Managing Operations and Finance

SunRay Ltd. is a company, based in London, UK and established in 2015, and it produces mobile solar panel and associated accessories. It is a relatively small company, with a highly skilled work force aiming at integrating latest technologies into solar energy production, a growing market. Despite increased competition, the company is still profitable due to its excellent high quality products and reputation for customer service and technological innovation.

The company has six key departments – Marketing, Customer Support, Finance, Manufacturing, Research and Development, and HR.

The company Mission statement is to be “Recognised by customers and employees as a progressive, high quality, supplier of innovative high-tech products at affordable prices”

Key Financial Targets

The CEO, Mr. Kostas, has recently had a formal strategy meeting with his fellow directors to confirm the Mission Statement, and they have agreed that the financial targets for each of the next three years should be a Return on Capital Employed of 12% and a profit before tax of £4m.

“With a £235 selling price per solar panel unit and a £110 variable cost per unit, we are working flat out, we need to spend a lot more on product development to make any significant improvements to the product.”

The head of the accounting department noted that expanding production facilities will increase the fixed cost to £1,000,000.

Manufacturing Issues

Although manufacturing is generally very efficient, and of a high standard, the Manufacturing Director, Mr. Zorba, is anxious to maintain and even improve this performance. He intends to implement a policy that all direct manufacturing staff should be qualified to NVQ level 4, and all supervisors should be qualified to BSc (Hons) level.

To assist with quality improvement, Mr. Zorba has introduced a new quality measurement system, and has set a target for defective finished products requiring rectification at a maximum of 5%.

Customer Support

The reputation with its customers is a crucial area for SunRay Ltd., a customer satisfaction survey request is sent to every customer within 2 weeks of a completed sale. The target is for the proportion of customers rating the company as “Excellent” to be at least 80%.

As many of the sales are direct to customers, telephone response within the Customer Support team is extremely important. Miss. Midas, the Customer Support Manager is concerned about the speed of response to telephone calls and would like to introduce an objective of answering all calls within four rings.

Employee Retention

The HR department has been looking very closely at employee retention and is concerned that there is a fairly rapid movement of skilled production operatives within companies in the London area. The current annual staff turnover is 20% and the objective, to support the Mission Statement, is to reduce this to 10%.

Current Developments

The previous Finance Director has been recently dismissed, following a heated meeting with the CEO about weaknesses in budgetary reporting and control. The company has taken on a new Finance Director, Ms. Jokasta, who is a qualified CIMA accountant and has also recently gained an MSc in Management from Prague College, she is a dynamic progressive character.

As part of her induction, Ms. Jokasta has talked to all the key staff and has identified a number of areas of concern. Three areas have particularly worried her.

  1. The CEO has explained that he is fully aware of the importance of an annual budgetary process, rolling budgets and detailed budgetary control, but is having great difficulties in explaining this to his fellow directors, as the overall process at Medusa Ltd has fallen into disrepute. He would also like to clearly understand the number of units that the company must sell in order to achieve the target profit of £4m per annum that was set at the recent strategy meeting, as this has never been properly defined.
  2. In discussion with Ms. Jokasta, the manager of the mobile accessories department, Mr. Ajax noted that there were major concerns about the budget control reports that were issued by the previous Finance Director. They were usually issued on the last Friday of each month, with data for the previous month. Mr. Ajax was very disappointed at the indication that he was doing a bad job, with adverse variances reported, when in fact his team had worked hard to achieve the level of output that had been requested of them. Mr. Ajax offered a copy of a recent report as an example of the issues.
  3. SunRay Ltd. would like to expand the production of future innovative products proposed by the research & development department. Four proposals have been submitted but only one of the proposals can be accepted.
    The following information was obtained for the proposals. The cash flows for year 5 include, where applicable, the sale of the fixed assets purchased (year 0) at residual value. The company’s cost of capital is 10%.
    Cash flows All (£m) Proposal 1 Proposal 2 Proposal 3 Proposal 4

Year 0 -£12 -£9.5 -£8 -£16
Year 1 £8 £1 £3 £3
Year 2 £6 £4 £4 £5
Year 3 £4 £4 £3 £9
Year 4 £2 £6 £3 £8
Year 5 -£4 £5 £2 £6

Residual value £0 £0. £0 £4

Discount rates at 10% to be used:

0 1.00
1 0.91
2 0.83
3 0.75
4 0.68
5 0.62

  1. Ms. Jokasta’s general feeling from her many discussions was that the company was generally staffed by a committed team, but that the overall strategy which the Directors had devised was not clearly known to the operating and production teams. They were unsure what their part was in achieving the objectives of the company and had no plans or projects for improvement. During her MSc Management course, Ms. Jokasta had learned about the Balanced Scorecard approach and decided to consider if it would be helpful for this company.

Having collected a large amount of information about the company and its issues, Ms. Jokasta decided to free up her diary for 3 days and think seriously about the recommendations to her fellow directors at the monthly board meeting that was coming up next week.

1) Calculate the number of units to make to achieve the desired profit that is in the case
2) Calculate the breakeven number of units
3) Draw the breakeven chart
4) Apply the calculations of Net Present Value and Internal Rate of Return to the 4 proposals
5) Create a correct budget

Sample Solution