Product Design Decisions Help Explanations Information on Rules/Procedures

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1 Product Design Decisions Help Explanations Information on Rules/Procedures The product design screen involves deciding on the caliber of the components to incorporate in your entry-level and multi-featured camera lines, the special utility features to be built into the cameras, the number of models to have in each line, and how much to spend on new product R&D, engineering, and design. The decisions here determine the P/Q rating the World Digital Camera Federation will assign to your camera lines and also have a major bearing on production costs (component costs are far and away the biggest driver of costs per camera). Each time you make a decision entry on this screen, an assortment of on-screen calculations will instantly show the projected effects on P/Q rating, component costs, and total production costs. The challenge here is to try to design your cameras so as to achieve the desired P/Q rating at the lowest possible production cost per camera. Special Note: In making decision entries on this screen, there will be occasions when you enter a decision for entry-level cameras and the on-screen calculations for costs and profits change not only for entry-level cameras but also for multi-featured cameras. Conversely, decision entries for multi-featured cameras can result in changed cost and profit projections for entry-level cameras, as well as for multi-featured cameras. Why? How can this be? The reason is that costs common to both entry-level and multi-featured cameras specifically, advertising costs, administrative costs, depreciation, and interest costs are allocated to entrylevel cameras and multi-featured cameras based on their share of total units sold. Thus, if the number of entry-level cameras sold is 75% of total unit volume, then entry-level-cameras will be allocated 75% of all common or joint costs and 25% will be allocated to multi-featured cameras. Many of the decision entries on this screen affect the projected number of units sold (because of corresponding changes in the P/Q rating); any time a decision entry changes the projected unit sales of entry-level (or multi-featured cameras), then it also changes the projected cost allocations between the two lines of digital cameras. So it is entirely proper, indeed necessary, from an accounting perspective for certain cost categories for entry-level and multi-featured cameras to change whenever there is a change in the percentage mix between entry-level camera sales and multi-featured camera sales. Core Component Decisions Understanding the Decisions The better the caliber and performance capabilities of the core components used, the better a camera s performance and quality (but the higher the production costs per camera). All three core components (the image resolution module, lens, and flash memory card) are purchased from outside suppliers; these suppliers sell essentially the same core components at the same prices to all camera makers. However, advances in low-cost digital technology, coupled with greater ability of suppliers to achieve production economies in the manufacture of image resolution modules, LCD displays, and camera lens are resulting in steadily lower market prices for these three components. You Copyright 2009 GLO-BUS Software, Inc. Page 1

2 can expect that the prices your company pays its suppliers for these three core components in upcoming years will decrease 5% annually, starting in the first quarter of Year 7. You should try several different what-if entries for the core components to be used in entrylevel and multi-featured cameras, aiming for the lowest cost combination of achieving the P/Q rating you desire. Brand-Specific Component Decisions Two of the four brand-specific components (the imaging part that determines color quality and the accessories) are purchased from outside suppliers. These suppliers have imaging devices and accessories of varying quality and performance, giving you a range of choices in designing your two lines of cameras. Camera bodies are obtained from a contract supplier that works closely with company personnel to provide distinctive camera body styling tailored to each of the company s models and help distinguish the company s models from those of rival brands. Different styling options have different costs. The image handling software incorporated in entry-level cameras and multi-featured cameras is developed by outside software developers; the same entry-level software is used in all entrylevel models and the same software is used in all of the company s multi-featured cameras. The agreement with software developers calls for them to receive a fee for each camera assembled and shipped; the fee varies according to the features, options, and functionality you and your co-managers desire (higher fees equate to more sophisticated software and lower fees equate to less functionality). You and your co-managers can choose from the array of brand-specific components, paying whatever amounts for these items that you see fit. Special Utility Feature Decisions You can have up to 8 special utility features for entry-level cameras and up to 16 special features for multi-featured cameras. The costs of special utility features vary with the number selected (to see the cost per camera of any specific number of special utility features, look in the $/unit column of the itemized production costs in the lower section of the screen). You can try various numbers of special utility features entries, observe the impact on the P/Q rating and the per camera cost consequences in the on-screen calculations, and then settle on what number of special utility features is acceptable in terms of P/Q contribution and unit cost for each camera type. Just as for core components, the costs of special utility features tend to decline 5% annually. Deciding How Much to Spend on New Product R&D Expenditures for new product R&D, engineering, and design (as they accumulate over time and build the company s camera R&D, engineering, and design proficiencies) act to: Copyright 2009 GLO-BUS Software, Inc. Page 2

3 1. boost a company s P/Q rating, 2. reduce warranty claims and costs (because cameras with higher P/Q ratings have lower warranty claim rates), and 3. improve the productivity of PATs (since some of the company s engineering and design effort goes into making the company s cameras easier/quicker for workers to assemble). Cumulative spending on new product R&D (shown on the screen just under the decision entry boxes) is much more important than current spending, since the effectiveness of new product R&D, engineering, and design is greater from continuous effort over time as opposed to startstop efforts. It takes all four quarters for the amounts spent on new product R&D to produce the full benefits on the P/Q rating; in other words, spending $4 million on new product R&D annually translates into an effort of $1 million per quarter and any projected change in the P/Q rating, say from 2½ stars to 3 stars, occurs gradually as cumulative spending on new product R&D builds. There are separate R&D spending entries for entry-level and multi-featured cameras so that you can have varying emphasis on R&D, engineering, and design for each line of cameras should that prove advantageous in striving to boost the P/Q rating and/ or lowering warranty costs and claims for one line of cameras versus the other. Bear in mind that expenditures for R&D, engineering, and design also have the effect of boosting PAT productivity because a portion of the R&D effort is aimed at designing cameras in a manner that speeds the assembly process. Deciding on the Number of Models Prior management elected to have a product line-up consisting of 3 entry-level models and 3 multi-featured models. You can have as few as 1 model or as many as 5 models. While there s merit in trying to expand sales by adding more models, the addition of more models introduces quality control difficulties in assembly and temporarily reduces the number of cameras that production assembly teams (PATs) can assemble quarterly. PATs cannot assemble 8 models as proficiently and as problem-free as they can assemble the current 6 models. Increasing the number of models tends to raise warranty costs because of faulty camera assembly and consequent problems that buyers will encounter during the warranty period. Decreasing the number of models tends to lower warranty costs see the on-screen calculations for the projected warranty costs associated with changing the numbers of models. Increasing the number of models in a given year will reduce PAT productivity by 4% for each additional model for a period of 1 year until team proficiency in assembling the new model builds (the 4% per model productivity penalty disappears after 1 year). Reducing the number of models tends to boost productivity by 2% for each model dropped because teams have fewer assembly procedures to master and less model change-over time. You can see the effects of adding/reducing the number of models by making what-if entries for the numbers of models and checking out changes in the on-screen calculations of warranty Copyright 2009 GLO-BUS Software, Inc. Page 3

4 costs and labor costs. You ll see different impacts from changing the number of entry-level models versus changing the number of multi-featured models because of the big differences in unit sales volumes. Projected warranty claim rates and warranty costs are shown on the Marketing Decisions screen. Understanding the On-Screen Calculations The lower section of the screen showing the projections of production costs contains two columns of cost numbers the first column shows total dollars and the second shows cost per camera. Both numbers are based on the annual number of cameras being assembled and shipped (based on the decision entries showing on the Assembly Decisions screens for entrylevel and multi-featured cameras. What follows is an explanation of how these cost projections are calculated: The total cost number for each of the three core components is simply the cost per component multiplied by the annual number of that type of camera scheduled to be assembled and shipped (based on the entries in the decision boxes on the two Assembly Decisions screens. The unit costs for core components are based on the price that is paid to suppliers for that component this unit price varies with the quality and performance capability of the component. If you think the unit cost is too high, then you can alter your decision entry for that component. Bear in mind that the costs for core components tend to drop 5% annually, creating a tendency for overall unit costs to decline over time (unless you elect to increase the performance/quality of the components being used or incur rising unit costs elsewhere in the design and assembly process). The total and unit costs for brand-specific components flow directly from your decision entries. Costs can be lowered/raised by making differences choices on the decision entries. Costs for special utility features are determined by the decision entries. The unit costs of special utility features vary with the number selected there not a specific cost per utility feature, rather the incremental cost of each additional feature is a variable that rises gradually for each added feature, up to around 8 features; past a total of 8 features, the cost of each additional features declines slightly up to the maximum of 16 features for multifeatured cameras. The total cost number for special utility features is simply the cost per camera for special utility features multiplied by the annual number of that type of camera scheduled to be assembled and shipped (based on the entries in the decision boxes on the two Assembly Decisions screens). Just as for core components, the costs of special utility features tend to decline 5% annually. The total dollar and cost/unit calculations for total cost of product components and features equal the sum of all the costs for core components, brand-specific components, and special utility features. The costs for new product development, engineering, and design for entry-level and multifeatured cameras come directly from your decision entries of the total amount to be spent. The projected unit cost number is equal to the total dollars spent divided by the number of Copyright 2009 GLO-BUS Software, Inc. Page 4

5 that camera type to be assembled and shipped (based on the entries in the decision boxes on the two Assembly Decisions screens). The specified annual expenditures for new product R&D, engineering, and design occur evenly over the course of the upcoming 4 quarters. The projected numbers for labor costs are based on decision entries on the Compensation and Training screen. They represent expenditures for base pay, bonus, fringe benefits, and overtime pay for all of the PATs engaged in the assembly process. The costs of handling a warranty claim are $50 per claim on entry-level cameras and $100 per claim on multi-featured cameras. Projected annual warranty costs in both the total dollars and per camera columns are a function of the warranty period entry on the Marketing Decision screen, warranty costs from preceding years (if any), the anticipated warranty claim rate on cameras to be assembled and shipped in upcoming quarters, and the warranty claim cost per camera. (You can consult the more detailed discussion of how warranty costs are calculated in the Help page for the Production Cost Report.) The company s depreciation costs average out to 4% of gross fixed asset investment (facilities, workstations, other assembly-related equipment, office furnishings and equipment, etc.) on an annual basis (equal to an average asset life of 25 years). Total depreciation costs are allocated to entry-level cameras and to multi-featured cameras in proportion to each camera type s share of total unit production in other words, if 80% of all the cameras assembled and shipped in a quarter/year are entry-level cameras, then 80% of the company s quarterly/annual depreciation costs are allocated to entry-level cameras and the remaining 20% is allocated to the production costs for multi-featured cameras. Unit depreciation costs for each camera type are equal to total quarterly/annual depreciation allocated to that camera type divided by the number of that type of camera assembled and shipped in the corresponding period. The total dollar and $/unit costs of company-assembled units equal the sum of the abovelisted costs. The cost of units outsourced always equals the sum of (1) the costs for core components, brand-specific components, and special utility features; (2) an allocation for new product R&D, engineering and design; (3) an allocation for warranty claim costs (the company is still responsible for warranty claim costs on outsourced cameras), and (4) the $25 per camera fee paid to contract assemblers for performing the assembly. Projections of Companywide Performance (at the middle-left of each decision screen) On the left side of every GLO-BUS decision screen there is a box containing projections of the company s overall performance for the upcoming year on the following measures: Revenues defined as worldwide revenues (after taking into account all exchange rate adjustments and promotional discounts) from the combined sales of both entry-level and multi-featured cameras in all four geographic regions. Revenues are booked at the time of shipment, not when the company receives the cash payments from camera retailers (which occurs the quarter following shipment). Net profit defined as worldwide profit after all expenses and taxes. Copyright 2009 GLO-BUS Software, Inc. Page 5

6 Earnings per share defined as net profit divided by the number of shares of common stock outstanding at the end of the year. Earnings per share is one of your company s five annual performance targets. ROE defined as net profit for the year divided by total shareholders equity investment at the end of the year. An annual ROE of 15% or higher is one of your company s annual performance targets. Credit rating Your company s credit rating is established by credit analysts using four measures: the percentages of debt and equity that comprise your company s total capital investment, times-interest-earned ratio, debt payoff capability (in years), and the % of the line of credit which you have used (loans outstanding divided by the total line of credit your company has established with its bank). The credit rating shown at the bottom of the screen is the projected credit rating for next year, given the company s projected performance it is not the current credit rating (which is reported in each issue of the GLO-BUS Statistical Review). The company s Board of Directors and investors/shareholders expect that your company will achieve a credit rating of B+ each year. Image rating Your company s image rating is based on (1) its P/Q ratings for both entrylevel cameras and multi-featured cameras, (2) its market shares for both entry-level and multi-featured cameras in each of the four geographic regions, and (3) your company s actions to display corporate citizenship and conduct operations in a socially responsible manner over the past 4-5 years. The company s Board of Directors and investors/shareholders have established a target image rating of 70 or higher for your company to achieve each year. Revenues defined as worldwide revenues (after taking into account all exchange rate adjustments and promotional discounts) from the combined sales of both entry-level and multi-featured cameras in all four geographic regions. Revenues are booked at the time of shipment, not when the company receives the cash payments from camera retailers (which occurs the quarter following shipment). Net profit defined as worldwide profit after all expenses and taxes. Why These On-Screen Projections Are So Important and How to Use Them Properly. Each time you make a new decision entry, all of the above companywide performance projections are instantly recalculated, thereby showing you the incremental impacts of that decision entry. It is easy enough then to simply enter a trial decision and determine whether the resulting projections look better or worse than before. By entering several different trial decisions, you can quickly and readily compare the projected outcomes of what if we do this against what if we do that. After entering a number of different trial decisions, you ll be able to identify which decision entry seems best or most acceptable, given all the different onscreen calculations that are provided. This GLO-BUS feature provides you with powerful capability to explore all kinds of what if scenarios and make wise numbers-based decisions. Always bear in mind that the projections do not represent a valid indication of your company s projected performance until you and your co-managers have made a complete set of decisions (covering all decision screens) for the upcoming year. In other words, while you are working your way through the early decision screens the projections will be updated with each entry, but the numbers shown will only be a rough approximation Copyright 2009 GLO-BUS Software, Inc. Page 6

7 and lack finality because the projections are not yet based on all the decision entries you plan to make for the upcoming year. Once you have gone through all the decision screens and entered what you think are reasonable decisions for all the boxes, then it is time to really scrutinize all the various company performance projections and determine whether the projected outcomes of your strategy and decision-making look acceptable. If not, then you need to tour back through the decision screens, make different trial decisions here and there as seem appropriate, and not stop tweaking and fine-tuning until you arrive at a set of company projections that appears to be the best you can come up with. But even then, then projections are still only projections they do not represent guaranteed outcomes. Why? Because there remain a host of uncertainties about what competitors will actually do (what prices will they charge, how much they will spend on advertising, how many different camera models they will offer, what warranties they will offer, and so on). These will not be known until the deadline for the decision round arrives, at which time the GLO-BUS server will process the decision entries of all companies and determine the actual outcomes of competition in the marketplace for digital cameras. Copyright 2009 GLO-BUS Software, Inc. Page 7

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