Best Solutions to Capsim problem
There are different kinds of issues that can be encountered when doing Capsim. They include: Low margin of contribution, typical issues, loaning in a hurry, among others. Are you facing these Capsim problems? Worry no more! We got solutions for them!
Contribution Margin is Low
Revenue minus labor, material, and inventory carrying costs – stated as a percentage of sales – is the contribution margin. It’s described as an average of each company’s product portfolio on page 1 of The Courier/FastTrack. 30 percent is an excellent starting point. If the contribution margin is less than 30%, the company should consider cutting costs and/or raising pricing.
MTBF Ratings Are Excessively High: Material costs are directly affected by MTBF ratings. On the Courier /FastTrack Segment Analyses, compare the MTBF ratings of each product to the Customer Buying Criteria. Is it possible that they are higher than they need to be? There is minimal value in having MTBF set higher than the minimum if the MTBF range is 12000-17000 and it is the buying criteria.
Prices are excessively low: In the annual reports of the corporation, look at the income statement. Compare each product’s revenue to its cost. Within the current cost structure, prices must be set high enough to allow for reasonable revenue.
Loan in a Hurry
On page 1 of the Courier/FastTrack, there is a list of emergency loans. When there is a cash flow gap, an Emergency Loan is granted with a 7.5 percent premium over the prevailing debt interest rate. It’s not a big deal to get a little emergency loan. Excessive emergency loans of more than ten million dollars signals major concerns.
Inventory in Excess: On page 4 of the Courier /FastTrack, check the inventory status of each product. If there is an excessive amount of inventory, try to figure out why. Were sales expectations simply too optimistic (see 3.7.3 Decision Summaries in the Decision Audit)? Or was it a case of having a subpar product (in the eyes of that segment’s customers) compared to the competition? Instructors can figure this out by comparing items using Market Segment Analyses.
Purchases of unfunded capacity and automation: Companies often make large investments in plant yet fail to raise the necessary funds. On page 3 of Courier /FastTrack, look for the Cash Flows from Investing Activities Plant Improvements line (Financial Analysis). Were there significant capital investments in plant and equipment? If that’s the case, how was the money raised?
Inventory that is too large
Carrying significant volumes of goods is quite expensive (total unit cost is multiplied by a 12 percent inventory carrying charge). The ideal year-end inventory position is one unit in each product line: you’ll know you’ve made every possible sale, and the carry cost will be so low that it won’t matter. Excessive inventory is accompanied by lower-than-expected revenue from sales, creating a double whammy. Not only did the team face unexpected inventory costs, but it also earned far less money than expected.
Sales Forecasts That Are Overly Optimistic: Each market segment study includes a list of previous year’s client needs (along with segment growth rates). Compare segment demand to the company’s sales projection estimates.
Were their sales projections too high? If the sector demand ceiling is 3 million units and there are six teams in the segment, a “fair share” beginning point is 500 thousand sales per team. Sales will be higher if the company has a better-than-average product. When it comes to products that aren’t up to par, the opposite is true.
Companies should be aware, however, that every product that follows the rough-cut standards will generate some sales. In other words, customers do not purchase all of the best things first, then begin purchasing the second-best product, and so on. Customers instead rate each product on a monthly basis. The best products sell more than the least appealing ones, yet this is a relative comparison.
Less attractive things may sell out, whereas more desirable products may have inventories. Let’s imagine the Andrews team makes 250 thousand of a bad Capstone® Size segment product, while Baldwin makes 750 thousand of a great Size segment product. Andrews would be able to stock out in this scenario, but Baldwin would end up with 150 thousand units in stock.
Having a Hard Time Understanding How Spreadsheets Work: The link between sales predictions, manufacturing schedules, and production capacity can be confusing at times. Sales forecasts entered in the Marketing decision box have no effect on proformas, which assist participants visualize financial outcomes if sales projections are accurate.
The actual production decision for the year is the Production Schedule in the Production decision area. It should mirror the prediction, with any inventory from the prior year deducted. Participants must specify how many units they intend to make. It’s on the calendar.
The Initial Shift Production
The capacity of a factory is its size. Companies can create up to one million units using a first and second shift if their capacity is 500 thousand. All units produced in excess of 500 thousand, however, will incur a second shift labor cost equal to 150 percent of first shift labor costs.
Stock Prices Have Dropped
The price of a stock is determined by the following factors:
- Book Value
- Earnings Per Share (EPS)
- Annual Dividend.
Equity divided by the number of shares outstanding equals book value. The common stock and retained earnings values on the balance sheet are referred to as equity. The number of shares outstanding refers to the total number of shares that have been issued. For example, if the company’s equity is $50 million and there are 2,000,000 shares outstanding, the book value per share is $25.
The earnings per share (EPS) is derived by dividing net profit by the number of shares outstanding. The dividend is the amount given to investors per share each year. Dividends above the EPS are ignored by stockholders, who believe they are unsustainable. If an EPS is $1.50 per share and the dividend is $2.00 per share, for example, owners would disregard anything above $1.50 per share as a driver of stock price.
When profits are lower than in past years or losses occur, stock prices tend to fall.
On page 1 of the Courier/FastTrack, profits and losses are stated. Overproduction, resulting in excess inventory, and a combination of too high expenses and too low prices are the most common causes of losses. Excessive sales and promotion budgets (put in the Marketing box), high interest payments on loans, and write-offs when products are withdrawn can all reduce profit.
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