Financial Comparison $ billions Income Statement Mar-02 Mar-02 Mar-00 Mar-99 Mar-98 Revenue

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1 2.008 For-Profit manufacturing firms Performance Measures Ownership: Market value = PV (Earning) PV (Growth Opportunity) Management: Performance Targets 2 Automotive Market Share in the U.S. 3 30% 2 20% % 0% Oct-99 Jul-00 Apr-0 Dec-0 Oct-02 GM Financials $ billions Income Statement Dec-02 Dec-00 Dec-99 Dec-98 Dec-97 Revenue Gross Profit Margin 26.% 28.4% 2.0% 23.4% 2.9% Operating Margin 5.7% 9.% 5.6% 4.2% 2.2% Net Income Net Profit Margin 0.3% 2.4% 3.6%.9% 4.0% Balance She e t De c-02 Dec-00 Dec-99 Dec-98 Dec-97 Cash Net Receivables Inventories Other Current Assets Current Assets Net Fixed Assets Other Noncurrent Assets Assets Accounts Payable Short-Term Debt Other Current Liabilities Current Liabilities Long-Term Debt Other Noncurrent Liabilities Liabilities GM (w/s aab) DaimlerChrysler (w/mercedes) Honda Ford (w/volvo, Jaguar, & Land Rover) Toyota Nissan Preferred Stock Equity Common Stock Equity Equity Toyota Financials Financial Comparison $ billions Income Statement Mar-02 Mar-02 Mar-00 Mar-99 Mar-98 Revenue Gross Profit Margin % 27.4% 27.8% 27.0% Operating Margin 7.6% 6.0% % 6.4% GM TOYOTA Net Income Net Profit Margin 3.9% 5.% 3.8% % Balance Sheet Mar-02 Mar-02 Mar-00 Mar-99 Mar-98 Current Ratio Cash Net Receivables Days Receivable Inventories Asset Turnover Other Current Assets Current Assets Inventory Turnover Net Fixed Assets Other Noncurrent Assets Assets ROA 0.2%. 2.2% 2.9% 4.0% 2.9% Accounts Payable ROE 3.0% 4.8% 29.% 7.7% % Short-Term Debt Other Current Liabilities Gross Margin 26.% 28.4% 2.0% % 27.4% Current Liabilities Long-Term Debt Operating Margin 5.7% 9.% 5.6% 7.6% 6.0% 5. Other Noncurrent Liabilities Liabilities Profit Margin 0.3% 2.4% 3.6% 3.9% 5.% 3.8% Preferred Stock Equity Common Stock Equity Equity

2 i 7 Investment Decision Time Value of Money $ today is worth more than $ tomorrow NPV Payback Period Average Return on Book Internal Rate of Return Profitability Index Discount rate: Return foregone by investing in the project rather than in other opportunities Spr ng Cash Flow During Product Cycle Mfg Example Hobbed Gear Percent of P/M Gear Percent of Hobbed : : SAE 45, including 2% setup MPIF FC-0208-S (7.0 g/ cm3 scrap and 46% chips 5. densi ty ) scrap 9.97 NPV Operations: Cash Flow n Bar chuck, cut off and bore Broach keyway Hob teeth Operations: Compact (0-ton press) Sinter Harden.92 Harden.92 Grind ends perpendicular to pitch diameter 5.93 Grind ends perpendicular to pitch diameter 5.93 Deburr 0.53 Deburr 0.53 Inspect 0.26 Inspect 0.26 Perishable tools and gages, per Perishable tools and gages, piece 7. per piece Elements of Product Full cost (cont d) Direct = Direct Labor Prime = Full Production ( or Inventory ) = Distribution General & Administrative Full R&D Engineering Admin., sales, marketing 2 Profit Selling Price 40% Plant & machinery, depreciation, energy 2% 40% Indirect Labor 26% Direct Labor 2% s 2 2

3 i Direct/Indirect vs. Fixed/Variable Production Relative to Volume 00 Traceability: Accountant Volume-dependence: Economist Relat i ve cost per part ($ ) 0 One of Batch Mass a kind production production Relative Producti on Rate ( parts/time) 3 4 Fixed and Variable How Man, Machine, and Spend Time in the Factory People s Machines u e - Val Value - Value - per un t, $ ( TC) Vari able (VC) Fi xed ( FC) Volume, n TC = FC n VC : waiting for materials, watching machine running, produci ng defects, looking for tools, fixing machine breakdowns, producing unnecessary items, etc. : transportation, storage, inspection and rework : unnecessary movement of machine, setup time, machine breakdown, unproductive maintenance, producing defective products, producing products when not needed, etc. 5 6 Product cost by industry Industry Direct s Direct Labor overhead Aerospace Allocation Bases of Computers Electronics Industrial and farm equipment Meta l products Motor vehicles and parts Labor hours Machine hours direct cost Activity based Scientific and photographic equipment Average for seven industries

4 i 9 ABC: Accuracy Target Allocation Bases of (cont d) Actual Raw material Final product Stat Stat Stat Station 3 ion ion 2 ion 4 Unit Level Activity Driver Quantity of Driver per Unit Driver Tota l Extensive ABC System Value-added Activities: - Assembly Person di rect labor 8 hours per day $64.00 per day Simple ABC System Non-value Added Activities: - Machine setup Person Di rect labor hour per day $8.00 per day - Tool Load/Unload Machine time 2 hours per day $60 / hour $20 per day - Part Load/Unload Person Di rect labor 45 hours per day $6.00 per day - Inspection CMM Time 3 hours per day $35.00 / hour $5.00 per day $ Spr ng s Traditional ing Production 600 Machine Classes Support s Pools s Process Oriented ing Production 600 Machine Classes Support Order Processing Special Components DM Direct to date Allocation Bases DM Direct to date Per order # of special components 2 22 Traditional and Activity-Based ing Distribution of Orders $ 000 s Traditiona Transferred Process Oriented ( ) l Mater ial $5,000 $5,000 Mater ial 6,000 6,000 related overhead Labor 36,000 36,000 Production related overhead 20,000 20,000 cost 267,000 (74%) 267,000 (74%) Engineering costs 2,000 6,300 5,700 Tooling costs 22, ,500 Administrative costs 60,000 27,000 33,000 Support rel ated cost 94,500 (26%) 33,300 ( 9%) 6,200 (7%) Number of motors 630, ,800 57,500 4% 3% > 99 Motors 9% 44% Motors 3% Order processing cost 3,800 3,800 Spec ial components cost 9,500 9,500 cost 0 $36,500 $36,500 75,600 3,500 48% Motor 26% 2 4 Motors 5 9 Motors 3% 7% Percent of Tota l Number of orders 65,

5 Estimate: Example A B C D E Pre-Support Related Base Motor Components x.35 x.35 x.35 x Traditional Systems Distort Product and Customer s Volume High Low Overcosted Complexity Traditional s High Ratio to Traditional Low Undercosted Revised per Unit A B C D E unit ,02.0,5 units units units Product Complexity Sma ll batch sizes Long set-up times Unique components Special inspection and tests Extensive material handling Special vendors Customer Complexity Customized products Short lead times Unpredictable orders Extensive technical support Extensive post-sales support Special test and requirements