the manufacturing
capacity, the availability of raw materials and manpower, and the productivity of labor. By
allocating your resources judiciously between all factors affecting the manufacturing you will
reduce your unit costs. Make sure that you have sufficient capacity and good productivity in
order to be price competitive, and remember that a price war is often won in the battle of
costs.

YOUR MARKET SHARE

In the CERESs vocabulary (and in real life), market share means: share of orders
received whether the orders have been filled or not ! Every team in the industry starts the
simulation with the same market share. Your market share depends on your marketing mix
relative to that of the competition:
Your relative price, i.e. the price set by your company in a segment divided by
the average price of all competitors in that segment
Your relative advertising expenditures
Your relative sales force effort
Your relative R&D budget
Sensitivity of these factors varies according to the segment sensitivity table presented
above.
What happen if you are running out of stock ? The orders you received will be partially
allocated during the next quarter among all teams in proportion to their total orders.
in the industrial segment 60% is postponed to the next quarter
in the consumer segment 40% is postponed to the next quarter
These back orders to be allocated the next quarter appear in your Marketing Report
under the net back orders label. Back orders are the first to be satisfied among all orders.
They are shipped at the price they were contracted for.
Cancelled orders are given out among those competitors who have excess inventory and
can deliver rapidly. They receive these back orders redistributed in inverse proportion to
their relative price. Back orders not distributed during a quarter are definitely lost thereafter.
If your company received some of these back order redistributed the quantity appears in the
orders received from competition line.

Section III

MARKETING REPORT & MARKETING DECISIONS

At the end of each period you will receive the result of the competitive simulation, as
computed by the CERES model. The first section of the output is entitled Marketing Report.
In this report you will find:
a price comparison of each firm in each segment
market information: orders, back orders, sales, advertising, sales force
the results of your company during the period that just ended
PRICE DECISIONS
Since all competitors market essentially the same product, your prices should not be too
far from your competitors, unless you believe that your product is better made, has a superior
image or any other distinctive attribute. However, in spite of all its attributes, your product
will not sell if:
in the industrial segments price is 10% or more above the average price
in the consumer segments price is 20% or more above the average price
if your prices go beyond these limits your sales will be zero
your price is set at zero ($0). However, back orders will be filled at the
previous price.
ADVERTISING DECISIONS
Advertising has a greater impact in the consumer segment. The effects of advertising
expenditures will be felt over several periods.
SALES FORCE DECISIONS
The industrial segment is more sensitive to sales force than the consumer segment. The
effectiveness of the CERES salesman is a function of:
his available time (number of hours)
the budget allocated to personal selling
his hourly wage
Wages do not influence the individual productivity of a salesman, but may lead some of
them to resign. A salesman normally works 500 hours per quarter. Because of training
requirements, new sales force (trainees) only put in 250 hours of work during one quarter.
In order to optimize your sales, keep your sales force effort in line with the other
variables of the marketing mix. By carefully analyzing your result over several periods and by
obtaining information from your consultants (market studies) you will gradually gain a better
understanding of each segment and be able to adjust your strategy accordingly.
RESEARCH AND DEVELOPMENT (R&D) DECISIONS
Investments in R&D improve the quality of the product and the production process. A
better production process may lead to cost reductions. R&D investments have a long term
effect, rather than short term.

Section IV

R&D AND MANUFACTURING DECISIONS

The ultimate success of your company depends largely on the operating decisions and
on cost control. All products sold during a given quarter must have been manufactured during
this quarter or any previous quarter. You can manufacture the casings needed for the
consumer segment or you can buy them outside. It is up to you to make or buy them,
depending on your costs and unused manufacturing capacity.
The output level in any quarter is not only a function of the planned production but also
depends on the available resources: plant capacity, raw materials, manpower, discretionary
overhead, and R&D. The output will never exceed the planned production, but can be less
if manpower, raw materials or the production capacity dont match the planned production. In
the other hand raw materials and manpower allocated in excess of what is required to meet
a given production level will be wasted, therefore they will increase manufacturing costs.
Unused plant capacity increases the fixed cost per unit.
Most manufacturing data appear in the Manufacturing Report and in the Inventory &
Manpower Report which you receive at the end of each period. Some costs are allocated
directly to production, e.g. raw materials, labor, fixed costs, and discretionary overhead.
Others, such as R&D, affect the efficiency of the production system but are part of the general
operating costs of the company.
MANUFACTURING CAPACITY
The real manufacturing capacity of your plant is a function of the nominal capacity, the
labor productivity, and economies of scale and volume.
The nominal capacity is a direct function of the planned value and translates into a
theoretical number of units that can be manufactured during a period (263,467 units for the
1st period). At the start of the simulation there is one capacity unit for approximately each
$20 of plant investment. Later the cost of each capacity unit may change with inflation and
efficiency.
You can increase or decrease the nominal capacity of your plant by investing in it or by
selling it (enter a positive or a negative number in the appropriate line in the decision sheet).
The additional nominal capacity corresponding to your investment (capital expenditures in
the Financial Report) will only be available at the end of the next quarter as will be available
the fruit of your sales.
With the passage of time your equipment shows signs of wear and tear, nominal
capacity will decrease if your fail to make new plant investments. Depreciation levels are
good indicators of the capacity loss due to obsolescence. In practice, the depreciation rate is
set by law for tax purposes and rarely coincides with the rate of physical deterioration of the
plant or equipment. CERES makes the simplifying assumption that the depreciation rate does
correspond to the rate of physical deterioration and that both are equal to 3% per quarter. If in
any quarter no new investment is made, the nominal capacity of the plant and the plant
value will decline by 3%.

Labor productivity depends on labors attitude and working habits, and on the
technological level of the firm, these two factors (labor and technology) are influenced
respectively by two types of expenditures: discretionary overhead and R&D.
Economies of scale are linked to the size of the plant you operate: a manufacturing
capacity over the standard of 250,000 units per quarter makes possible longer production runs
and in the end decreases the production unit cost. A real capacity level below the standard
would have the opposite effect. However having a large nominal capacity doesnt necessarily
mean that you can benefit a cost reduction. Economies of volume are linked to the level of the
actual manufacturing output. In other words its often better to use 100% of the manufacturing
capacity of a small plant rather than 50% of a larger plant.
You will read in the Manufacturing Report the capacity forecast for the next period
(263,467 units for 1st period), taking into account the depreciation and new investments in
plant and equipment and assuming that all other manufacturing variables remain unchanged.
Manufacturing standards are used to forecast manufacturing capacity and costs, therefore
these are attainable goals if you manage your facilities efficiently.
RAW MATERIALS
Operating according to the standards, 4.0 units of raw materials are needed to make
one unit of the finished product. The real quantity of raw materials required depends on
your technological level. If, thanks to your R&D, you are able to develop a superior
technology, you will need less than four units of raw materials to manufacture one finished
product. If your R&D and your technology are insufficient, you will need more than four units
of raw materials to make one finished product.
Only the stock of raw materials available at the beginning of a quarter (or at the end of
the preceding quarter) can be used during the period. Raw materials ordered during a
quarter become available only at the next period. It is therefore imperative to plan your
inventory of raw materials carefully.
If, by mistake, you allocate more raw materials to production than that held in stock, the
quantity produced will be adjusted downward automatically. If you allocate more raw
materials than needed (when other manufacturing constraints arent met), all raw materials
allocated to production will be used and wasted thus increasing your cost. However, if you
do not allocate enough raw materials there may be a shortage and production may be cut. The
cost of raw material per unit depends on the total cost of raw materials allocated to production
and on the level of output.
Emergency purchases. May you run short of raw materials you have the option to
request last-minute purchases from a warehouse. When you input your decisions the
computer will ask you if you wish to avail yourself of this option. Answer YES [1] to the
question Last Minute Purchase of RM in the decision sheet. If you do, the difference
between the quantity allocated to production and the quantity available at the end of the
previous quarter will be automatically purchased at a premium price, 20% above the standard
unit cost of raw material in the previous quarter. The opening inventory data for the current
quarter will be adjusted on the Inventory & Manpower Report accordingly. The cash available
at the end of the previous quarter will be decreased by the appropriate amount. You should
take this adjustment into consideration when you prepare your financial decisions.
DIRECT LABOR
9

Operating under standard conditions, manufacturing one unit of finished product

requires 4.0 hours of direct labor. In practice it takes more or less than four hours,
depending on the productivity of labor, on the motivation of the work force and on the quality
of your technology. Discretionary overhead, in the form of bonuses and fringe benefits have a
positive effect on the productivity of your work force. To be technologically competitive and
at least operate at standard you must sustain your R&D effort.
Obviously, the available manpower depends on the number of people employed at the
plant. Each employee works 500 hours per quarter, with the exception of the newly
hired workers who devote half their time to training, thus working only 250 hours
during their first quarter of employment. During any quarter, you may hire new workers,
fire others or let them resign if they are poorly paid. Of course new workers are expensive
during their first quarter since they receive full pay and only work half the time.
The total labor cost depends on the number of workers employed and on the hourly
wages paid. The labor cost per unit of finished product depends on the total labor cost and on
the level of output. Make sure that your work-force level is as close as possible to that
required by your production plan. Too many workers would inflate your costs, and too few
would prevent you from reaching the production level you had planned.
FIXED COSTS AND DISCRETIONARY OVERHEAD
Manufacturing costs include the cost of raw materials, labor costs, fixed costs, and
discretionary overheads. Fixed costs include costs independent of the level of production.
They are composed of all indirect operating costs such as overhead, maintenance, and
insurance for a total of $400,000.
Discretionary overhead expenditure are perks. They will motivate workers to work
harder and more efficiently. The impact of discretionary overhead is stretched over time and
depends on the size of the plant. Like any other category of expenditures it is subject to the
law of diminishing returns. However if you set these expenditures to zero, the impact may be
harmful on workers. If you set discretionary overhead at the right level, it will increase the
productivity of the workers and enable you to reduce the manpower required to obtain a given
level of production.
RESEARCH AND DEVELOPMENT (R&D)
To survive in a competitive environment you must innovate and constantly improve the
quality and the appearance of your product; you must also seek new manufacturing methods.
Dont forget, R&D is a key-factor, it can turn your company into an instant success or it can
condemn it to be a marginal competitor with no chance of breaking through. R&D has a
positive effect on product differentiation and productivity.
The effect of R&D expenditures depends on the size of the plant and on the continuity
of your R&D policy. It is inefficient to have a high R&D budget during one period and then
cut it the next period. Passed a certain level, R&D expenditures yield diminishing returns.
However its impact on unit costs is subordinated to manpower planning and raw material
planning. If you allocate too many workers or too much raw material to production, unit costs
will be high regardless of your R&D budget. On the other hand insufficient R&D levels will
undermine the productivity of your plant.

10

MANUFACTURING STANDARDS AND VARIANCE

Distinctions must be made between various standards mentioned in this description of
the manufacturing process.
Manufacturing Standards
These standards are set by industrial engineers and are equal and unchanging for each
firm. They are calculated by using scientific management methods like timing and
sampling. These standards represent the average quantity of raw materials and hours
required to manufacture one finished product (4 units of raw material and 4 hours of
labor).
Community Standards
These standards are based on initial standards, subject to changes prevailing in the
economic environment. The initial standards for unit cost of material ($2.25), the hourly
labor wage rate ($2.25) and the hourly salesman wage rate ($5.00) will change over the
quarters. The changes depend solely on external economic conditions. Therefore, these
standards are by no means averages of company results.
Operating Standards
These standards are influenced, and thus adjusted, by the circumstances prevailing in
the plant in the previous quarter: manufacturing standards come from your technology
level, labor productivity, and operating effectiveness. As an example, the operating
standard for labor is 4.36 hours in quarter 0-4 although the manufacturing standard is
4.0 hours.
These various standards are given for you to analyze the variance of actual costs from
the operations and assess your own management efficiency. They are not incorporated into
the accounting of the firm.
MAKING OR BUYING CASINGS
Finished products sold to consumer segments have to be marketed in a special box,
called a casing. Casings can be purchased from a supplier at an initial market price of $12.
The purchase will take place automatically in accordance with the sales volume in the
consumer segment. No decision is required for this action.
Another alternative is to manufacture casings in your own plant. The plant equipment is
flexible enough to manufacture both casings and finished products. Should the firm decide to
use its equipment to that end, a decision must be made regarding the quantity of casings to be
produced. Because of the manufacturing process involved, the production of casings is
given priority in relation to the production of products. As a consequence the production
of casings decreases the capacity available for basic products.
The production lot size has a considerable effect on the production efficiency and cost
of casings. At a lot size level of about 108,000 casings, one casing cost will be exactly 65%
of a basic product. So, at manufacturing standard, one casing requires 2.6 units of material
and 2.6 productive labor hours (4 x 0.65). If the lot size is small the manufacturing efficiency
of casings decrease and one component will be equivalent to more than 0.65 basic product. If
the casings production exceeds 108,000 units, there will be a slight improvement in the
11

equivalence ratio. In addition the manufacturing cost of casings is subject to an experience

curve: it will decrease by a certain percentage each time the accumulated production doubles.
If sales to the consumer segment exceed the number of casings produced, the difference
will be purchased automatically. If the production of casings happens to exceed that of basic
products sold to the consumer segment, the difference will be kept in inventory.
Although at first, the production of casings may result in higher costs, there may be
some advantages to making casings instead of buying them: use of excess plant capacity,
lowering the turn-over rate of the labor force, larger quantity discounts on material purchases,
reduction of raw material inventory, etc. It is not an easy choice, especially when you
consider that the production of casings must be financed with part of your working capital,
whereas if you buy outside you can pay them with the sales revenues of the current period.

12

Section V

PURCHASING AND INVENTORY MANAGEMENT

If purchasing and inventory management are not under control they will inflate your
costs. In order to be able to offer competitive prices and to increase your profit you must
rationalize your purchasing policies and control your inventory. You will find all relevant
information to make purchasing and inventory decisions in the Inventory & Manpower
Report.
RAW MATERIAL PURCHASING
Raw materials used in the production of casings (if you make them yourself) and basic
products are ordered and paid at the beginning of the quarter and become available at
the end of the quarter. Except for last-minute purchases from the warehouse, materials
purchased in a quarter can be used for manufacturing only in the next quarter. Consequently,
the planning of production output for at least one quarter ahead is essential in order to
calculate the purchasing requirements.
The price of a unit of material depends on the market price (standard cost) which varies
with the economic situation, and the number of units bought. Thus, the exact market price is
not known at the time or ordering, but can be forecasted. At about $2.3 million, the unit cost
is the same as the market price. The price is slightly higher for smaller purchases, and lower
for larger purchases.
INVENTORY
Raw material inventory is a prerequisite for uninterrupted manufacturing, and must be
planned accordingly. Its safe to always have a proper number of raw materials in inventory
(around four times the number of units to be produced next quarter). Otherwise you will have
to order expensive last-minute purchases.
There will be an inventory of basic products whenever sales are inferior to the sum of
the opening inventory and the production of the period. Similarly, when the sales to the
consumer segments are inferior to the sum of the opening inventory of casings and the
production of casings during the period, casings will remain in inventory at the end of the
period. If casings are bought, there is no inventory.
Units held in inventory are coasted on a First In, First Out basis (FIFO). In
accordance with this costing method, the unit cost of products sold may differ from the
production cost for the given period.
Cost of excess inventory. Because of the limited storage space, excess inventory cost is
incurred if the average inventory (materials, products, casings) exceeds the standard inventory
quantities.
Raw material average inventory > 1 million units cost: 8 per extra unit
Product or casing average inventory > 40,000 units cost: 40 per extra unit
The average inventory is calculated on the basis of the opening and closing inventories.

13

Section VI

INDUSTRIAL RELATIONS
Your companys success hinges on your skills as a strategist, an organizer and a leader.
You have to be able to motivate your employees, to make them proud of working for your
company. To make the appropriate decisions, read the lowest part of the Inventory &
Manpower Report.
LABOR FORCE
Workers are engaged in finished products and casings (if any) production and work 500
hours per quarter. The labor force can be regulated by hiring and firing, and an attrition rate
must be considered with respect to resignations (retiring, sick leave). Hiring and firing take
effect at the beginning of the quarter. Resignations take effect at the end of the quarter.
Hiring. Workers hired in a quarter are trainees for that quarter. Their production effectiveness
is one half that of regular labor force (250 hours / 500).
Resignation rate. The resignation rate of the work force depends mainly on the level of their
hourly wage rate, as compared to the standard community wage rate. It is also influenced by
their morale, which is in turn affected by the discretionary overhead. Because your workers
are skilled workers, they expect slightly higher pay than the standard community wage rate.
At standard pay, the resignation rate is about 4 or 5 %, depending upon the morale of the
work force. As the relative pay increases, the resignation rate decreases considerably. If,
however, the hourly wage falls below standard, the resignation rate becomes progressively
higher, ultimately resulting in a strike.
Strike. The labor force is unionized and reacts quite sensitively to the industrial relations
policy of the firm. If 20% or more of the work force is about to resign, dissatisfaction spreads
and results in a strike.
Union negotiations may also be introduced by outside union representatives. The
bargaining procedure is intended to simulate a real-life situation. Therefore, in case of a
deadlock in negotiations, a strike of one week (which can be escalated to four weeks during
the bargaining) may be declared by the union representatives. Once declared, the strike will
take place at the beginning of the next quarter. The strike and its duration will be announced
in the Manpower Report.
In the case of a strike, suitable adjustments will be made in the allocation for
manufacturing: direct labor hours, material and their respective costs will be
automatically adjusted. Thus, even if the strike is foreseeable, firms should carry out their
production allocations in the regular manner, assuming full production during the quarter.
SALES FORCE
Salesmen are engaged in personal selling and work 500 hours per quarter. The sales
force can be regulated by hiring and firing, and an attrition rate must be considered with
respect to resignations (retiring, sick leave). Hiring and firing take effect at the beginning
of the quarter. Resignations take effect at the end of the quarter.
Hiring. Salesmen hired in a quarter are trainees for that quarter. Their selling effectiveness is
one half that of regular sales force (250 hours / 500).

14

Resignation rate. The resignation rate of sales force depends mainly on the level of their
hourly wage rate, as compared to the standard community wage rate. It is also slightly
influenced by the pre-selling activity of the firm, represented by the advertising expenditure
per salesman. If the sales forces wage rate in a comparable industry is above the community
wage rate, the resignation rate is quite high, unless the firm pays more than the community
standard. It may be as high as 12 or 14 per cent, depending upon the pre-selling activity. This,
of course, decreases as the relative pay increases, but may be very high if the actual wage rate
falls considerably below the community standard, ultimately resulting in a walk-out at the
beginning of the quarter. Since the sales force is not unionized, a high resignation rate dont
result in a strike.
If, however, the pay is substantially above the community standard, trained sales force
will offer their services. In such a case, negative resignations appear and the trained sales
force are added to the sales force at the end of the quarter. They are directly operational on
their territories.

15

Section VII

FINANCIAL DECISIONS
Your policy options in marketing, production and industrial relations are constrained by
your financial resources. What will you do if you do not have the cash to finance your
operations ? In this section we shall examine the origin and the allocation of cash resources
during a quarter. Remember: most expenditures are made at the beginning of the quarter
while revenues are received only at the end, thus making it essential to carefully plan your
cash in-flow and out-flow. To do so, examine the Financial Report.
FINANCIAL RESOURCES
Short-term funds available to your company come from your cash, the use of a line of
credit and, if applicable, the sale of short-term marketable securities. Long-term funds come
from the issuance of bonds, whenever the instructor give you the authorization to issue them.
Loans. Each company has a line of credit established at the local bank. The unused line of
credit that appears on the Financial Report is the difference between the authorized line of
credit and the outstanding loans. The ceiling for the credit is 75 % (this rate may vary; check
with your instructor) of the standard cost of materials, products, and casings inventory. Since
the value of the inventory fluctuates, a loan may be accepted at the beginning of the
quarter but may exceed the allowable level (75 % of inventory) at the end of the period.
Your credit line then becomes negative and you must reimburse immediately the difference
between the loan you took and the new line of credit. Reimbursement is automatically
handled by CERES.
The initial interest rate applying to loans planned in advance is 1.5 % per quarter (6% on
an annual basis) on any bank loan originating from the line of credit. This interest rate may
vary from one quarter to the next according to the economic situation. The interest rate of the
quarter appears at the top of the Financial Report. If you under-estimated your cash needs
and you still have enough line of credit, CERES will automatically borrow from the bank, but
at a higher rate.
Should you still need more cash than the unused line of credit, CERES will reduce your
expenses automatically by: 1) reducing your purchases of raw material and, if it is not enough,
2) selling some equipment. An alternative is to issue bonds if your are allowed to do so.
Bonds can be issued, subject to the authorization of your instructor. They constitute a source
of long term funds in order to finance ambitious plant expansion plans, R&D investments, or
take-over. They are 20-year bonds with a nominal value of $100, underwriters fee of $5,
and 6% coupons payable quarterly (these rates may vary, check with your instructor).
Consequently for a $100 bond you only receive $95 and you have to pay coupons quarterly of
$1.5 for 20 years. Although bonds dont have to be paid back before 20 years, they may be
called back at any time. Bonds are guaranteed by lasting physical assets and CERESs
corporations law prohibits the issuance of bonds for more than 60% of plant and
equipment value.

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EXPENDITURES
In real life revenues and expenditures would flow continuously during the quarter and
you could operate with a small working capital. CERES is different: most of the
expenditures are made at the beginning of the quarter from available cash and near-cash,
others are covered by sales revenues and are made at the end of the quarter. Be careful to plan
your budget and working capital keeping this feature in mind because it has a considerable
impact on your operations.
Expenditures financed from cash to be paid at the beginning of the quarter:
Sales force wages (number of salesmen x 500 x hourly wage rate)
Advertising expenditures
R&D expenditures
Fixed costs, and discretionary overheads
Raw material purchases (regular purchases and emergency ones)
Labor force wages (number of workers x 500 x hourly wage rate)
Capital expenditures (plant and equipment)
Dividends to be paid to shareholders
Loan repayments
Other expenses: market research, Management & Planning Report, bonds
underwriters fees, penalties, severance pays, etc.
Expenditures financed from revenues to be paid at the end of the quarter:
Transportation cost of products sold in the Eastern markets
Purchases of casings for products sold in Consumer markets
Excess inventory cost
Interest and coupons on loans and/or bonds
Taxes (35% of income)
At the end of the fourth quarter, a tax adjustment will be made, and a tax refund will be
given if the company paid more taxes, during the year, than the annual income warranted.
Losses will not be carried forward into the next year for tax refund purposes.

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