Capsim emergency loan

Round Analysis for Year 2025 Round 8 - F84781_017.

http://ww3.capsim.com/assets/images/smallstar.gifEach Team can earn a maximum of 5 stars. Stars represent an overall performance evaluation, much like the stars in the Morningstar ratings.

One star is issued for each of the following:

· Contribution margin over 30%

· Zero emergency loan

· For total units across entire product line: satisfy at least 95% of demand for their products and can not carry more than 90 days of inventory.

· Increase in stock price over last year

· Profit greater than zero

Company

Profit

Margin

Emer Loan

Inventory

Stock Price

Total

Grand

Andrews

0

7

Baldwin

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5

35

Chester

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4

36

Digby

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5

37

Erie

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5

36

Ferris

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4

36

Hello Andrews Team! For Round 8 you earned a total of

PROFITS : You earned no stars because your profits were negative at $- 45,678,553. Profits are listed on page 1 of the Foundation FastTrack . Losses are usually the result of insufficient margin caused by a high cost structure and too low prices. Profit can also suffer from excessive expenditures in selling and advertising, heavy interest payments on debt, and losses on liquidation (scrapping) of inventory when retiring a product line.

ANALYSIS - You may need to raise prices or reduce costs - or both. Watch your production schedule. Is it matched to a good sales forecast for each product?

CONTRIBUTION MARGIN: You earned no stars because your corporate contribution margin is 0.0%. Contribution margin is defined as:

Sales - (Direct Labor + Direct Materials + Inventory Carry) Sales

It is reported on Page 1 of the Foundation FastTrack as an aggregate average of each team's product portfolio. A good benchmark for contribution margin is 30%. A product-by-product margin computation is available on the Income Statement portion of your company's annual reports.

ANALYSIS - Your contribution margins are inadequate. Margins are driven by both price and cost. Check to see which of these problems you have:

1. Are your prices too low? "Variable Margin" is the margin that you make on each unit. It is defined as:

Price - (Direct Labor + Direct Materials)Price

From your variable margin you pay for depreciation, R&D, promotion, sales, admin costs, etc. A good benchmark for variable margin is 38%. You will find Contribution Margins on the Production Sheet in your Foundation software.

2. Are your MTBF ratings set too high? MTBF ratings affect material costs. Check the MTBF ratings of each product against the "Customer Buying Criteria" on pages 5-6 of the FastTrack. Are they higher than they need to be? Example: If the MTBF range is 14,000-20,000, and it is the 3rd buying criteria (as it is in the Low Tech segment), there is little benefit in having MTBF set higher than the minimum. The Low Tech customer is saying to you that given a choice between reliability and price, they prefer price.

3. Is your positioning too advanced? Material costs at the leading edge of a segment are $4 higher than at the trailing edge. If the customer values price more than positioning, sacrifice positioning.

4. Is your labor content too high? Labor content is the percentage of Cost of Goods (COG) consumed by labor expense. For example, if COG is $10, and labor costs are $4, your labor content is 40%. You can reduce labor content with automation. To a lesser degree, you can also limit labor content by eliminating overtime and by negotiating for a more favorable labor contract. A good benchmark for labor content in Foundation is 30%.

5. Are you dropping price to increase market share? If so, recognize that Foundation customers have no loyalty based upon past purchases, and they endure no switching costs. Customer behavior is driven by product attributes, awareness, and accessibility.

6. Are you dropping price to respond to competition? Check your competitor's margins. Are they making money? Losing money? If they are losing money, resist the temptation to follow them. While your unit volume will fall, it is more important to stay profitable. Thank your competitor for losing money. They will soon discover that they cannot sustain the losses and will want to raise their price. If you have lowered yours, the industry will be trapped in a price war. On the other hand, if you discover that they are making money because they have attacked their cost structure and are passing along savings to customers, you have a serious problem. Address your costs, differentiate so you can maintain your price, or get out of the segment.

7.

EMERGENCY LOANS: You earned no stars, because you had an emergency loan of $ 281,828,350. Emergency loans are listed on Page 1 of the Foundation FastTrack. The simulation gives you every benefit of a doubt, but if you are out of cash at the end of the year, "Big Al" arrives to give you just enough cash to bail you out -- at a 7.5 percentage point premium, of course. In the real world we often refer to emergency loans as "a liquidity crisis", "Chapter 11", or simply "Bankruptcy."

ANALYSIS - You have an excessive emergency loan. Check to see which of the following problems you have:

1. When you saved your decisions, did your Proforma Balance Sheet project negative cash? If so, your emergency loan was unnecessary. In Foundation you can always raise adequate cash via stock issues, new bonds, or short term debt. Of course, this is not true in the real world, but it is a necessary aspect of our simulated environment. Your task is to learn how to dig your way out of this hole. Here are some guidelines:

a. Raise all the money via stock issues that the spreadsheet will allow. Note that the spreadsheet presents a ceiling called "Max Issue". Do not exceed the number in "Max Issue". (You can enter a bigger number and the spreadsheet will accept it, but when your decisions are processed on the website you will actually receive the value in "Max Issue.")

b. Raise all the money via bond issues that the spreadsheet will allow, or enough to make your Proforma Cash balance positive. Do not exceed the number labeled "Maximum Issue This Year". (Like the stock "Max Issue," you can enter a bigger number, and the spreadsheet will accept it, but when your decisions are processed you will get "Maximum Issue This Year.")

c. If your Proforma Cash balance is still negative, borrow sufficient Current Debt to bring Cash into the black. Current Debt is your last choice because it is your most expensive money, but even it is less expensive than an emergency loan. Note that the Current Debt principal is due at the start of every year, but you have the option of reborrowing or "rolling" the debt.

d. If you have large quantities of inventory on any product, identify which segment it falls within on the Perceptual Map. Find the price guidelines for that segment. Price to sell within those guidelines. You need to convert that inventory back into cash. Cut back on production as appropriate.

e. Take a critical look at your plant capacity. If your product lines are running at less than 100% utilization, sell the excess capacity.

f. If you are planning to retire a product line, now is the time. Sell the capacity. If you have inventory, however, and think you can sell it, keep one unit of capacity. This makes it possible to sell the inventory instead of liquidating it at 50% of its value.

g. In the Help files in your software or on the website, find the item "How do we develop a unit sales forecast?". Follow the guidelines to prepare a realistic sales forecast and enter it on the Marketing spreadsheet.

h. Examine your Proforma Income Statement. If any product shows a negative "Net Margin", you must address the problem. If necessary, do not make or sell the product. Do not sell a product at a loss.

2. If you