PART 1
Advantages of Implementing Strategic Planning:
It is indeed a fact that Nga Keke has its 30 years of experience on hand to make simple cakes, éclairs, Lamingtons, scones, and custard tarts made with their long-trusted recipes. However, given the recent downfall reported in the revenues and the result of the feedback collected from the customers’ shows that there is a critical need for strategically analyzing our position in the market and changing with the changes in the market.
As per the feedback collected from our past clients, the orders have declined because they are not able to “Sale” our products. It is because of the reason that we are selling products which majority does not want anymore. With an abundant supply of similar products and better and creative products as well, we have very less time to do what is needed. There is a big demand for gourmet products. One can argue that we are not good at it. However, what we are good at is not good enough for our customers. So, naturally, we need to upgrade our operations and make some immediate and dedicated changes not only in our product portfolio but also in our strategic planning procedures. The advantages of adopting a strategic planning cannot be numbered. There have been numerous studies that have been done to find the relationship between strategic plans and financial and organizational performance. And it has been found positive. A study conducted in 2007 for examination of the effect of the strategic planning on the organization’s progress and its “survival” showed that strategic planning indeed improves the performance, and in the long run, it has an effect on the survival of the company. The study was conducted by getting feedback from the junior and senior staff of the First Bank in Lagos (Taiwo & Idunnu, 2007).
Another study conducted in 1994 showed the adaptation impact in the form of standard deviations in the returns on capital (Capon, Farley, & Hulbert, 1994).
This study found that the positive relationship between the performance and strategic planning exists. Another study, which evaluated the financial growth of the companies situated in Turkey regarding their adaptation of the strategic planning also showed positive results (Efendioglu & Karabulut, 2010).
| PRO-FORMA PROFIT AND LOSS | |||
| YEAR 1 | YEAR 2 | YEAR 3 | |
| Revenue | $ 462,000.00 | $ 484,835.00 | $ 508,812.00 |
| Direct Cost of Sales | $ 277,240.00 | $ 282,720.00 | $ 288,310.00 |
| TOTAL COST OF SALES | $ 277,240.00 | $ 282,720.00 | $ 288,310.00 |
| Gross Margin | $ 184,860.00 | $ 202,215.00 | $ 220,601.00 |
| Gross Margin % | $ 100.40 | $ 100.42 | $ 100.43 |
| Expenses | |||
| Payroll | $ 86,340.00 | $ 88,940.00 | $ 92,940.00 |
| Marketing/Postage/Other | $ 6,100.00 | $ 6,100.00 | $ 6,100.00 |
| Depreciation | $ 2,600.00 | $ 2,600.00 | $ 2,600.00 |
| Legal | $ 1,300.00 | $ 1,300.00 | $ 1,300.00 |
| Books/Accounting | $ 1,300.00 | $ 2,500.00 | $ 2,500.00 |
| Licenses/Permits/Memberships | $ 1,000.00 | $ 1,000.00 | $ 1,000.00 |
| Delivery/Transportation | $ 4,900.00 | $ 4,900.00 | $ 4,900.00 |
| Insurance | $ 3,700.00 | $ 3,700.00 | $ 3,700.00 |
| Rent | $ 30,100.00 | $ 30,100.00 | $ 30,100.00 |
| Utilities | $ 12,100.00 | $ 12,100.00 | $ 12,100.00 |
| Equipment/Supplies | $ 4,900.00 | $ 4,900.00 | $ 4,900.00 |
| Building/Equipment Maintenance | $ 1,300.00 | $ 1,300.00 | $ 1,300.00 |
| Payroll Taxes | $ 100.00 | $ 100.00 | $ 100.00 |
| Other | $ 1,300.00 | $ 1,300.00 | $ 1,300.00 |
| Total Operating Expenses | $ 155,740.00 | $ 159,540.00 | $ 163,540.00 |
| Profit Before Interest and Taxes | $ 29,220.00 | $ 42,775.00 | $ 57,161.00 |
| EBITDA | $ 31,720.00 | $ 45,275.00 | $ 59,661.00 |
| Interest Expense | $ 6,097.00 | $ 5,207.00 | $ 4,279.00 |
| Taxes Incurred | $ 7,037.00 | $ 11,370.00 | $ 15,965.00 |
| Net Profit | $ 16,286.00 | $ 26,397.00 | $ 37,118.00 |
| Net Profit/Sales | $ 0.04 | $ 0.05 | $ 0.07 |
Thus, it can be said that the use of the mission statements, vision, planning, and the strategic process will help us as well for our survival.
Control system needed to report Monthly Performance:
The introduction of the gourmet items like sandwiches, salads, lunches, gourmet pies, and creative cakes would be done to tap new markets. The Proforma statements show the potential revenues and expected costs.
Firstly, we would need to establish these activities:
- Priority activity
- Establishing and following of a set of procedures
- Mission Statement
- Verifiable and Quantified Written Objectives
- Allocation of resources precisely to the process
The Proforma statements giving a conservative glimpse of our future operations;
| BREAK-EVEN ANALYSIS | |
| Sales Break-even Monthly | $30,000 |
| Assumptions: | |
| Average % Variable Cost | 61% |
| Estimated Monthly Fixed Cost | $12,000 |
These financial Performa statements are all assumed.
Conclusion
Thus, it can be said that the adaptation of the strategic process and the introduction of new product items in the portfolio can act as leverage for our survival and revival in the industry.
PART 2
The data on the monthly administrative costs reported by the hospital and the relative patient load and emergency procedures can be found here;
| Month | Number of emergency procedures | Patient load | Administrative cost |
| January | 20 | 2800 | $ 27,800.00 |
| February | 22 | 1000 | $ 14,000.00 |
| March | 10 | 800 | $ 12,000.00 |
| April | 20 | 2000 | $ 20,000.00 |
| May | 24 | 2600 | $ 23,800.00 |
| June | 28 | 1800 | $ 18,400.00 |
| July | 16 | 2200 | $ 20,400.00 |
| August | 14 | 600 | $ 8,200.00 |
| September | 24 | 1400 | $ 18,800.00 |
| October | 24 | 2400 | $ 22,200.00 |
| November | 16 | 1200 | $ 16,600.00 |
| December | 32 | 3000 | $ 32,200.00 |
The clinical estimation of the relevant range for the next year of patient loads is shown as;
| Clinical Relevant Range | Minimum | maximum | |
| Monthly Activity | 600 | 1200 | patients |
1-Draw a scatter diagram of the clinic’s administrative costs and patient loads during its first year of operations.
This shows a scatter plot which is depicting the relationship of the administrative costs and the patient load for the hospital. The data points show that there is a curvilinear relationship present among the two variables.
2-Mark the clinic’s relevant range of activity on the scatter diagram.
It is the scatter diagram depicting the relationship of the patient’s quantity and the administrative costs of the hospital. The relevant rage of the clinical estimation of 600 to 1200 patients is marked with red showing the range in the graph.
3-Use the high–low method to estimate the behaviour of the clinic’s administrative costs, based on patient load within the relevant range. Use an equation to express the results of this estimation method.
High-Low Method:
Using high–low method for estimation of the behavior of the administrative costs, as dependent on the patient load within the relevant range an equation is derived. The calculations are as shown;
Variable Cost = (Total Cost at Highest Point-Total Cost at Lowest Point)/ (No.of patient at highest point – No..of patient at point)
Fixed Administrative Cost = Total High or Low Cost – (No.of patient * Variable cost per unit)
| Variable Cost Per Unit | ||
| Administrative Cost at High point | $ 32,200.00 | |
| Administrative Cost at Low point | $ 8,200.00 | |
| No of Patients at Highest Level | 3,000.00 | |
| No of Patients at Lowest Level | 600.00 | |
| Variable Cost Per Unit | $ 10.00 | per patient |
| Fixed Cost | ||
| Total Cost | $ 32,200.00 | |
| No of Patients | 3,000.00 | |
| Variable Cost per patient | $ 10.00 | per patient |
| Fixed Cost (From High point) | $ 2,200.00 | |
| Total Cost | $ 8,200.00 | |
| No of Patients | 600.00 | |
| Variable Cost per patient | $ 10.00 | per patient |
| Fixed Cost (From Low point) | $ 2,200.00 |
Equation:
In this equation:
This equation gives the total administrative costs bear by the hospital at a given number of patient loads.
Here;
10 is the variable cost per patient, determined through the high-low technique
2200 is the fixed cost determined by the high-low technique
X: represents the no of patients
This equation shows that with every one unit increase in the patient, the administrative costs would increase by $10. And it also shows that even if zero patients are reported, the administrative costs will not be zero, rather it will be equal to the fixed cost of $2200.
4-She then tries to predict the clinic’s administrative cost during a month when 800 patients visit the hospital, for instance.
Using the equation derived in the Q3, we can easily calculate the total administrative costs at any given number of patients. For determining of the administrative costs at the given patient load of 800 patients, the calculations are shown here;
| 800 Patients | |
| Patients (x) | 800 |
| VC | $ 10.00 |
| FC | $ 2,200.00 |
| Equation | Total Administrative Costs= 2200+10x |
| Total Administrative Costs | $ 10,200.00 |
It shows that with the patient load of 800 patients, the hospital would bear the administrative costs of around $10,200 in total. It should be noted that $2200 out of the $10,200 administrative cost is fixed in nature and will be applied even to zero patients.
5-She then decides whether she should use the cost function from step 3 to predict the clinic’s administrative cost for 300 patient visits. She needs to explain her findings and reasoning to John Carter in her report.
For understanding whether it would be wise to use the same cost function from step 3 to calculate the administrative cost for about 300 patient visits which are lower than the relevant range the following analysis is done.
Using the equation derived in the Q3, the total administrative costs at any given number of patients is calculated. For finding the administrative costs at the given patient load of 300 patients, the calculations are shown here;
| 300 Patients | |
| Patients (x) | 300 |
| VC | $ 10.00 |
| FC | $ 2,200.00 |
| Equation | = 2200+10x |
| Total Administrative Costs | $ 5,200.00 |
It shows that with the patient numbers as low as 300 patients; the hospital would have the total administrative costs of around $5200. It is to be noted that $2200 out of the $5,200 administrative cost is fixed cost and will be applied even with zero patients reported.
It is to be noted that the 300 patient’s costs even though here yield a result, in the form total administrative costs of $5200 in total, however, the equation derived has been calculated for the relevant range of minimum 600 patients whereas, 300 patients are far lower than that.
The relevant range means that the fixed and variable costs are only relevant for the patient load within the range. Thus, any computation using the same equation for the patient load outside the relevant range would cause misleading results from the hospital administration.
6-John Carter would like to have identified the number of emergency procedures, patient load and administrative costs for each month within the relevant range. Baines should attempt to report these as well.
For the reason of identifying the number of emergency procedures, the number of patients and administrative costs for every month that have been within the relevant range following steps have been taken.
For identifying the number of the patients, emergency procedures and administrative costs for each month that were within the relevant range, we have decreased the number of patients who were above the minimum relevant range to the maximum of 1600. Similarly, the patient load which is within the relevant range is left as it is. The equation derived in Q 3 is used to compute the relative administrative costs for each patient load within the relevant range.
Total Costs = 10x+2200
For the computation of the number of emergency procedures, a scatter plot for finding the relationship between emergency procedures quantity, and the patient load is graphed. The equation derived from this scatter plot is:
Y=0.004x+12.13
Here,
X is the total number of patients or the patient load
Y is the total number of emergency procedures for a given number of patients.
0.004 shows the variable cost per patient
12.13 shows the fixed cost per patient
| Number of emergency procedures | Patient load | Administrative cost |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
| $ 16.13 | $ 1,000.00 | $ 12,200.00 |
| $ 15.33 | $ 800.00 | $ 10,200.00 |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
| $ 14.53 | $ 600.00 | $ 8,200.00 |
| $ 17.73 | $ 1,400.00 | $ 16,200.00 |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
| $ 16.93 | $ 1,200.00 | $ 14,200.00 |
| $ 18.53 | $ 1,600.00 | $ 18,200.00 |
7-Baines thought she should construct an Excel spreadsheet and use regression analysis to estimate:
Simple Regression Analysis:
It was considered wise to use an Excel spreadsheet and use regression analysis to estimate the costing behavior and prediction of the costs.
| Regression Statistics | |
| Multiple R | 0.957909257 |
| R Square | 0.917590145 |
| Adjusted R Square | 0.909349159 |
| Standard Error | 1991.592647 |
| Observations | 12 |
| ANOVA | |||||
| df | SS | MS | F | Significance F | |
| Regression | 1 | 441642254 | 441642254 | 111.3447102 | 9.69328E-07 |
| Residual | 10 | 39664412.71 | 3966441.271 | ||
| Total | 11 | 481306666.7 |
| Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | |
| Intercept | 5341.409489 | 1462.67908 | 3.651798649 | 0.004449039 | 2082.357416 | 8600.461561 | 2082.357416 | 8600.461561 |
| Patient load | 7.812068171 | 0.740340026 | 10.55200029 | 9.69328E-07 | 6.162487803 | 9.46164854 | 6.162487803 | 9.46164854 |
a-an equation with patient load predicting administrative cost, within the relevant range
The equation for predicting the administrative costs from the number of patients using the regression analysis can be computed by using the intercept coefficient and the patient load coefficient. The intercept coefficient of 5341 shows the fixed cost of the administrative costs the patient load coefficient of 7.81 shows the variable cost. The R square of the more than 90 shows that one can depend on the regression analysis for computation as it shows the high linear relationship. The equation is:
Y=0.004x+12.13
Y is the total administrative costs
X is the number of patients
b-the clinic’s administrative cost during a month when 800 patients visit the hospital
For evaluating its performance, the administrative cost in a month when 800 patients are assumed to visit the hospital is induced into the equation to get results for the costs.
| For 800 patients | |
| Patients (x) | 800 |
| VC | $ 7.81 |
| FC | $ 5,341.41 |
| Equation | Y = 7.81+5341 |
| Total Administrative Costs | $ 11,591.06 |
c-an equation with both activities—patient load and the number of emergency procedures—predicting administrative cost, within the relevant range
Multiple Regression Analysis:
The analysis is pushed further by conducting multiple regression analysis and constructing an equation with both activities; the number of the patients and the no of emergency procedures for the aim of predicting administrative cost that is within the relevant range
| Regression Statistics | |
| Multiple R | 0.963963 |
| R Square | 0.929225 |
| Adjusted R Square | 0.913497 |
| Standard Error | 1945.49 |
| Observations | 12 |
| ANOVA | |||||
| df | SS | MS | F | Significance F | |
| Regression | 2 | 4.47E+08 | 2.24E+08 | 59.08194 | 6.68E-06 |
| Residual | 9 | 34064391 | 3784932 | ||
| Total | 11 | 4.81E+08 |
| Coefficients | Standard Error | t Stat | P-value | Lower 95% | Upper 95% | Lower 95.0% | Upper 95.0% | |
| Intercept | 3538.662 | 2058.655 | 1.718919 | 0.119748 | -1118.34 | 8195.664 | -1118.34 | 8195.664 |
| Number of emergency procedures | 148.5074 | 122.0906 | 1.21637 | 0.254781 | -127.681 | 424.6956 | -127.681 | 424.6956 |
| Patient load | 7.101339 | 0.929748 | 7.637918 | 3.2E-05 | 4.998103 | 9.204576 | 4.998103 | 9.204576 |
The multiple regressions of the patient loads, administrative costs and some emergency procedures show the following equation:
Y=3538+148z+7.10x
Here;
Y is the total administrative cost
X is the no of patients or the patient load
Z is the number of emergency procedures.
d-the clinic’s administrative cost during a month when 800 patients visit the hospital and there are 12 emergency procedures, using the equation from part (c).
The equation is evaluated regarding the administrative cost for one month in which 800 patients are assumed to have visited the hospital, and there are reporting of 12 emergency procedures, using the same equation from part (c);
The administrative cost of 800 patients and 12 emergency procedures can be calculated from the equation:
Y=3538+148z+7.10x
| For 800 patients & 12 Emergency Procedures | |
| Patients (x) | 800 |
| Emergency Procedures (z) | 12 |
| VC (x) | $ 7.10 |
| VC (z) | $ 148.00 |
| FC | $ 148.51 |
| Equation | Y=3538+148z+7.10x |
| Total Administrative Costs | $ 7,605.58 |
8-Baines thought that the inclusion of the additional cost driver of emergency procedures might improve the model. She, with your assistance, should attempt to explain her attempt and findings.
The total administrative costs through this method are computed as $7605. It is important to consider that this equation considers both the emergency procedures and the patient load thus can be considered more effective method as compared to the high-low and the simple regression method.
Conclusion:
The comparison below shows that even though the resultant costs are similar for the simple regression and the multiple regression analysis, the components of the equation like patient load and emergency procedure both can better predict the total costs.
| Multiple Regression | Single Regression | High-Low Method | |
| Patients (x) | 800 | 800 | 800 |
| Emergency Procedures (z) | 12 | 0 | 0 |
| VC (x) | $ 7.10 | $ 7.81 | $ 10.00 |
| VC (z) | $ 148.00 | 0 | 0 |
| FC | $ 148.51 | $ 5,341.41 | $ 2,200.00 |
| Equation | Y=3538+148z+7.10x | Y = 7.81+5341 | = 2200+10x |
| Total Administrative Costs | $ 7,605.58 | $ 7,605.58 | $ 10,200.00 |
References
Capon, N., Farley, J. U., & Hulbert, J. M. (1994). Strategic Planning and Financial Performance: More Evidence. Journal of Management Studies, 105-110.
Efendioglu, A. M., & Karabulut, A. T. (2010). Impact of Strategic Planning on Financial Performance of Companies in Turkey. International Journal of Business and Management, 5(4), 3.
Taiwo, A. S., & Idunnu, F. O. (2007). Impact of Strategic Planning on Organizational Performance and Survival. Research Journal of Business Management, 1, 62-71.
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