Decisions

Take Note

AFTER ENTERING DECISIONS, ALWAYS CLICK THE ‘SUBMIT’ BUTTON TO RECORD DECISIONS.  YOU MAY EDIT AND CHANGE YOUR DECISIONS AS MANY TIMES AS YOU LIKE BEFORE THE DECSION DEADLINE EACH WEEK.

+ OR - CHANGE DECISIONS: some decisions add to or subtract from your existing data. These decisions are shown below with a + Or -If you do not change your change decision variables they will repeat. If you issue 300000 shares of stock in quarter 1, for example, and do not reset this decision to zero for quarter 2, then you will end up with 600000 shares at the end of quarter 2. ALWAYS check all of your decision forms before the deadline.

Contract decisions are cleared out each quarter, after the quarter is run. Contract decisions will NOT repeat.

Never enter dollar signs, nor a ‘+’ sign, nor commas. Decimals are used uniquely for commissions and dividend payments.

 

Marketing Decisions

Note: A minimum amount should be spent on all marketing variables (advertising, and sales reps, including their remuneration). If not, the demand for your product will be much less.

Advertising: Advertising outlays should be calculated on a per unit basis. Advertising rates per unit can vary widely: from $1 to over $30 per unit. If you want to sell 2000 P1 in A2, and your advertising rate is $5 per unit, you would enter a budget outlay of 10000 in the space for Product 1, Area 2. More advertising can give a competitive advantage; however, beyond a certain amount, there are diminishing returns to advertising. Advertising has a cumulative impact: it takes three quarters for advertising to reach its full impact.

Price: In NAFTA, prices are entered in dollars; in the EU, in euros (sales in euros are converted into dollars on your income statement). All other variables are in dollars. It is best to make gradual changes in prices since there is a negative impact on sales when a firm changes prices dramatically in a single quarter. Sometimes, however, a major price change cannot be avoided for strategic reasons. After a couple of quarters, sales begin to adjust and become steady as your new client base is established at the adjusted price level. 

Price Range:
  Aftershave  Perfume
Low end   $85-100 per unit $150-185 per unit
Middle range   $100-170  $185-250
High end    $170-250   $250-350

Sales Reps: Enter the total number of sales reps ‘desired’ in each area. There is a one-time expense of $12000 to hire an experienced rep. To transfer a sales rep already in the field to the other area, you would simply lower the ‘desired’ number in the area with too many reps and increase sales reps in the other area to the new total (previous sales reps plus new transfers). The transfer cost is $3000 per sales rep. If a sales rep quits (because he/she is not earning as much as reps in other firms), the ‘current number’ will be different from the desired number. 

If you wish to fire all of your sales reps, please ask your administrator to facilitate this for you. The program will not allow a value of zero for this entry.

+ Or - Trainees: You can save money in your initial set of decisions by hiring sales trainees. The training fee is $3000, plus an additional $3000 to place the trainee as a sales rep once the training is completed. (You thus save $6000 by hiring a trainee versus an experienced sales rep.) However, a trainee can only be placed in the field the quarter following his/her training. Enter the number of trainees to be hired. This decision is not area specific.  Only after the trainees have been trained and are being placed as sales reps will the area be considered.  In the following quarter trainee(s) must be placed in the field by adding them to a sales rep area.  To place a trainee as a sales rep, increase the total number of ‘sales reps desired’ by the number of trainees being placed as sales reps in a given area (previous number of sales reps in the area plus trained trainees being placed in that area). When the number of sales reps is increased the simulation will automatically take the trainee(s) from the training pool first, before hiring new experienced sales reps. If a trainee is not placed as a sales rep the quarter following their hire as a trainee, they will continue to be trained at a cost of $3000 per quarter though no benefit is gained by this additional training.  To fire trainees rather than place them as sales reps, you would enter a negative number. For example, an entry of –2 would eliminate 2 trainees. When the game begins, it is a good idea to hire at least half of your sales force as experienced sales reps. However, some firms have a strategy of gradually increasing the number of sales reps. In this case they use sales trainees and gradually increase the new total number of sales reps each quarter.

Change variables should be set back to zero the following quarter if no change is desired; otherwise, the decision will be repeated. An entry for a change variable always adds to or subtracts from the existing or “current” value. Sales trainees is a ‘change variable’. Assume you entered 4 trainees in Q3. If you forget to reset this variable to zero in Q4, the simulation will automatically add another 4 trainees to the trainee pool in Q4. The variable ‘sales reps’ is not a change variable. You will change the ‘desired’ number of sales reps only if you intend to increase or decrease the current number of sales reps.  Other change variables will be signalled below.

+ Or - Salary: Sales reps are paid a quarterly salary plus a commission. Salaries and commission rates can vary widely. This variable is entered when the sales reps are placed in the field. For example, in quarter 1, if you place 2 reps in A1 and enter 5000, each rep will receive a base salary of $5000 per quarter. (This is a change variable, so you must not forget to reset it to zero in quarter 2; otherwise, their salary will automatically increase to $10000 in Q2.) Sales reps compare their average compensation (base salary plus commissions) with that of reps in other firms. If they are underpaid, they quit. 

+ Or - Commission : Commissions are paid based on the number of units sold. Enter the commission rate: for example, if you enter 5.50 (you can use a decimal in this case) for P1A1, your reps will receive $5.50 per unit sold in NAFTA. The next quarter, if you wish to increase their commission to $6.50, you would enter the value 1. An entry of        -1.50 would reduce the commission to $4.00 (you can use a negative sign, but you should never use a ‘+’ sign). 

Commissions are paid on units sold. This includes backorders from the previous quarter. Commission are not paid on contract sales to other firms or when your firm ‘picks up’ the lost sales of competitors. The computer gives the sale to your firm when your closest competitors are unable to meet the demand of their customers; thus, the sales reps are not responsible for the sale. 

Credit Policy: is determined by entering one of the following numbers.


Financial Decisions

The amount of financing required depends on the size of your plant (a fixed asset) and your working capital needs (cash, raw material and finished goods inventories, and accounts receivable). Interest rates at the start of the game are as follows:

Interest Rate Quarterly Annually
Short term loan  2.3% 9.2%
Term loan   3.0% 12.0%
Bonds  2.5% 10.0%
Special loan 9.0%  36.0%

Note: If your firm runs short of funds, the program will automatically generate a special loan for you. You do NOT want a special loan (with the exception of a small product order from Peacock going into your first quarter). A special loan carries a rate of 36% annually!

Short Term Investment: enter the US dollar amount you want to put into investments. Your firm is limited to cash on hand (above a $10,000 cash minimum which you must maintain) at the start of the quarter. Note that contract purchases come out of cash prior to the start of the quarter and should be taken into consideration when determining cash available for investment. Your short term investments will earn a profit (or loss) for the corporation instead of sitting idle. Earnings are reported on the income statement. Any earnings or losses from your investment will come into cash prior to any cash outflows for the quarter, as does the original investment.

As you make the entry, a set of investment choices will appear numbered as 0, 1, 2 or 3. Select one of the following choices.

Factor Receivables: Since customers are given credit, they pay only 60% of their purchases in the current quarter. The remaining 40% is in accounts receivable to be collected the following quarter. If you need cash, you can ‘factor receivables’ and receive 100% of sales income in the current quarter. Estimate forecasted sales revenue for the coming quarter and enter the amount that would normally go into accounts receivable. There is a 4.25% commission charge for factoring receivables.

Short Term Loan: Enter the loan amount desired. Your reports will identify your firm's unique borrowing rate which changes quarterly. At the start of the simulation the interest rate on short term loans will be 9.2% annually (2.3% quarterly).

Repayment of the short term loan is automatically made by the computer program the first day of the following quarter along with interest. You do not need to make an entry for repayment. If you can't afford repayment or need even more money, then place a request for another loan (referred to as rolling the loan over).

There is no set limit on short term borrowing. However, firms need to manage their debt-to-equity ratio to remain competitive. Bank audits that reveal excessive debt may result in conversion of short term loan to a special loan.

+ Or - Term Loan: Enter the change you want to make to a term loan. If you want to borrow $100,000 dollars than enter 100000. Note that this is a change variable. An entry with a negative sign will reduce the loan. No action on your loan balance (except interest charges) will be made by the program if you enter zero. Rates are the same for all firms and have been fairly stable from one quarter to the next. The rate at the start of simulation is 12% per annum (3% per quarter).

The loan limit is $1,000,000. Firms need to manage their debt-to-equity ratio to remain competitive. Bank audits that reveal excessive debt may result in conversion of long term loan to a special loan.

Issue or Repurchase Bonds: Enter the dollar amount of bonds you wish to buy or sell. Note that there is one entry box for an issue and one for a repurchase, thus you do not need to use a negative sign as with other change variables.  The bonds mature in five years, and therefore do not have to be paid back during the simulation. If bonds are bought back by the firm, it will be at face value plus a 4% prepayment penalty. Bond buyers demand a discount from the face value of a bond when it is sold. The discount demanded by the buyers increases as:

A. the firm's credit standing falls, or;
B. the amount of bonds issued becomes too large for the market to accept, or;
C. interest rates on treasury bills move higher.


Interest paid by the firm is always 10% (2.5% per quarter) on the face value. If the proceeds from the sale decline due to the discount, the effective bond rate could increase substantially. A firm might only receive $850,000 from a sale of $1,000,000 but must pay interest on the full $1,000,000. The full $1,000,000 must be repaid, thus a liability of $150,000 is instantly created.

The face value is always recorded as a liability under BONDS. The fact that the full face value was not received into cash is reflected as a loss to the stockholders. See their equity section on the balance sheet and find the negative stockholder account called AMORTIZED DISCOUNT. In the above example, the discount (or loss) would be $150,000. This loss is charged off the income statement at 5% per quarter.

Note that after a 1/1 debt to equity ratio has been reached, the bond market may close on a firm so that no bonds, or fewer bonds, will be sold.

+ Or - Issue or Repurchase Common Stock: Enter the number of shares to be sold. Note that there is one entry box for an issue and one for a repurchase, thus you do not need to use a negative sign as with other change variables.

A firm must issue at least 300,000 shares in order to begin operations. A minimum of 300,000 shares must be outstanding at all time. Slipping below this number will result in a fine.

There is a 10% limit when repurchasing shares of stock in subsequent quarters. Repurchase of stock exceeding 10% of outstanding shares is restricted except for special permission of the instructor, granted generally on proof of extreme need.

The accounting entries for a sale of stock are: increase cash; show the increase of the cash asset as coming from $1 per share of COMMON STOCK sold and the balance of the per share sale in PAID IN CAPITAL.

The accounting entries for a repurchase of stock are: decrease cash; reduce COMMON STOCK by $1 per share repurchased, reduce paid in capital by an average of paid in capital per share, AND reduce retained earnings by any excess paid to repurchase the stock.

For example, a repurchase of one share at $22.50 would reduce cash by $22.50, reduce COMMON STOCK by $1.00, reduce PAID IN CAPITAL by the average of paid in (say $4 in this case), and reduce retained earnings by the balance (which in this case would be $17.50 per share).

Estimating stock issue price:
following are two different examples of shares issued in quarter 1, year 1

Shares Issued
Amount Received Per Share
Amount Received Per Share
300000
$4.07
$3.54
400000
$3.09
$3.00
500000
$2.92
$2.94
600000
$2.92
$2.98
700000
$2.59
$2.56
1000000
$2.92
$2.33
2000000
$2.28
$2.51


Dividend: When retained earnings are positive (see the balance sheet), the firm has been earning profits and can therefore pay dividends. (You must never pay out more than you have in the retained earnings account, it is illegal and your firm could be fined.) The dividend payment is entered on a per share basis for example, $0.40. (You can use a decimal point.) The first time you pay a dividend, the maximum you can pay is limited to 0.50 per share (you can pay less). An increase in the dividend payment is possible, but the amount of the increase each time is limited to $0.50.  Thus, if your firm has the retained earnings to justify a dividend payment you may issue a dividend as large as $0.50 the first time, $1.00 the second time, $1.50 the third time and so on.   Remember that dividends are paid for with cash from the cash account but balanced against retained earnings on the balance sheet.  If retained earnings are negative when a dividend issued or after a dividend has been paid, the firm can be fined.

To calculate how much you are paying out, multiply the dividend payment per share by the number of shares outstanding (0.50 x 500.000 = $250.000). This amount will come out of your cash account and will reduce the amount in your retained earnings, which has an impact on your debt-equity ratio.  If a firm issues a dividend and repurchases stock in the same quarter, the dividends are paid first on the entire number of shares outstanding then the stock repurchase is made.


Budget Decisions

Engineering: Spending for the engineering budget reduces labor cost in production. The total savings possible is 20% in both stages. You can see unit production cost declining on the firm production report or on the Special Report (you must order this report). The ‘production efficiency factor’ on the Special Report has an initial value of one and can decline to zero depending on the amount spent. When it reaches zero, savings on labor costs have reached the maximum of 20%. A plant expansion can sharply reduce previously obtained savings. It is to be noted that the engineering budget is in thousands (i.e. an entry of ‘5’ would equal an engineering budget of $5.000 while an entry of 100 = $100.000).

Quality Control: Enter a dollar budget. Next, enter the percentage of that budget you want spent on P2 (Product 2). Entering 8000 with a percentage of 40 would cause $4,800 to be spent on P1 and $3,200 on P2. It is VERY IMPORTANT that you budget quality control as an element of your marketing plan. Poor quality control over time will give your product a bad name.

Budget toward either cost or image. If cost, keep increasing the budget until the cost of avoiding returns is equal to the cost of remanufacturing returns. If image, most returns should be avoided. Even after returns are minimized, additional quality expenditures provide for such things as insuring that labels are on straight. There is no upper dollar limit where expenditure per unit is wasted. Excessive expenditures are not recommended unless a "quality war" is being waged in your market group.

Firms that produce and sell in the same quarter should budget to production. Firms that produce to inventory for later sales have a unique problem, as do those firms who order through Contracts. Some of the inventory might have been damaged in storage. Never set your quality control budget to zero, even in the case where no units are manufactured. The safest, but most expensive method, is to set a per unit budget for production or unit sales, whichever is highest.

Regardless of the expenditure, since the manufacturer does not have complete control over the distribution channels, products might be returned. Some might be returned when the firm is not even at fault. A high quality firm might want to take action if units are returned even when no problem is thought to exist within the firm.

Product Improvement: Enter a dollar budget. Enter the percentage of the budget to be spent on P2 (Product 2). Each industry has different opportunities. For some industries, this is a black money hole. For others, it is a competitive tool. Product improvements are announced in the industry section of the news.


Capacity (Building Plant) Decisions

+ Or - Plant Addition: Enter the number of hours to be built by STAGE and by AREA. Make the entry in 100's of hours. An entry in A1S2 of 20 will build 2,000 hours of Stage 2 facilities in the NAFTA area. Be sure to build Stage 1 and Stage 2 in the appropriate mix to match desired product mix.

It takes two quarters to build a plant. Thus, a plant ordered in decision#1 will be operational and ready to produce only in decision#3. (Additions to plant capacity also require two quarters to complete.) A second shift can be opened immediately once your plant is operational. To place a plant in one of the low-wage areas make an additional contract decision.

There is a cap on adding plant capacity of 299 (29,900 hours). This is due to building restrictions. If you want more hours than this, you will have to order additional plant in the following quarter. It takes two quarters to build. One half is paid for in the quarter you place the order and the second half in the quarter the plant is finished. The facility is ready for production in the third quarter.

This is a change variable. Reset the decision to "0" the following quarter or another factory of the same size will be built.

How many hours of plant capacity do you need? Let’s assume that you produce 5000 units of aftershave and 2500 units of perfume per quarter. Multiply these quantities by the labor production parameters to get plant size:

The first stage of production is the mixing of ingredients; the second stage, bottling and packaging. To produce one unit of each product the following labor hours are required:

  Aftershave Perfume
Stage 1 1.7 hours 3.0 hours
Stage 2 2.0 hours   2.5 hours

 

Aftershave Perfume

Total

1.7 stage 1 hours x 5000 units + 3 stage 1 hours x 2500 units   Stage 1 = 16000 hours
2.0 stage 2 hours x 5000 units  + 2.5 stage 2 hours x 2500 units  Stage 2 = 16250 hours

Note: that the two products share available plant hours.

Plant Construction Cost: the cost to build 1 hour of plant capacity is 
$50 per hour for stage 1
$45 per hour for stage 2

What would be the cost of the plant shown above?
Stage 1: building cost = $50.00 per hour x 16.000 = $800000
Stage 2: building cost = $45.00 per hour x 16.250 = $731250
Site fee:                                                                         80000                
Total plant construction cost                                    $1611250

A one-time site fee of $80.000 is charged.  If your firm were to build one plant each area there would be a site fee for each plant, a total cost of $160.000. The plant construction cost is paid over two quarters. The site fee is paid in the quarter you order the plant.


 + Or - Second Shift: You can hire a second shift (or night shift) to increase your plant capacity. Additions can be made by increments of 10% (from 10 to 100%). To decrease second-shift capacity, you select a minus number. There is a one-time charge of $2000 for each 10% increment in capacity and a quarterly overhead charge of $350 per 10% increment as long as second shift capacity is available. Workers on the second shift earn a 5% wage premium. To reduce the second shift, there is a one-time charge of $1000 for each 10% increment removed. Adding a second shift is a very convenient way of increasing your production capacity without increasing the size of your physical plant.


Production Decisions

If you make production decisions YOU MUST HAVE A PRODUCTION FACILITY. To build a plant, use the capacity decision menu!!! It takes 2 quarters for plant hours to be built and ready to use in the 3rd quarter.

Labor hours required to produce one case of aftershave or perfume in each production stage:

  Stage 1 Stage 2
Aftershave (P1): 1.7 hours 2 hours
Perfume (P2): 3 hours   2.5 hours

Note: A High-tech plant can reduce Stage 2 packaging time by 20% for product 1 and product 2.

** High-tech costs $1,500,000 to install. You must use the Contracts program to order High-tech. High-tech takes only 1 quarter to install. Additional hours are automatically high-tech.

Labor Costs:
Stage 1 workers receive $12.00 per hour including benefits.
Stage 2 workers receive $5.50 per hour, including benefits.
The night shift earns a 5% premium over the day shift.
Overtime = another 25% of your shift hours at a rate of 1.5 times the regular labor cost
Subcontracting = anything beyond overtime (moves incrementally from 2.2 times the cost to 4.4 times to 6.6 times)

Workers are paid based on production scheduled, not the size of the plant.

First Shift Production (Day Shift: Shift 1) After calculating how much you think you will sell in the coming quarter and how much you would like to add to inventory, you place your production order. You enter the number of units (P1, P2) to be produced in the current quarter. (You would make two entries if you have plants in A1 and A2.) These units are available for sale the same quarter in which they are produced.

If planned production exceeds plant capacity, the computer automatically schedules overtime (between 100% and 125% of normal capacity). The overtime wage rate is 50% higher. If scheduled production exceeds the overtime limit (125%), the production order is filled through subcontracting. Subcontractors use your raw materials until you have no more, then buy the additional amount required at market prices. Labor rates for subcontracting are 2.2 times the normal rate between 125% and 150% of normal capacity; 4.4 times between 150% and 200% of  normal capacity; and 6.6 times if the production order is superior to 200%. Since it takes two quarters to build a plant, if you make a mistake and place a production order before the plant has finished being built, the simulation automatically subcontracts the order (based on a normal capacity level of 5.000 hours per stage) at the 2.2 multiplier rate. Mistakes of this kind are very expensive.

Second Shift Production (Night Shift: Shift 2): if you have hired a second shift, you would enter the number of units to be produced in the day shift and the number of units to be produced during the night shift (two separate entries). Be careful to respect capacity limits for each shift.

Maintenance Budget: is entered for each stage of production and for each plant. Maintenance cost will depend on the number of plant hours and the level of production. Maintenance budgets must be higher in stage 1 which is a very equipment intensive production stage. One might expect about $0.30 per hour for stage 2 maintenance for the normal (day-time) shift. Stage 1 could require as much as 75% more due to the complex machinery used in the mixing process. Overtime will increase the need for maintenance, as will the use of a second shift.

Hourly losses of plant capacity per quarter and per stage of 0.001 of total plant hours (29.900 x 0.001 = 29 hours lost) are unavoidable, regardless of how much is budgeted for maintenance. However, if you are losing more than this amount, you will need to increase your maintenance budget. Less than adequate maintenance will have a cumulative effect, that is, plant hours will be lost at an increasing rate even with a constant dollar budget. Maintenance is required even when the plant is shut down—machines rust and corrode, belts rot, and deterioration occurs even if the plant is idle for just a quarter. Maintenance will be required although some reduction in budget can be achieved. (Hint: Monitor ‘labor hours’ on your firm’s production report.)

Raw Materials Decisions

Raw materials ordered in one quarter are delivered on the last day of that quarter ready for use the following quarter. Calculate your raw material requirement and enter the number of units of each type for each plant. When the firm purchases raw materials in the quarter preceding their use (called ‘futures’), it is usually less expensive than purchasing at ‘market’ prices. Raw materials can only be ordered by your firm as ‘futures’. If you do not have enough raw materials in inventory, the simulation will automatically order the quantity required at market prices to complete your production order. However, there is a two-week delivery delay on ‘at market’ raw material deliveries.  Thus if your firm had zero raw materials in inventory at the start of a quarter, the simulation would order the necessary raw materials to meet production scheduled, but you would lose two weeks of production time waiting for those raw materials to be delivered. (Since there are 13 weeks in a quarter, two weeks is equal to roughly 16% of production time.) A safe rule is to have at least 16% of the raw material requirement in inventory at all times.

There are two types of raw materials—type 1 (ingredients) and type 2 (packaging). They are the same for each product, only the quantities change. Raw material requirements and costs are as follows:

 Units of Raw Materials Required to Produce 1 Unit of Product 

  Type 1 Type 2
Aftershave (P1):    6 units     12 units
Perfume (P2):  12 units      25 units

Raw material costs:                
$1.33 per unit of type 1 raw materials
$0.96 per unit of type 2 raw materials

Inventory carrying costs are $0.60 per unit for P1 and $0.90 for P2 for each quarter the unit is in inventory.
Raw materials carrying costs are $0.005 per unit and per quarter for both types.

 

Shipping

Note: if you are making contracts you do not use this decision menu to ship product. Shipping is handled within the contract itself.

Shipping A1 to A2: Enter the number of P1 units to be shipped from A1 to A2. Next, enter the number of P2 to be shipped. You must ship in lots of 1,000.
Cost:

Shipping A2 to A1: A firm can also ship from A2 to A1. Cost is the same. Enter in lots of 1,000 up to 20,000 units.

Emergency (also called Just in Time) Shipping: Say yes or no, when prompted, regarding shipping. "YES" for P1 and/or P2 will allow that product to be shipped air freight, one unit at a time, in order to satisfy a customer in that market area. The program will only ship if a unit is demanded in the needed market area and all regular customers are satisfied in the surplus market area. On rare occasions, when demand is heavy in one area and light in another, some finished goods are retained for the next quarter instead of being shipped. There is a premium for air freight, 30% higher than regular shipping costs.