Qualitative Discussion

Will always req both quant and qual analysis - AO allocated to each (or at least half an AO to each)
Items to discuss:
Pros/cons
- don't need to be equal
- integrate case fact to help explain why it’s a pro/con
- tie in user needs if you can
Structure: Case fact…therefore..implication
Risk mitigations
Consider additional/critical info req to make a decision

Recommendation
Needs to link both quant and qual that led you to the decision
Highlight the key pro/con - will like to SG sometimes (mission/vision/core value)
Performing Calcs
1. Start w excel outline/general skeleton of model you want to use
2. Complete line items for critical large $ items
and itsms that require more than 1 step calcs -> usually considered a critical item
3. Fill in other easy numbers that come directly from the case
4. Apply formula (NPV, sum, etc) to get result
5. If you have time (from ur allocation or going back) fill in other items you skipped
If time allocation is up conclude and move on
Be strategic abt how to use your time!!
Usually on a D2 I'd leave MA for last bc its really easy to lose track of time due to wanting to get the "right" answer

Don't go overboard with formatting it just needs to be readable (top down)

Minimizing Errors in Quant Analysis

Practice in excel setting up common quants + calcs
will increase efficiency and help you rmbr formulas/calcs better
don't get trapped in trying to fit things in a specific format -> have a general skeleton and be flexible
Do a "sanity check" when you're finished to see if ur results seem unreasonable
Common mistakes to look for:
too many/few 0's in a number
adding instead of subtracting (and vice versa)
missing some cells in sum formula
interchanging #s in 000s with actual numbers
missing any obvious line items such as cos, taxes, etc
Take extra care with "make or break" numbers -> hard to get a C if these aren't correct
ex Revenue
cogs
DON'T RUSH READING!! Can cause misinterpretation of case facts that will lead to errors!!
take your time even if you are super slow -> increase ur typing speed
re-read paragraphs with
Decision Tool

Cashflow and income projections

Whether to proceed with a new business, NPV/IRR
expansion, or other investments Breakeven
Relevant cost comparison
Make or produce
What to buy when capacity is NPV
constrained CM per constrained resource
CM analysis
CF and income projections
Cost allocation
How to price products/services Breakeven

Relevant cost analysis

Divisional allocation
Whether to discontinue a division, product, CM analysis
line of business Profitability analysis
Transfer pricing
Responsibility centers
Evaluating mgmt or divisional performance Performance measures

How to improve performance efficiency, Varience analysis

increase profitability or reduce waste Cost allocation

General Principles for Short Term Business

Decisions
Focus on relevant/increm revs/cogs - costs that differ btw options/that change as a result of a specific decision being made
Impact of capacity
Use CM apporach - VC and FC are separated
Never include sunk costs - always explain why these are incurred -> costs that have been incurred and won't change as a result of the decision
as a result of the decision
When Model is used:
Assessment of profitability
Viability of a business, expansion, division
Assess the financial/cash position at a certain future date
Ability to repay a loan
Calc financing needs (when will they have enough cash)

What you may need to do (1 or more):

CF forecast starting from i/s
make adjustments for:
Non-cash items
non-recurring items (normalize)
RPT NOT at FV

Revise a forecast that has been prep'd by someone else

Can include incorrect + missing amts based on case facts
ex investing/financing outflows
incorrect/unreasonable assumptions
calc errors

Prepare a detailed CF stmt from scratch

How many years to project

Implicit in the required -> if asking when will you be able to repay loan chances are the projection is over term of loan
Rule of thumb -> project until business has reached a "steady/stable" state
Pay attention to the # of years for info provided -> usually a hint

CF Setup - Indirect approach if starting from i/s

Net income before tax **common mistake of mixing up indirect/direct/incremental approaches in same CF projec
Adjusted NI from ACTG errors
Add: deprec
One time items (to normalize)
Operating CF before tax
Operating CF After tax
Less: sustaining re-investment
investing activities (purchase/sale of capital items ex PP&E)

Less/Add: Financing activities

ex repayment of loans, obtained a new loan etc
Net Cash

CF Setup - Direct approach if no i/s (new venture) or if most rev + cogs will change in the future
Inflows
Outflows
Net cash or Cash shortfall
**don't miss any rev/exp in i/s that wont change -> this amt needs to be included still

Setup excel as you read and slot the numbers into each category:
Operating inflows
Operating outflows
Investing/financing

Quant Considerations to include in report

Was the assumption provided reasonable -> ex. Rev expected to increase x amt but industry comp increased
Consider which asumptions will have the greatest impact
don’t change this in the exhbit but explain why unreasnable
inconsistent, aggressive
state impact on CF if they are not met
ex Does CF justify risk of venture
will additional financing be required
is there a going concern issue
proaches in same CF projection
When Model is used:
Whether an investment/purchase of eq etc should be made when UPFRONT COST and FUTURE CF are known
Dedcide btw 2 investments when both will generate positive CF but only 1 can be chosen

NPV very similar to CF projection bc setup is the same -> used over CF when concluding which one is better
If CF projection req but you did an NPV (only 1 extra step) you will be given full credit
If doubt which one to use -> NPV and the conclude both CF positive/negative and magnitude of NPV

USE NPV FORMULA IN EXCEL = NPV(rate, range of annual CF)

OR
PV formula
amt year PV
Initial investment formula
Annual interest
Annual pmt
NPV Sum
When Model is used:
May need to calc breakeven volume to:
Determine viability of new business/expansion
Viability of new products/serivces in existing business
Risk of venture by comparing how close projected sales are to breakeven lvl-> how much cushion is there?

What you need:

VC CM per unit = Selling price - VC
FC Breakeven Units = FC / CM per unit
Selling price Breakeven units = FC/ (selling price - VC)

# units to reach target profit = (FC + Target profit)/(selling price per unit - VC per unit)
Target Profit = VC per unit + Lost CM on external sales

Breakeven Multiple Products

Assessing viability/ calc break even sales of business that sells more that one product
1 Calc each products CM
2 Calc weighted avg CM
(product mix % * CM ) + (product mix %2 + CM2)…
3 Calc breakeven units = Total FC / Weighted avg CM
4 If req, calc breakeven units for each individual product

Breakeven Price/Bid price

Asked for break even price or price required to achieve a target profit
Break even price = VC per unit + FC per unit + required profit per unti
**req to make an assumption on sales volume -> ex # units FC is spread across

Quant Discussion - reasonability of being able to achieve the required number of units
Will demand be high enough to reach BE level?
Will business have capacity (labour, machines etc) to reach BE lvl?
Always answer the required
When Model is used:
What products should be emphasiszed or discontinued when capacity is LIMITED

What to Do:
1 Determine the constrianed resource (limited capacity)
2 Calc CM per unit of constraint for EACH PRODUCT
CM per machine HR = CM per unit product 1/# machine hrs used per unit for product 1
3 Rank products in order of highest CM to lowest
4 Allocate the total constrained resource (Total machine hrs) to Rank 1 -x until 0
5 Qualitative considerations
impact on customers who purchase these products that you will be reducing

Setup
Product 1 P2 P3
CM per unit a
Constrianed resource per unit b
CM per constrianed a/b
Units to be produced
When Model is used:
Whether to accept a special order at a discounted price

Only accept if INCREMENTAL PROFITS is positive (CM - increm FC)

Steps:
1 Calc CM per unit of special order
2 Sufficient capacity -> no must calc LOST CM on sales - increm FC
3 Increm profit = CM special order - Lost CM on sales - increm FC
4 Qualitative considerations:
can you still meet customer demands
impact on existing customers if they found out selling same product at discount
employees required to work overtime/incur additional stress?
When Model is used:
Asked if they should outsource any part of their production

1 Calc cost of each option -> only include REVELANT costs (do it imcremental basis or total basis)
2 Calc NPV of each option if required to determine which option is better if:
Upfront/one time costs associated w either options
1 option cheaper in certain yrs than others -> usually past a certain volume

General Relevant costs

Make Buy
DM Purchase price
DL
Indirect DL - only if delivery
Extra CMchargers
from
impacted by buy freed capacity
VOH FOH CM
- only
Lost onif
impacted by buy
alternate products
- only if at capacity
Ex if product is manu in a plant, and plant will shut down -> costs included in buy as negative

Qualitative Considerations - Pros + Cons

Reputation of external producer
Capital outlays that can be avoided through outsourcing
esp if CF are tight or financing constrained
Loss of control over quality
Economic dependence on external producer
Capacity constraints
Capacity constraints of new manu -> might not have cap to produce amount you need to meet customer demand
Commitement required -> length of contract
Cancellation penalties
Servance and union implicatoins -> if employees laid off as a result of outsourcing
When Model is used:
Asked to evaluate which product/division/line should be closed down

At Capacity
Apply constrined resoruce steps
1. CM per unit
2. CM per constrained resoruce
3. Rank which provides highest CM
4. Conclude and allocate accordingly until constrained resource = 0

Not at Capacity
Should only be discontinued IF: Total CM generated < Total AVOIDABLE FC
Need to identify relevant FC that will be eliminated/reduced if product line is discontinued
ex. Ad costs of that product, employee wages for that specific line (you'll be firing everyone)
Watch for costs that have been allocated to the line that will not change bc of closure
ex. Rent, utilities, head office costs

Qualitative considerations
Severance costs
Employee morale
Impact on sale of other products if one is dropped (esp if theyre complimentry ex. Hotdogs and hotdog buns)
Ability to increase price/reduce costs to improve profitability as an ALTERNATIVE to discontinuing
Management Evaluation
Will be asked to critique/design a mgmt evaluation system (incentives + review)
Condsider:
Mgmt should have control over what they are evaluated on (responsibility centres)
Measures must align with goals of company
Measures encourage decisions that are in best interest of entity as a whole
not to improve performance of one at expense of other
Combo of both financial measure and non-financial measures

**usually an issue when multiple divisions + transfer pricing/divisional cost allocations

Division splits (type of responsibility center)

Cost (cost center)
Profit/income (profit center)
ROI (investment center)
Revenue (revenue center)
types of responsibilities should align to what manager has control over

Transfer Pricing - Internal price charged when 1 division provides goods/services to another
Issues:
Whether it results in accurate/fair evaluation of divisional perofmance
Whether it encourages mgmt of each division to make decisions that benefit org as a whole:
what orders to accept/decline
Whether to purchase internally or externally
Move to lower quality suppliers/less skilled labour
Alternatives to TP:
VC -> if hav excess capacity
Full (absorption) cost = FMOH + VMOH allocated + VC -> if NO capacity
Market price = VC per unit + CM on lost sales
Negotiated price
Appropriate TP dependent on:
How divisions are being evaluated -> whether they are cost vs profit centers
If there is excess capacity
 Mgmt only has profitability (instead of short
control over term success)
production costs Focus: quality + timely
delivery
ex. # customer compliants,
ex. Manu division Full cost if at employee
Responsibility and another division capacity ex.# defects, # warranty
Centre When to use TP turnover,customer/employe
Qual Measures
in charge
Mgmt of pricing
control over claims, customer
e satisfaction satisfaction
surverys, new
Cost and sales
both costs and VC
FMV or negotaited products introduced to the **charge back for rework/warranty claims to discourage mgmt from sacrificin
if not capacity ratings etc.
Profit revenues price market, etc
Triggers
Mismatch btw type of responsibility center and TP used
If combo of mgmt evalution + TP will result in decisions where other divisions will bear the cost
rage mgmt from sacrificing quality to reduce costs
When Model is used:
Asked how mgmt/ shareholders should monitor perofmance of a business

Relate measure to KSF

Address current challenges/problems
Make use of info that is available -> work with info that company already gathers
Explain why measure is important/what problem it will solve + how you would go about measuring it

Ex Of Performance Measures
Financial
Rev growth + GP by job/product line
Labour hours used, sales per LH, OT hours, labour rates
% of sales coming from new/key products
Product returns as a % of sales
% increase/decrease in key costs and/or key costs as % of sales
Non-Financial
customer turnover/% customers retained
Customer satisfaction survey results
market share
# customer complaints
Employee turnover
Avg length of employement
Time to get new products to the market
% of products to market
% of products that are defect-free
avg time btw order receipt and delivery
Avg set-up time
% of time that system is down/inaccessible

For depth:
1. recommend a metric (list above)
2. Explain why the metric is relevant -> what risk/concern is it covering?
Always tie to client conern/mission,vision,KSF
3. Explain how it will be measured -> what data is going to be used and how are they getting it?
When Model is used:
No direct ask, but focus on the information given
Will typically be about if their current cost allocation method is appropriate
ex. Allocating all costs equally across all divisions (sales and man divisionsare allocated equal costs)

What Is It
Calc total cost of jobs/projects to quoate a price or assess profitability

1. Determine what are the cost drivers of each cost category (what drives the use of the resource)
ex IT division -> cost drivers can be # hrs worked, # IT tickets solved, etc
2. Explain why the driver was allocated to the cost
3. Determine the driver rate
4. Allocate rate to respective division/team to re-allocate common costs

Setup
Cost Driver Rate Actual allocation
$/unit

Benefits of Job (activity based) Costing

More accurate allocation of what costs are being incurred where
More accurate info = more accurate budgetings

Cons of ABC
Expensive bc more work required to track + investigate

Spoilage
Master Budget Pros of Budgeting:
Defines goals + objectives
Coordinate activites
Means of allocating resources
Uncover potential bottlenecks
Think abt future plans
Communicate plans

Cash Budget - Similar to CF Projection Flexible Budget

Inflows Takes accts changes in rev + costs expected to occur as consequencce in chnages in actual acitivity
Outflows Provides estimates of what rev + cost should be for any lvl of acitivity in specified range
Net CF from Operations Improves performance evaluation
Investing CF
Financing CF Literally budget vs actual
Net CF Budget Actual Variance U/F

Opening CF
Add/less Net CF
Ending Cash balance
ctual acitivity
When Model is used:
Will be explicit, or will be given a table of budgeted vs actual -> make sure you conclude favourable or unfavourable
Favourable = saved $
Unfavourable = Budgted < Actual (usually)

AQ = Actual Quantity
AP = Actual Price
SQ = Standard quantity
SP = Standard price

AQ*AP - AQ*SP - SQ*SP

Price V Quantity V
Spending V

Price (Rate) Varience -> difference btw what was actual and expected price of materials/exped amt paid per hour vs actual amt paid per hr
Causes: Increase/decrease in comodity prices
New suppliers
change to better/poorer qualty of mats
Overtime hours
use of contract or replacment workers
Union re-negotiation
**pay attention to case facts

Quantity (efficiency) Varience -> more/less waste than expected/efficiency of workers

Causes: Experience of staff
quality of raw mats
age/efficiency of machinery and tools
Lvl of experience and training
amt of supervision
machine downtime
Sometimes doesn't really seem like MA, but marked as such

Potential Asks:
Comparisson of 2 IT system acqusition alternatives
Pros/cons of each one orgaznied by FACTOR

Format:
Factor System 1 System 2

Factors:
Cost
time to complete
product reliability
Flexibility of system to adapt to org current system
vendor rep/knowledge/service/support
Service lvl agreement (ex 24 hr tech supp or only when issue arises)
Documents + mannual available
Amt of training provided/required
Extent of testing
Compatibility w existing systems

Weakness + Suggested improvements for implementation plan

IIR format
If a COMMON AO (D2) -> look at it from a broader POV, don’t focus on operational issues and treat like AA
Factors to consider:
Was info obtained constented to
Method of collecting info -> where customers told what info was for, how long compnay would keep?
What info was collected -> necessary?
Data maint and security -> should only be stored in 1 place w limited access
Detection of access + breached -> any audit trail o determine who accessed? Any policies in place in case breached?

Factors That Must be Discussed:

Factor Implication Recommendation
Integrity
Privacy
Confiendtiality
Complaince w regulatory requirements
Security Principles
priviacy, freedom if info, anti spam
legislation
Ethical use of info
n case breached?
What is it
Measures a company's performance using both financial and non-financial metrics

Financial (sales) - ROI, profits, EBITDA

Customer - customer satisfaction, customer retention/loyalty
Operations (costs) - efficiency, defects, quality, productivity
Internal Growth - feedback loops, employee retention, trained/experienced employees
Cost of Goods Manufactured
Total cost of inventory completed and transferred out during a period
Depends on what inv costing method is used

Weighted Avg COGM = Total Manufacturing cost for the period

FIFO COGM = Beginning WIP + Total Manufacturing Costs - Ending WIP
Total Manufactring Costs = DM + DL + MOH + conversion costs
Six Sigma (DMAIC)
Technique used to improve business processes of product quality control

D - Define problem with a process is defined

M - Measure initial performance is measured to create a benchmark
A - Analyze Inputs of the measure are identified and investigated
I - Improve Implement changes to improve system
C - Control Control proccesses to ensure no regression
Total Quality Mgmt (TQM)
Processes to improve a company's output quality
No specific formula -> can be a cost allocation of categories

Business Process mgmt (BPM)

Model that usues automation, control, optimization to improve business activity flows
D - Design Processes identified and understood
M - Model Creation of different scenarios to see how the process wil work under different conditions
E - Execute Implement the model
M - Monitor Oversee how the model is doing through KPIs
O - Optimize Process is refined by addressing inefficiencies, botlenecks, deviations from expected outcomes

Lean Mgmt
Focus on maximizing value of customer while minimizing waste in all processes
1. Define value What customer is willing to pay for
2. Map value stream Identify all processes that contribute to the value
3. Create flow Remove wasted actions form the value chain
4. Establish pull system Just-in-time delivery and manu -> prodycts create in time they are needed
5. Pursure perfection Always find ways to improve the production flow
Centralized Decision Making
Top down strucutre where decisions made by top mgmt then communicated downward

Pros:
More control -> over resoruces and operations
Focused vision/mission -> align w tone at top better
Consistent

Cons:
Slow response time -> everything must be reported to top before decision made
reduces productivity
Rigid -> no flex to adapt to local needs
Lack of employee loyalty -> employee autonomy is limited

Decentralized Decision Making

Authority is distributed to lower lvls of org (teams, branches etc)

Pros:
Faster response time -> quicker decision making + adaptation
Flexibility -> make decisions tailored to their needs
Imrpoved employee loyalty -> through increased autonomy

Cons:
Inconcistencies -> may make decisions that benefit their team at exp of another
Duplication -> duplication of efforts + inefficient use of resources
Loss of contol -> over shared resources + allocations