INDIVIDUAL COURSEWORK AUTUMN 2015 70% OF MODULE MARK SUBMISSION DEADLINE: 12:00, January 31 st, 2015. This individual coursework carries 100 marks. The total word count for the solution to this coursework is 2,500 words. You will be penalised for exceeding this word limit. The company Y-Factor Plc was established in 2000 in USA to provide factoring services. It keeps receivable accounts and records transactions in its own information system Factor-Sys. Since 2005, the company also acts as a settlement agent for companies with a great number of receivables. Settlement transactions are also processed by Factor-Sys. In 2013, Y-Factor Plc set up a subsidiary, which provides short-term loans and instalment payments for Y-Factor debtors. Revenues: Currently, the company charges its clients: 1. For factoring services: on average 10% of receivables (depending on the credibility analysis of debtors); 2. For receivables settlement: $3 annual fee per account; 3. On loans: 15% of the borrowed amount per annum (depending on the credibility analysis of debtors). Direct costs: Y-Factor is able to directly ascribe only below costs to each of its products: 1. Factoring: Costs of annual confirmations (number of letters sent equal to the number of accounts x unit costs of one letter). In 2015 Y-Factor sent 50,000 letters, each costing $4. 2. Settlement: none 3. Loans: charges for bank accounts kept for loans ($10 per annum x number of bank accounts (2,000 accounts in 2015)). Overheads: Currently overheads are collected, then allocated to each of the three products by using the overhead rate per one account (Total actual overheads/ total number of accounts = about $1.92 in 2015). 1
Products profitability analysis for 2015: P&L ($) Jan 1st-Dec 31st, 2015 Volumes Pricing base Factoring Receivables nominal value 50,000,000 Settlement No of accounts 1,000,000 Loans Amount borrowed 1,000,000 Selling price: Factoring Average % of receivables nominal value 10% Settlement Price per account 3.00 Loans Interest rate 15% Revenues: Factoring 5,000,000 Settlement 3,000,000 Loans 150,000 Revenues 8,150,000 Overheads estimation: Estimated overheads: 2,020,000 Estimated number of accounts, including: 1,052,000 - Factoring 50,000 - Settlement 1,000,000 - Loans 2,000 Rate per account 1.92 Products profitability Factoring Revenues 5,000,000 Loans direct costs: bank charges - factory burden 96,008 Factoring -Gross margin 4,703,992 Settlement Revenues 3,000,000 Factoring direct costs: annual confirmations - Loans direct costs: bank charges - factory burden 1,920,152 Settlement -Gross margin 1,079,848 Loans Revenues 150,000 Factoring direct costs: annual confirmations - factory burden 3,840 Loans -Gross margin 126,160 84% Gross margin- total 5,910,000 Total overhead 2,020,000 2
Profit and loss account for 2015: P&L ($) Jan 1st-Dec 31st, 2015 Revenues 8,150,000 Total overhead 2,020,000 Cost of Goods Sold 2,240,000 Gross Margin 5,910,000 Operating costs 5,623,000 Depreciation and amortization 800,000 Payroll 1,500,000 TI costs 1,987,000 Rent 670,000 Professional fees 350,000 Other services 130,000 Entertainment & Travel 120,000 Fees 12,000 Other expenses 54,000 Gross profit / loss 287,000 Financial ratios Gross profit 287,000 Groff profit 3.5% Gross margin 5,910,000 Gross margin 72.5% The problem One of the biggest Y-Factor clients believes the company s settlement services are too expensive as competitors prices are about 5-10% lower. Y-Factor managers are aware that some clients for whom settlement services are provided may resign from the services if the charges are maintained at the above level. The managers also suspect that any charge reduction for one client will additionally force fee reduction for other Y-Factor clients. The company analysed prices of competitive companies and prepared new charge structures: 1. Factoring services: 9% of receivables + reimbursement of direct cost and overheads; 2. Receivables settlement: $1.5 per account annually + reimbursement of direct cost and overheads; 3. Loans: without changes. 3
The Financial Director suspects that the cost apportionment is not fair and is considering switching to a more detailed allocation of overheads. In order to do so, the following resources and activities were identified: Total cost Cost for 2015 ($) Settlement operators (FTE) 900,000 System implementation 480,000 no. units in 2015 Cost driver Factoring Settlement Loans Total No. accounts 50,000 1,000,000 2,000 1,052,000 No. purchased batches 2 4-6 Telephone charges 320,000 No. phone calls 100,250 5,000 12,010 117,260 CC operators (FTE) 300,000 Debt collection agents 20,000 No. phone calls 9 1 2 12 No. Nonperforming debts 2,500-300 2,800 Total 2,020,000 Requirements: Part 2. 1. Re-calculate revenue from settlement agent services based on new fees, and compare the results with the current revenue to see whether targeted 5% decrease of revenues from settlement agent services was achieved. 2. Re-calculate profitability of Y-Factor products (factoring, settlement, loans) using the Activity Based Costing technique, basing calculation on the current pricing policy. 3. Explain briefly why these numbers differ from the profitability of products calculated using the Y-Factor Plc existing simple costing system. 4. Estimate revenue, product profitability and company profit, basing calculations on the new basic fees + cost reimbursement (specified on page 3). Based on the outcomes, advise Senior Managers which costing and pricing system should be applied. As the market becomes increasingly competitive, further price cut expectations may become more common. Senior Managers are aware that in order to maintain profitability, Y-Factor have to continuously improve efficiency. In order to do so, Senior Managers want to set up financial and nonfinancial targets for managers of critical Y-Factor Plc. departments. These units and the main responsibilities of these departments are specified below: Department Main Responsibilities Settlement department - Settlement of receivables with payments - Generating periodical and ad hoc reports according to clients requests - Receivable and debtor analysis for clients 4
Department Main Responsibilities Call Centre - Incoming and out coming phone calls handling - Phone debt collections (relegated by Legal department) Asset management - Credibility analysis of receivables in case of factoring services - Debtors credibility analysis before loan granting - Pricing (factoring and loan services only, prices should be set up at the level which covers financial risk) - Sale of factoring services and loans - Managing debt collection process in case of nonperforming debts (debts at risk of not being repaid) IT - Factor-Sys (operating system) development and improvement - Implementation of new reports according to client requirements - IT services for all company departments - Purchases of hardware and software Legal - Preparation of agreements according to current law requirements - Advisory in debt collection regulations - Debt collections process coordination Product development - Existing product improvements - Implementation of new products - Collecting of requirements from existing clients - Maintaining relationship with existing clients Correspondence and - Handling with incoming and out coming mails archive - Scanning of all documents - Archiving of company documents Managers of the above departments are responsible for recruitment and training of their subordinates and for all costs their incur. Currently, their efficiency was assessed in a form of comparison of actual costs incurred versus annual budget figures. Annual bonuses for managers was granted on discretionary basis, when the company generated net profit margin above 3%. Requirements: 1. Utilising insights from the relevant literature, suggest performance measures for above departments: give examples of NFPI s (non-financial performance indicators), KPI s (Key performance indicators) and suggest incentive systems for managers of above departments. Make necessary justifications, but do not rewrite the case. 5