Case Analysis #4

CONTACT GLOBAL
 Hello!
We’re Group 6:
Magnaye, Giecelle
Barcia, Alek Jethro
Luis, Melvin

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1 Synthesis
Let’s look closer on details presented for case 4.
 Contact Global
manufactures
advanced global
positioning system
(GPS).

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 Current Status:
◇ Guochang Li assumed new position as CEO in later November.
◇ The previous CEO was fired due to business malpractice, which
includes shipping of defective GPS devices to dealers.
◇ Guochang Li’s priorities were to restore employee morale and
prepare budget for presentation on December 15.

During the meeting certain figures were raised…

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 P 2,000,000
An influential member of the board stated that
“Managers should have to stretch to meet profit goals”.

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 P2,000,000
The board decided to set profit goal.

P10,000 – P25,000
It was also agreed that bonuses will be awarded upon achievement of goal.

ALL OR NOTHING.
Only achievement of 2M net operating income would mean bonuses for managers.

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2 Point of View
Whose view should we consider to better solve the problem?
 GUOCHANG LI, CEO
We are taking, Guochang Li, the new CEO’s
point of view to determine how to drive
employees morale and achieve the profit
goal of Contact Global.

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3 Statement of the Problem
What is the main problem that we need to solve?
 What ethical course of action does

“
Guochang Li need to take to restore
employee morale and achieve profit
goal for the year?

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4 Objectives
What are the goals to solve the problem?
 OBJECTIVES:
one.
Determine the options that
the manager has for them to
be able to achieve the target
profit for the coming year
amounting to PHP2,000,000.
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two.
Prepare various sample
income statements to identify
the volume of products to be
produced and sold for them to
achieve target profit.
5 Areas of Consideration
What are the main points that are directly related to our objectives?
 Major Points:
◇ The company has enough capacity to produce more products to be sold
within the following year.
◇ Calculate income using absorption costing and variable costing and
determine the type of costing to be used that may result in higher net
operating income
◇ Assume that all other costs remain the same all throughout the
period

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6 Alternative Courses of Actions
What possible action plans should Guochang Li take.
 Alternative courses of action:
ACA 1 ACA 2 ACA 3
Do nothing and follow Increase production and Increase income by
budgeted income sales of the product delaying a portion of
statement for the year the fixed manufacturing
overhead until next year
by increasing
production only

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 ACA 1: Do nothing and follow budgeted
income statement for the year

PROS CONS

There is no need for

the managers to No bonuses
think of ways on
how to achieve
ACA1 will be paid
target profit for the out.
year.

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 ACA 2: Increase production and sales of
the product

PROS CONS
Increase in sales is not
guaranteed. This is still
Target profit for the dependent on how strong
the demand for the
year will be product is.
achieved.
ACA2 Increase in production
may incur additional costs
Bonus will be as this may require
received. additional resources which
may further decrease net
operating income.

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 ACA 3: Increase income by delaying a portion of
the fixed manufacturing overhead until next year
by increasing production only

PROS CONS
This may increase net
operating income for the
A significant current year but the effect
of leaving a portion of the
increase in income produced devices in
will be achieved. ending inventory will be
ACA3 seen in the following year.
Bonus will be This may also result in
received. legal sanctions as the
reason behind the
deferment is not justifiable.

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 Decision Criteria:
Weight ACA 1 ACA 2 ACA 3

1. Can
contribute to the
increase sales 40% 25% 38% 35%
and achieve
target

2. Lessen the
costs of the
company while 30% 0% 25% 30%
increasing its
profit margin

3. Can
contribute to the
improvement of 30% 15% 25% 20%
the employee’s
morale

TOTAL 100% 40% 88% 85%

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7 Recommendation
What alternative course of action (ACA) is best to pursue.
 ACA # 02
Increase production and sales of the
product

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 Gouchang Li should increase production of the devices
and increase sales as well to increase profit. This is
considering that all fixed costs will remain the same
throughout the period. Should there be changes in
expenses, these changes should be minimal as to not
break-even the increase in revenues.

Furthermore, Gouchang Li should retain usage of

absorption costing for the subsequent year as this method
yields a higher net operating income compared to that if
variable costing is used.

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8 Implementation Plan
Action plans to take to achieve better net income for Contact
Global
 Prepare income statements using various
methods to identify which costing method is
better to use and determine amount of
additional products to be produced

Discuss new marketing strategies with

Marketing Team to help expand target market
for the units and boost sales

Get feedback on improvement in sales and

operating income within a few months after
implementation of recommended action.

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9 Learning Points
Key takeaways for the case presented.
 Key Takeaways:
◇ Basis for amount of bonuses should be based on net
revenue based plan – as revenue increases, amount

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of bonus also increases and vice versa.
◇ Frequent alignment meeting with the team is
essential in reviewing business performance and
execution of planned activities to achieve profit
target.
◇ Use of proper costing method that would yield better
net income.

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10 Appendices
Answers on the questions provided for the case.
 #1: Assuming that the company does not build up its inventory (i.e., production equals sales) and its selling
price and cost structure remain the same, how many units of the GPS device would have to be sold to meet
the net operating income goal of P2,000,000. Assuming that the company does not build up its inventory
(i.e., production equals sales) and its selling price and cost structure remain the same, how many units of
the GPS device would have to be sold to meet the net operating income goal of P2,000,000.

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 #2: Verify your answer to (1) above by constructing a revised
budget and budgeted absorption costing income statement
that yields a net operating income of P2,000,000.

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 #3: If sales are 400,000 units for the year and the selling
price and cost structure remain the same, how many units
would have to be produced in order to show a profit of at
least P2,000,000 under absorption costing?

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 #4 Verify your answer to (3) above by
constructing an absorption costing income
statement.

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 #5: should guochang li
approve the plan of managers?

Partly yes. Gouchang Li may approve the plan of the

managers given that they should also exert effort to
increase the volume of products sold. Building inventory
will increase ending inventories and increase sales, but it
doesn’t necessarily mean that these inventories will not
contribute to decrease in income. Cost of the ending
inventory will be carried over to the subsequent period.

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 #6: advice to board of
directors:
With the current bonus plan of the company, it is so tempting to
do unethical actions just so the employees can receive their
bonuses. More so, this is magnified as bonus is considered all-or-
nothing.

The Board of Directors may revise their bonus plan. Instead of

implementing an all-or-nothing scheme, they may use net
revenue-based plan to implement fairness. This may be done by
assigning a corresponding percentage to one bracket of revenues
earned for a certain period. As the revenue increases, so does the
bonus.

This is more applicable as this scheme fairly represents the

financial performance of the company.

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 Sample:

REVENUE BONUS (PERCENTAGE

OF REVENUE)
PHP0 – PHP1,000,000 0%

PHP1,000,001– PHP2,000,000 10%

PHP2,000,001– PHP3,000,000 15%

PHP3,000,001– PHP4,000,000 20%

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 Thanks!
Any questions?

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