Course Project

Introduction

Our exercise simulates the types of decisions all managers will make in their planning and controlling functions. While there are formulas and templates to facilitate the process, ultimately it is the manager’s judgement that interprets the data. Effective decision-making often relies on doing the correct analysis in order to support instinct.

In this course project, we will complete these inter-related activities:

(1) Develop an operating budget using the contribution margin format.

(2) Prepare a cash budget based on projected cash receipts, disbursements, investing and financing activities.

(3) Conduct variance analysis between the budget and actual results

(4) Decide whether or not to outsource production

(5) Conduct a discounted cash flow analysis in order to select the best project investment.

Background

You own a frozen pizza manufacturing and distribution business. Our premium product, “Buzz all natural pizza” appeals to the adult learners at DeVry University. A marketing survey revealed a time-starved segment that is always in need of energy at the end of the day or week in order to do their schoolwork. Also being poor time-managers this homogenous group requires a more direct form of intervention, in order to reach peak academic performance. In order to meet this need, your pizza has caffeinated tomato sauce.

The Assignment

Obtain the course project spreadsheet located in the class files. You are responsible for entering data in each of the worksheets (see tabs at the bottom). Each worksheet represents a deliverable. Data entry is required in the yellow highlighted cells. After you have input into the prescribed formulas, you are to explain the calculated answers.

Each worksheet is due on a different week.

Instructions

There are instructions in each of the five (5) worksheets. This is a summary of the requirements:

(1) The Operating Budget

a. Input your forecast product mix, as provided by the Marketing department

b. Input the sales volume, as projected by your Field Sales managers.

c. Input the efficiency rate for your direct labor, as projected by the VP of Manufacturing

d. Input the sales commission, as provided by the VP of Sales and the department’s fixed costs

e. Input the administrative fixed costs as provided by the CFO.

f. Calculate and comment on the breakeven point

g. Calculate the sales volume needed to reach a target profit and comment

(2) The Cash Budget

a. If needed, copy the sales from the 1st Quarter operating budget

b. Using an aging of the collection period, as provided by the credit manager, forecast cash receipts by month.

c. Calculate the cash disbursements by month

d. Determine the timing of a capital expenditure

e. Determine the timing and amount of financing

(3) Performance Evaluation – Variance Analysis

a. Given actual results and the operating budgeted rates, prepare a flexible budget for one month.

b. Explain deviations from plan.

(4) Incremental Analysis - Deciding whether to Outsource

a. Using the operating budget for the quarter, prepare the relevant costs for in-house production

b. Given avoidable costs, calculate whether the outsourcing decision will save costs in total.

(5) Capital Investments – discounted cash flows

a. Input the cost of the project

b. Input the positive cash flows due to production cost savings

c. Decide on the “best” year in which to conduct major maintenance

d. Using Excel functions, given a “hurdle rate” calculate the project’s Net Present Value (=NPV) and the Internal Rate of Return (=IRR)

e. Calculate the payback period and profitability index.