Using Goalseek to set a target uder 5 scenar

ABC Company:

$ per unit Quantity $

Sales 250 500 125000
Variable cost 120 500 60000
Contribution 65000
Overheads 37000
Net profit 28000

Shareholder
capital employed: 400,000

ROSCE % 7%

The directors and the shareholders of ABC company are dissatisfied with the current ROSCE of
The profit or loss statement above is linked by formulae to the Shareholder Return on Capital Em
The highlighted cells are the five cells we can use Goalseek to change, in order to meet the dire

Scenario 1 Change the selling price

Scenario 2 Change the sales quantity
Scenario 3 Change the variable costs per unit
Scenario 4 Reduce the overheads
Scenario 5 Reduce the shareholder capital employed

To see the 5 scenarios press the relevant tabs.

er 5 scenarios:

the current ROSCE of 7% and want you to explore scenarios where this can be increased to 10%:
er Return on Capital Employed (ROSCE)
order to meet the directors' and shareholders' new requirements for ROSCE
sed to 10%:
 Using Goalseek to set a target using sales pr
ABC Company:

$ per unit Quantity $

Sales 274 500 137000
Variable cost 120 500 60000
Contribution 77000
Overheads 37000
Net profit 40000

Shareholder
Capital employed: 400,000

ROCE % 10%

Scenario 1 Change the selling price In the current position ABC com
Note that we set the original Go
In scenario 1 we want to achiev

If we press OK we get the solu

So to obtain 10% ROSCE ABC

Question:
What is the main implication of raising the price which this model does not take into account?

Answer:
By raising the price demand might be affected so you would not be as likely to sell the same volume.
g sales price per unit:

nt position ABC company was achieving an ROCE of 7% but the directors are not happy with that and want to increa
e set the original Goal seek target as above, where the target cell is D15 where we are looking for a target value of 1
1 we want to achieve that by changing cell C7 (Selling price)

OK we get the solution presented:

n 10% ROSCE ABC Company would need to set the price per unit at $274 per unit.

same volume.
py with that and want to increase that to 10%
looking for a target value of 10% or 0.1
 Using Goalseek to set a target using sales qu
ABC Company:

$ per unit Quantity $

Sales 250 592 148076.9
Variable cost 120 592 71076.92
Contribution 77000
Overheads 37000
Net profit 40000

Shareholder
capital employed: 400,000

ROSCE % 10%

Scenario 2 Change the sales quantity In the Default position ABC comp
Note that we set the original Goal
In scenario 2 we want to achieve

If we press OK we get the solutio

So to obtain 10% ROSCE ABC C

Question:
Would ABC company be able to increase its sales by 92 units without incurring additional overheads and w

Answer:
As far as fixed overheads are concerned these would not normally increase with volume, unless some cap
additional transportation costs of using extra vehicles Production or storage costs may increase if extra cap
ng sales quantity:

ult position ABC company was achieving an ROCE of 7% but the directors are not happy with that and want to increa
e set the original Goal seek target as above, where the target cell is D15 where we are looking for a target value of 1
2 we want to achieve that by changing cell D7 (Sales Quantity)

OK we get the solution presented:

n 10% ROSCE ABC Company would need to sell 592 units at $250 per unit.

ional overheads and why?

ume, unless some capacity constraints were reached such as

ay increase if extra capacity was needed.
py with that and want to increase that to 10%
looking for a target value of 10% or 0.1
 Using Goalseek to set a target using variable
ABC Company:

$ per unit Quantity $

Sales 250 500 125000
Variable cost 96 500 48000
Contribution 77000
Overheads 37000
Net profit 40000

Shareholder
capital
employed: 400,000

ROSCE % 10%

Scenario 3 Change the variable costs per unit In the Default position ABC company
Note that we set the original Goal see
In scenario 3 we want to achieve that

If we press OK we get the solution pr

So to obtain 10% ROSCE ABC Comp

Question:
Identify ways in which ABC Company could reduce its variable costs per unit to this level?

Answer:
ABC could make more efficient use of materials. They could reduce waste, or even purchase lower cost (a
They could also look at other savings on variable costs such as reducing direct labour costs.
sing variable cost per unit:

ult position ABC company was achieving an ROCE of 7% but the directors are not happy with that and want to increa
e set the original Goal seek target as above, where the target cell is D15 where we are looking for a target value of 1
3 we want to achieve that by changing cell C8 (Variable cost per unit)

OK we get the solution presented:

n 10% ROSCE ABC Company would need to reduce variable cost per unit to $96 per unit.

this level?

ven purchase lower cost (and inferior quality) raw materials etc.
abour costs.
py with that and want to increase that to 10%
looking for a target value of 10% or 0.1
 Using Goalseek to set a target using overhea
ABC Company:

$ per unit Quantity $

Sales 250 500 125000
Variable cost 120 500 60000
Contribution 65000
Overheads 25000
Net profit 40000

Shareholder
capital
employed: 400,000

ROSCE % 10%

Scenario 4 Reduce the overheads

In the Default position ABC compa
Note that we set the original Goal
In scenario 4 we want to achieve t

If we press OK we get the solution

So to obtain 10% ROSCE, ABC C

Question:
What kind of savings would ABC company need to make to reduce its overheads by this amount?

Answer:
ABC could reduce fixed overheads by looking at their fixed costs and identifying savings, such as switching
They could examine ways of reducing costs, such as re-negotiating leases or reducing administration, adv
ng overheads:

ult position ABC company was achieving an ROCE of 7% but the directors are not happy with that and want to increa
e set the original Goal seek target as above, where the target cell is D15 where we are looking for a target value of 1
4 we want to achieve that by changing cell E10 (Overheads)

OK we get the solution presented:

n 10% ROSCE, ABC Company would need to reduce its overheads by $12,000.

y this amount?

vings, such as switching to cheaper energy suppliers.

ing administration, advertising and promotion costs.
py with that and want to increase that to 10%
looking for a target value of 10% or 0.1
 Using Goalseek to set a target using shareho
ABC Company:

$ per unit Quantity $

Sales 250 500 125000
Variable cost 120 500 60000
Contribution 65000
Overheads 37000
Net profit 28000

Shareholder
capital employed: 280,000

ROSCE % 10%

Scenario 5: Reduce the shareholder capital employed In the Default position ABC comp
Note that we set the original Goal
In scenario 5 we want to achieve

If we press OK we should get the

So to obtain 10% ROSCE ABC C

Question:
How could the shareholder capital employed be reduced and what impact could it have on the company?

Answer:
Shareholder capital could be reduced by buying back shares or converting shares to loans. The impact wo
the financial gearing of the company and its financial risk might be affected.
ng shareholder capital employed:

ult position ABC company was achieving an ROCE of 7% but the directors are not happy with that and want to increa
e set the original Goal seek target as above, where the target cell is D15 where we are looking for a target value of 1
5 we want to achieve that by changing cell D13 (Capital employed)

OK we should get the solution presented, but using goal seek, which is iterative, gives a small rounding error:

n 10% ROSCE ABC Company would need to reduce its capital employed by $120,000

ave on the company?

loans. The impact would be that

py with that and want to increase that to 10%
looking for a target value of 10% or 0.1

s a small rounding error: