1. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 1 Seminar: Performance and Cost Analysis Author: Manuel Fritsch Patrick Wild Christian Hellwig

2. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 2 Company & Value Chain Course book: Chapter 1, 2 Research and Development Design Supply Marketing PRODUCTION Distribution Customer service  German Family Enterprise (1916)  Producing high performance chains  3 different locations (Munich, Landberg, Strakonice) Value Chain Developing chains Dominated by functionality Receiving steel sheets Core Process B2B Exhibitions Outsourcing JIT Account- Manager / customer

3. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 3 Costs, Cost Hierarchy and Costing Systems Course book: Chapters 2, 3, 8 Examples for Direct Costs at Iwis Chains: Direct Labor: machine and quality control workers Direct Material: steel, stamps, machines Examples for Manufacturing Overhead Costs: Indirect Labor: steel purchase manager Indirect Material: power supply for whole plant Examples in Cost Hierarchy: Unit Level: steel Batch Level: stamps Product Level: stamp design Customer Level: IT, key account managers Facility Level: building area Income Reporting: Absorption, Variable, or Throughput Costing? Absorption: „Hide a bad year in the inventory“ or promoting long-term view? Variable: Understating the real costs or preventing fixed costs to seem variable? Throughput: Oversimplifying costs or avoiding incentives to produce excess inventory? Conclusion: JIT environment – little inventory Decision unimportant and dependent on management‘s individual attitude Choice of Product-Costing System: Job-Order: Not senseful, as chains mutually resemble Operational: Matches chains‘ medium product differences within comparable processes Process: Disregards differences in production ABC: Elaborated approach: Getting inside view of costs and enabling outlook by simple variations of cost drivers Our favourite: ABC

4. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 4 ABC Approach Course book: Chapter 4, 5 What if costs are considered too high?  Identify costly production steps; ask „Why?“ repeatedly until the reason is found  Determine value-added/non-value-added activities  Take action to reduce primarily non-value- added activities (but consider the implications!)

5. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 5 Cost Volume Profit & Break-Even Point Course book: Chapter 11, 12 Fixed cost:1.039.988,89 € (Machines, Use of Factory…, including partial each SG&A and Manufacturing Overhead) Variable costs per unit: 15,33 € Steel: 7,67 € / unit (unit level cost) Production of stamps: 6,80 € / unit (Batch level cost!1 Batch = 5000 units) Stamp Exchange: 0,14 € / unit (Batch level cost!) Production QC Workers: 0,72 € / unit (Batch level cost!) Selling Price: 65 €  Break-Even Point: 20.936 chains But: We must consider step-wise growing batch-level costs! We calculated the Break-even point by breaking down the batch-costs to a single unit. 20.936 units  produce 5 batches including 25.000 units  Results in a sales revenue of -31.119,96 € Sales Volume of the new Renault Chains Solution: Produce other 543 chains chains * 65 € (selling price) - chains * 7,67 € (steel/unit) = 31.119,96 € chains = 31.119,96 € / (65 € - 7,67 €) chains ≈ 543  Final Break-Even Point: 21.479 chains Break-even point 5000 10000150002000025000 38290 76580 114870 153160 191450 # chains Costs Calculated costs: ~ 160.330 € Real costs: 191.450 € Difference: ~ 31.120 €

6. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 6 Quality & Time Total Quality Management (TQM) Failures are not accepted, because one defective chain could destroy the whole engine JIT Manufacturing JIT Manufacturing = “pull” manufacturing produce and deliver products just when needed Customer-response time Because of flexible working hours, iwis has a very short customer-response time Course book: Chapter 7

7. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 7 By-Products & Investment Decisions Scrap metal as by-product Because of the increasing metal prices, it is nowadays profitable to sell the scrap metal Investment Decisions Is it for iwis profitable to expand their business to bicycle chains? Course book: Chapter 9, 14 No, because of the expected competition is the probability for losses very high Break-even point No Yes No

8. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 8 Course book: Chapter 13 Decision Making Should iwis improve or outsource its distribution? Decision: Outsourcing of the distribution

9. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 9 Selling, General, and Administrative Expense Budget Course book: Chapter 15 SG&A expense budget shows the planned amounts of expenditures for selling, general, and administrative expenses for a future budget. It is a helpful key tool for planning, control, and decision making

10. 4D1163 – Performance and Cost Analysis - Seminar - © 2006 Manuel Fritsch, Patrick Wild, Christian Hellwig Page 10 ? ? ? ? ? ? Thank you for your attention! We will gladly answer your questions!