1. Group 5 Final Presentation Analyzing Capital Investment in New Products Managerial Accounting ACC 6013 Instructor: Dr. Robert Theng Team members: Winni Liu, Jenny Yang, Andy Wu, Vincent Shen

2. Outline Case Background Five Major Concerns: The New Emphasis on Financial Performance Changes and Challenges Q&A

3. CYTO Technologies Background A rapidly growing biotechnology company Started approximately 15 years ago in USA CYTO’s products have two major uses: 1. Providing materials and techniques to life science researchers for their experiments. 2. Providing materials and techniques to private and government-supported laboratories in DNA and food testing.

4. Project Selection Process PAT (Project Approval Team) Head of manufacture Head of Quality assurance Head of Finance and accounting Head of R&D Head of Marketing (Five constant members) (Two rotating members)Staff Cross-functional participation  More effective value-chain

5. Project Selection Process (cont.) Marketing Efforts R&D Efforts Innovative Products Me-too Products BCG Matrix Concept

6. Project Selection Process (cont.) Idea Initial Screening Product Design Product Development Product Launch Idea generation and investigation Define product image, spec, marketing potential, initial ROI or IRR estimates Figure production cost, sales forecasts, final IRR computes, marketing plan test Four-phase process

7. Project Selection Criteria 1. Potential for proprietary position 2. Balance between short-term and long-term projects and payoffs. 3. Potential for collaborations and outside funding. 4. Return on investment 5. Need to establish competency in an area 6. Potential for spin-off products 7. Strategic fit with the corporations planned and existing technology, manufacturing capabilities, marketing and distribution systems. 8. Impact on long-term corporate positioning. 9. Probability of technical success.

8. Project Selection Criteria (cont.) Three reasons for focusing on financial performance: 1. The costlier infrastructure (buildings & equipments) due to rapid growth  careful investment 2. Inefficient project ideas (5 works out of 25) cause bad resource allocation. 3. Increased competition and higher cost of capital need more precise financial analysis

9. Five Major Concerns: The New Emphasis on Financial Performance Cost accuracy Cost specification Timing Evaluation criteria Behavioral implications

10. I. Cost Accuracy The allocation of R&D overhead cost. Cost allocation for different products.

11. Cost Accuracy Suggestion~ Activity-based costing Using simple cost driver. Cost inaccuracy. Poor decision making Gives more than just financial information Fairer system of overhead allocation Recognizes the changing cost behavior of different activities as they grow and mature. Current situation~ Traditional method

12. Current situation~ Single predetermined overhead Suggestion~ Multiple drivers Failed to separate cost Computing separate rates for the fixed and variable portions of the total overhead. Clearer cost structure for different type of products. I. Cost accuracy (cont.)

13. Innovative vs. “Me too” Products Innovative products require more time to develop. Innovative products have to do more market research The outlay costs for innovative products are higher than “me too”products. More in-depth analysis of the differences in the resource consumption of the two types of products is required.

14. II. Cost specification How to distinguish between pre-launch and post–launch costs? The time of marketing, quality assurance and process development personnel. Marketing research and competitor analysis.

15. II. Cost specification (cont.) How to estimate the time spent on each activity? Maintain log books. List the factors that influence the amount of time. Be based on past experience. To get the proportion of time spent on pre-launch activities versus post-launch activities.

16. III. Timing Life cycle Misleading NPV& IRR Investigating the life spans of Innovative and “me too” products Financial analysis The analysis is conducted too late The projects must be evaluated more Carefully during phases one and two. Tradeoff Terminating financially unsatisfactory Project is too late. Evaluating a tradeoff Problem Suggestion

17. IV. Evaluation Criteria Cyto has not yet established an a priori cut- off internal rate of return (IRR). Possible Solutions: * The use of a minimum acceptable IRR based on historical returns * The use of different cut-off rates for the innovative and “mo-too” products

18. V. Behavioral Implications  Scientists’ resisting on: The changes by increasing importance of financial performance Evaluation criteria for new projects

19. V. Behavioral Implications (cont.1)  Overemphasis on financial performance will: Stifle scientists’ creatively Create scientists’ fear. Demoralize the scientists Decrease motivation and alienation

20. V. Behavioral Implications (cont.2)  Solution: Balance: Emphasis on both financial and non-financial measures Encourage scientist’s motivation. Reinforce scientist’s financial performance Facilitate communication & coordination

21. V. Behavioral Implications (ended) (^_^) Non-Financial measures: Ex:  Market position  Productivity  Employee attitude

22. Changes (IT-based) Online Monitoring Available in Data Analysis New Cost Accounting System Before-and-After Comparison of Returns

23. Challenges More Training Needs Participation-based Effectiveness Cost-Benefit Trade-off

24. Team Suggestions: Formulate integrated project process. Different approved criteria for Innovation and Me-too is suggested. Take a weighted average evaluation on project selection.

25. Weighted Average Project Evaluation Ex. 1. Potential for proprietary position … 15% 2. Balance between short-term and long-term projects and payoffs…10% 3. Potential for collaborations and outside funding… 5% 4. Return on investment… 25% 5. Need to establish competency in an area… 10% 6. Potential for spin-off products… 8% 7. Strategic fit with the corporations planned and existing technology, manufacturing capabilities, marketing and distribution systems… 12% 8. Impact on long-term corporate positioning… 5% 9. Probability of technical success… 10%

26. Q & A Any ambiguous question will be thought as a cost burden to our presentation and will be ignored as non-value-added item. So, think before submitting your question… Relax! Just kidding!