ICAN CASE STUDY REVIEW QUESTIONS QUESTION 2 CASE STUDY EXERCISES CASE 2 TOTAL PICTURE NIGERIA PLC THE COMPANY

Transcription

1 ICAN CASE STUDY REVIEW QUESTIONS QUESTION 2 CASE STUDY EXERCISES CASE 2 TOTAL PICTURE NIGERIA PLC THE COMPANY Total Picture Nigeria Plc is a fully owned Nigerian company incorporated in 1976 with the Head Office, located in Ikorodu, Lagos State. The company initially started with three (3) subsidiaries, located in Apapa, Ikeja, and Badagry all in Lagos, it has just acquired a fourth (4 th ) subsidiary - N1POTEX Limited in Kano. All the subsidiaries are wholly owned. The structure of the holding company is such that its Managing Director doubles as Group Managing Director. All the subsidiaries are headed by General Managers, titled "Plant Managers". The company is listed on the Nigerian Stock Exchange with recent decision in favour of cross-border listing and introduction of a new derivative, known as Global Depository Receipt (GDR) to widen its stock base. The stockbrokers have always complained of the unreasonable length of the T+ 5 delivery system of the Nigerian Stock Market. The company has four (4) factory sites located in Ikorodu. (Head Office), Apapa, lieja and Badagiy. The Ikorodu factory operates under the name "TOTAL PICTURE"; Apapa under the name of TOTAL BEAUTY NIGERIA LIMITED, Ikeja under the name TOTALTEX NIGERIA LIMITED and Badagry-TOTAL FOOD AND BEVERAGES LIMITED. The company is in the manufacture of: Textile Materials - ikorodu and Ikeja factories Cosmetics and Beauty Products - Apapa Food and beverages - Badagry STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 1

2 PRODUCTION Production in the Food and beverages Unit is in three (3) stages, namely Processes 1, 2 and 3. The output from one stage essentially becomes the input of the other. The company currently operates in all factory sites at 70% capacity, which has been adequate for meeting all demands to date, although at 85% capacity, all current facilities will conveniently cope. Besides, the cosmetics and beauty products pass through four (4) stages to completion, while the textile environment is divided into whapping, knitting, waving, dying and finishing. It was the policy of the company to blend the ideal standard with a five per cent (5%) allowance for deviations from standards while raw materials were subjected to proper handling. As stated earlier, Ikeja factory is for production of a popular brand of textile fabrication weed "ANKARA". RAW MATERIALS Raw materials for the textile fabrication apart from designers' stencils are mainly yarn and dye, imported from India. For the food and beverages, only two (2) of the materials, T1TA and DONO are imported while other materials are available locally. The cosmetics and beauty products have three (3) imported materials, PERME, CREAMA and FUME. All cleaning activities are handled by 'ALA1MOKAN LIMITED' which is currently on retainership with the company. WAREHOUSING AND STORAGES Raw materials are centrally purchased and stored in the central stores at the Head Office in lkorodu. Each factory site is expected to complete and submit materials requisitions to the central Stores Manager for supplies, although each of the plant also maintains stores for raw materials, work-inprogress and finished goods. Each factory/plant manager is to monitor the stock level to avoid production delays/ stoppages, and such stock level figures are made available to the Head Office for checks and balances. Spare parts and consumables are also purchased and stored centrally, although minor consumables (not more than 0.5% of the plant imprest) confirmed out of stock by the Head Office could be purchased directly by the plant manager. Since a centralised store system is being operated, finished goods from all plants are transferred to the central stores in Ikorodu where they are issued to different sales outlets. Currently, three (3) warehouses are maintained in Ikorodu for finished goods. SALES OUTLETS Four (4) sales depots are maintained in Ikorodu, Port-Harcourt, Makurdi and Maiduguri classified into regions for convenience and controlled as follows: Ikorodu - South-West Port-Harcourt - South-South Makurdi - Middle Belt STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 2

3 Maiduguri - North-North Finished goods are moved to sales depots from the central stores via a team of salesmen from the Head Office sales department. There are depot representatives in each depot handling direct sales to customers in each region with performance targets set for all sales depots and bonus schemes attached to performance levels at 1% of total sales for depots that are able to meet performance target and 2% on sales above the performance target level. Bonuses are attributable and/or apportioned to every staff at the sales depots in the ratio of their basic salaries. Staff on suspension or other disciplinary measures forfeit such benefits. MARKET Competition in the food and beverages industry is very keen. Every producer comes up with one product or the other to attract consumers. Benchmarking was on the increase leading to a marketing war, coupled with the fact that many small scale entrepreneurs who recently got loans from the Federal Government went en-masse into the Food and Beverages industry, producing different kinds of tea, in some cases without consideration for NAFDAC's requirements. However, Total Picture's strategy is to produce its powdered tea at cheapest cost, adopting a sale price affordable to every intending consumer, leading in the market and yet maintaining the quality. Incidentally, market intelligence is prompt and regular. With its current 20% market share, the marketing slogan still remains "Total Picture product in every hand by year 2002". DISTRIBUTION Mass production and distribution strategy was adopted, allowing each depot to distribute products through retail outlet's to every remote consumer. However, the team of salesmen from the Head Office occasionally visit depots and are conducted round key customers for a feedback to improve qualities and customer' satisfaction. NAFDAC REGISTRATION The company is duly registered with NAFDAC having met all registration requirements including the establishment of a modern laboratory. ACCOUNTING Each of the factories is self-accounting, although there is a Centralised control from the Head Office Accounts department to which monthly operating statements are rendered. Uniform policies are in place and the Head Office Accounts department is expected to consolidate results from all units for a comprehensive financial statement every month. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 3

4 TRAINING/STAFFING Being driven by profit, it is not surprising that TOTAL Picture's approach to training -was both minimal and spasmodic, generally regarded as a luxury only to be offered when times were good. training was the first expenses trimmed when times were tough. Training levels were also influenced by the attitudes of Head Office management and by individual plant managers. The South-South region with a sales target of N5 million per month consists of eight aggressive staff including Mr. Stronghead, the second highest paid staff in that region, on N8,000 total monthly package, he once insulted one of the company's valued customers and was placed on six months suspension without pay from July It was surprising that despite the fact that the total staff emoluments in this region was N76,000 monthly in the ratio 4:3:3:3:3:2:1:1 as basics, and reduction in strength, sales figures rose from N4.5 million to N5.2 million structure to N5.4 million, N5.6 million, N5.45 million, N5.3 million, N5.6 million and N5.5 million for the 6 months from July This region was tagged "Best Region" of the year THE MANAGING DIRECTOR The Managing Director, Mr. Oleku, a complete gentleman, loved by all staff is a man who loves good policies and planning. He runs an open-door policy and of the opinion that every responsible officer with a good plan should know how to translate such plans to organisational goals. He gave free hands to all Managers at all levels to control activities and also develop themselves. He only waits for occasional reports of activities during management meetings and often allows them to have their ways if they believe that these are better ways of handling issues, even after management's decisions. Little wonder his being tagged "the man of the people". SPECIAL The financial picture of the group on Schedules A, B and C showed a deteriorating state as turnover went down from N25.7 million to N23.8 million while expenses rose from N5.4 million to N5.99 million resulting in a huge loss of N1.5 million. The Board became worried and ordered an investigation into the issue. There was an advertisement recently by ltesiwaju Nigeria Limited on the Television and prominent Nigerian Newspapers on her locally manufactured TITA and DONO at very cheap prices compared with imported ones which the Managing Director readily ignored. When it was also raised by some managers in a management meeting, the MD rejected the idea as he doubted the ability of these local products to meet imported standards. He allowed no further discussions on the issue. BACKWARD INTEGRATION The company recently expanded its textile operations with full commitment to backward integration and self-sufficiency in its efforts towards local sourcing and development of raw materials. The company took over (100%) on April 13,1999, N1POTEX Limited, located in Kano, a yarn producing company for a purchase consideration, transferred one of its Managers from the Head Office, Mr. Brain, a graduate of Mechanical Engineering from University of Ibadan, to take over as STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 4

5 Production Manager and Acting Plant Manager pending the appointment of a substantive Plant Manager. This assignment is in addition to Mr. Brain's current schedule as Manager (Technical Services) in the Head Office. Before this take over, the morale of NIPOTEX staff had suffered greatly; operations were often near standstill and important decisions were left untaken. The general feeling of the workforce and the environment was that NIPOTEX would soon join the long list of distressed firms. MR BRAIN On becoming the Production Manager/Acting Plant Manager, Mr Brain, having worked for several years knew little or nothing about NIPOTEX, as very little information was available at the Head Office about this outfit. On Mr. Brain's first trip to Kano, the former owner/general manager made only himself and his tight-lipped controller available for discussions. The discussions plus a quick plant tour took up the whole four (4) hours of visit. During the subsequent visits, the former owner/general manager had discouraged his subordinates from having any close contact with Mr. Brain. Apart from Mr. Brain's little or no knowledge about NIPOTEX, he knew even less about Kano, spoke hardly a word of Hausa and had to communicate with NIPOTEX staff in English language. Since most of the staff were not fluent in English language, internal communications posed a real challenge. Also, Mr. Brain was uncertain, whether the officers would be willing to stay after the take-over as the previous owner/general manager, who was to withdraw immediately, has asked his entire commercial staff to leave with him. During their first meeting, the Commercial Manager told Mr. Brain that he would stay for two (2) or three (3) months for the company to stabilise after which he would pull out. Finally, Mr. Brain himself was only able to devote only half of his time to NIPOTEX, since he retained his earlier duties in the Ikorodu Head Office as Manager (Technical Services). In spite of the fact that he did not have any experience either in knitting or sewing, Mr Brain, was faced with some urgent decisions when he resumed in NIPOTEX, Kano. The most critical was the introduction of a Nl million special line for special occasion head ties, ordered by the Federal Government of Nigeria for the Family Support Programme (FSP), that was already three weeks late and which had to be ready within ten days. The contract terms included, among other things, a 60% mobilisation and payment of balance on delivery. In case of default in delivery, the penalty clauses were a refund of the mobilisation in full with a twenty percent interest and a lien of all company asset. The 40% balance being the entire profit estimate on the said contract of N10 million. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 5

6 Also, before the middle of June 1999, fabric selections were to be made and basic design issues settled for year The departure of one of the two (2) designers had left NIPOTEX short in design skills, which required immediate action. Furthermore, during Mr. Brain's early days at NIPOTEX, a delegation of workers complain of insufficient work as production was being subcontracted and certain working conditions needed improvement. For the past few years, NIPOTEX turnover and profit performance had been deteriorating. EXTRACT FROM NIPOTEX ACCOUNT Sales N 16 million N 11 million N 8 million Profit (loss) (N0.6 million) (N 2 million) (N 1.8 million) PRODUCT DEVELOPMENT One of the subsidiaries, Total Beauty Nigeria Limited - Apapa was the manufacturer of CREAMORA, a new petroleum jelly formula. Mr. Ogaju, an experienced OND holder was the Cost Accountant. A performance yardstick was set as follows: - Every unit of CREAMORA requires 4 kg of perfume jelly at N 60 per kg man-hours of labour at N 2.50 per hour A new operations Manager, (Mr. Agbari) was employed and he considered that with the benefit of hindsight, for each unit of creamora, 5kg of perfume jelly will be used at N55 per kg. The interim result for January-June, 1998 showed the following: Production 23,000 units Opening stock of finished goods Raw materials NIL WIP NIL Direct labour costs N 2.8 million for 1.2 million hrs. Materials purchased N 6.96 million for 120,000 kg Materials used in production 96,000 kg Closing stock of raw materials 24,000 kg In a very hot argument at a meeting where the Accountant was emphasising the use of cost standard, the Operations Manager quickly responded that given time and usage standards in hours and kgs respectively, he could control the business satisfactorily without the use of any cost standards. DISTRIBUTION AND SALES POLICY STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 6

7 As part of the distribution policy, goods are moved from the warehouse to any depot at least cost, although an external consultant had in the past suggested that either the North West Corner, the least cost method or the vogel's approximation method could be used, but the least cost method should be adopted. In a particular month, the stocks of goods available in the three (3) Ikorodu warehouses were 120 cartons, 80 cartons and 80 cartons respectively. However, due to pressure from customers, at Port-Harcourt (Depot 1), Makurdi (Depot 2) and Maiduguri (Depot 3), the depot representatives had requisitions for 150 cartons, 70 cartons and 60 cartons respectively. The Transport Manager was worried staying late in the office almost on a daily basis as the transportation costs were becoming uncontrollable. The movement of goods from the first warehouse to the three (3) depots cost N8, N5 and N6 respectively as against the second with N15, N10 and N12 respectively, the third N3, N9 and N10 respectively. The Managing Director who was on a visit to the warehouse wanted to know the cost of moving these goods to the sales depots where there were stock outs which could in loss of market. Furthermore, the company's aggressive sales team include Mr. Get-Rich-Quick who has always met sales targets and bagged the best staff of the year award in 1998, with a commendation on him in 'The Guardian' to inform all customers of his brilliant performance and to challenge others. However, one of the customers from the South-South region made certain payments (N50, at a time) in cash, and received hand-written notes from Mr. Get-Rich-Quick in acknowledgement receipt - an initiative earlier commended by management, since it had the effect of enhancing company's liquidity position. Mr. Get-Rich-Quick spent the sum so collected on his children's school fees and did not disclose same until he had resigned and collected his final entitlement. The company, learning of these payments by the customer, claimed that the transaction was purely a private matter between the customer and Mr. Get-Rich-Quick as some signed pieces of papers presented did not carry the company's logo. The customer threatened litigation, which the company did not take seriously. Again. Mr. High-minded, also a salesman made N personal profit from overpricing a brand in high demand in Lagos which he kept in his office safe with is personal cash of N250,000. He however gave an accurate account of all sales with adequate cash remittance as per normal (authorised) sales prices. This overpricing was revealed by a telephone conversation of the Managing Director with known customer who wanted the MD to commend him for substantial purchase during the previous week. Although the customer was not aware that the product was overpriced neither did the MD show any sign of such, but rather, ordered investigation. A spot check into the salesman's office discovered the N400,000 cash which was collected and paid into the company's bank account. On further interrogation, the salesman confessed overpricing but explained that the personal secret profit was N150,000 and the balance of N250,000 was cash sales from his private shop. The MD however disagreed and the salesman contacted his lawyer. INVESTMENT Total picture, as part of the re-engineering exercise, created a Corporate Planning Unit headed by Dr. Oripe with Miss Omotide who has just passed ICAN Foundation Examination as Cost Accountant. One product named "SUDICO BAG' was in the final stages of development. Producing SUDICO BAG was a blessing since it would utilise machinery. which otherwise, would have been sold off. The plant originally cost N200,000 and STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 7

8 planned to have a life span of ten (10) years. After only five (5) years, there was talk of hoarding and selling for N Fortunately, with the advent of the new product, this would not now be necessary but would be expensive in other ways. Firstly there was the planned capital expenditure as follows: NOTE 1 PROPOSED CAPITAL EXPENDITURE N Building Extension and land 90,000 Design Office 15,000 Retail shop 12, ,000 The retail shop was an experimental notion in line with new policies of increased customer service. The design office expenditure was one of convenience - the present design office needed to be relocated and this new building could come handy. The new land and building investment form part of the general corporate plan of growth and not specifically the SUD1CO BAG project. Also, there would be the investment in working capital arising through a policy of maintaining high stock levels for better customer service. The summarised data are shown below: (a) The anticipated product life was six (6) years. (b) Fairly steady demand for the first four (4) years was forecast at 8,000 units per week at worst, perhaps 12,000 units at best. (c) The last two (2) years sales were likely to fall steadily and it would be difficult at that time to judge whether an improved model would be worthwhile. (d) Normally, six (6) weeks credit was given to customers but this could well be stretched to eight (8). (e) Production could be planned at either 8,000 units per week or 12,000 units per week but the final decision would be left until the launch date when a more accurate assessment of sales demand could be made. (f) When interest rates were high, Total Picture' might well be tempted to delay their own payments by another month. (g) Costs Direct material N2.50 per unit Direct labour N1.00 per unit Additional overhead N9,000 per week Creditors for materials and overheads on average were paid four (4) weeks after supply. Wages were paid one (1) week in arrears. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 8

9 (h) (i) For the first four (4) years, it was planned to sell at N6 per unit, however, competition in the last two (2) years might force the price as low as N4.50. To avoid production delays and facilitate bulk purchasing, it was felt that a raw material stock of N4,000 should be held at the lower production level and N6,000 at the higher. The length of the complete production cycle would be approximately three (3) weeks and because of the wide distribution network and the necessity of holding finished goods stock at different locations, some six (6) weeks supply of thermseal in finished form would need to be held. It is part of the company's policies to value finished goods at full cost and W.l.P. at prime cost. SCHEDULE A TOTAL PICTURE NIGERIA PLC GROUP PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER N 000 N 000 Turnover 23,889,820 25,722,376 Cost of Sales (19,427,986) (20,772,782) Gross Profit 4,461,834 4,949,594 Distribution & Admin. Expenses (5,993,828) (5,485,926) (Loss)/Profit from operations (1,531,994) (536,332) Share of profit of associated companies 171, ,612 Other income (Note 1) 657,092 1,705,450 (Loss)/profit before taxation, MI & EI (703,722) 1,282,730 Taxation (452,850) (308,382) (Loss)/profit after taxation, but before MI & EI (1,156,572) 974,348 Exceptional income (EI) 2,815,954 PAT & EI before MI 1,659, ,348 Minority Interest 57,936 (175,612) PAT, EI & MI 1,601, ,736 Dividend (545,180) (545,180) Profit retained for the year 1,056, ,556 Gain/(Loss) EPS before EI (kobo) (120) 80 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 9

10 ESP after EI (kobo) DPS (kobo) SCHEDULE B TOTAL PICTURE NIGERIA PLC BALANCE SHEET AS AT 31 DECEMBER N'000 N'000 Employment of Capital: Fixed Assets 7,763,124 16,639,602 Long term Investments 4,896, ,342 Long term debts 67,760 50,022 Net current assets 1.173, ,934 13,900,628 17,168,900 Minority interests (1,879,028) (1,955,270) Creditors falling due after one year (270,714) (272,000) Provision for liabilities & charges (1,337,022) (1,094,858) Total Net Assets ,864 13,846,772 Funds Employed: Share capital 454, ,318 Share premium 257, ,328 Capital reserve 1,306,926 10,459,254 Other reserves 5,237, ,594 Retained profit 3.157,438 2,118,278 Shareholders' Funds 10,413, ,772 SCHEDULE C NOTES TO THE FINANCIAL STATEMENT 1. OTHER INCOME N'000 N'000 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 10

11 Profit on disposal of Fixed Assets 184, ,634 Other trading income , ,092 1,705, PROFIT BEFORE TAXATION N'000 N'000 The profit before tax was arrived at after charging: Auditor's Remuneration: Group 19,880 14,500 Others 1,700 1,400 Director emoluments 20,428 17,424 Interest: Bank loans 103, ,720 Bank overdrafts 1,318,716 1,006,030 Less: Interest capitalized 1,422,414 1,349,750 - (92,446) 1,422,414 1,257,304 Depreciation of fixed assets 644, ,818 Research & development expenses 2,000 11,160 Provision for unfunded retirement benefits 178, ,112 QUESTION 2.1 STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 11

12 (a) (b) Advise the operations manager of total beauty limited on the alternative basis that might have been sued originally as the yardstick and compare these in terms of arising from the use of each of them. Also justify the substance in his cost standard argument showing relevant calculations of deviations from plans as against operations. How much is the transport cost to be presented to the Group/ Managing Director as requested, bearing in mind the company s policy QUESTION 2.2 (a) Explain the following in terms of definition, use, merits and demerits as may be relevant: (i) Cross border listing (ii) Derivatives (iii) Global Depository Receipt (GDR) (iv) Bench marking (v) Market intelligence (b) Why is T + 5 not healthy as complained by the stockbroker? QUESTIONS 2.4 (a) (b) What are the legal implications in Get Rich Quick and High minded cases? Comment on the losses presented in the Group Final Accounts. QUESTION 2.5 (a) (b) Discuss Mr. Oleju s management style and the implication for the company Design a cost-reduction programme for the company TOTAL PICTURE PLC (c) Identify policy weaknesses} in TOTAL PICTURE PLC and suggest improvement. STARRY GOLD ACADEMY , , info@starrygoldacademy.com, Page 12

13 QUESTION 2.6 (a) For the two (2) levels (lowest and highest) of production/sales of SUDICO BAG project calculate working capital requirement. (b) Calculate the total staff emoluments of South-South region for July- December 1999, identifying special incentives to each of the eight staff with respect to sales on monthly basis, to the nearest hundred. STARRY GOLD ACADEMY , , Page 13