Bill Nicholson wants you to help him prepare the financial case for moving the manufacturing operation to Andover. He has specifically expressed interest in getting answers to the questions contained in items 1 and 2, below. Item 3 outlines the specifics for the memo containing the financially-based rationale supporting the move.
1) Assume that the changes outlined in the case were executed as predicted.
a) Working from Exhibit A and other necessary data from the case and exhibits, create an income statement that shows the performance for the patient monitor production plant that would be reported in 2009 if the operation was in Andover and operating as planned. Assume demand and prices to be the same as 2008. Since insufficient data exists to compute the new capital charge, stop at Plant Margin. Show your results in a format similar to Exhibit A.
b) List any other factors related to changes in financial performance that are relevant to the difference between operating in Danvers and operating in Andover. Consider the critical asset balances and how you expect them to change (large or small change, what direction) and how that would impact the capital charge. For each item on your list, explain the relevance to assessing the financial impact of the proposed move in a short sentence.
c) For both Exhibit A and for your projected Andover-based income model, what would have happened to reported Plant Margin before capital charge if unit sales volume had been 5% higher or 5% lower? Assume that the sales mix remains constant (that is, the average revenue per unit does not change).
2) The profit performance of the Kappa line is of particular interest to Dräger Medical management. It is a low volume, but high profile product used in operating rooms. However, the original cost system had not been designed to examine full manufacturing costs on a line-by-line basis. The Danvers plant had been analyzed using ABC (Exhibit C).
a) The basic data for an ABC analysis in Andover have been accumulated (Exhibit D), but the analysis has not been completed. Complete that analysis and compute the full cost per unit for Kappa in Andover. Present your results in an exhibit similar in format to Exhibit C. Compare to the cost of the unit produced at Danvers in Exhibit C.
3) Evaluate the proposed move from a profit improvement perspective. Provide a memo for Nicholson to use in his argument to top management in favor of the move. Explain your rationale and cite any evidence you believe to be relevant. (limit 3 text pages; refer to earlier answers or use tables and exhibits as necessary to support your analysis) This is an important part of your exam, so please save time to write a thoughtful memo!