Jones Company

Case: Jones Company^[a] 

Name: Angela Lo

Student #: 100238724

Short Cycle Process:

• Who: New Corporate Controller, reporting to the president
• What: Prepare report on my investigation and analyse of areas that need management’s attention, including the evaluation of the land swap deal and transfer price of the divisions
• When: Report due in one month, 2001
• Where: Sleepyside, Canada

Case Analysis:

Issue 1: Determine whether the developer’s offer to swap land is sufficient to accept

Concept(s): WACC, NPV, Free Cash Flow Analysis

Qualitative Analysis: The new location may cause discrepancies in travel times for workers, distribution and suppliers. Changing locations will have additional administrative duties to change all the addresses for related party interactions. Machinery and equipment may damage during the moving process that needs to be accounted for by the developer. The new location has larger land space but may lead to more idle capacity if the space is not used up. We need to consider if JCL needs the extra space to operate.

Quantitative Analysis: Given JCL’s WACC of 15%, the existing facility has a NPV of $6.6 million. The proposed facility has a greater NPV value of $8 million with the capital gain on the $5 million up front provided by the developer (Exhibit 1).

Recommendation: Agree to move to the new location, given that the developer will cover any further damages incurred during the moving process.

Issue 2: Determine what the lumberyard division would have paid under market conditions from the manufacturing division

Concept(s): Transfer pricing

Qualitative Analysis: JCL does not currently apply a transfer pricing approach. Currently, the manufacturing division is benefitting from overcharging the lumberyard division. The losses from the lumber division is evident in the overall financial position of the company. As each division operates as its own profit center, TCL as a whole faces discrepancies in sales recognition and managerial decision making. There is not a congruent goal for each division’s managers to work towards as they are only benefitting their own divisions.

Quantitative Analysis: The lumberyard division has been progressively paying more than the market price to the manufacturing division. In 2001, they paid 13% more. Given the mark up rate of 25%, the asking price has been higher than the market rate since 1999. The lumber is priced using a cost-plus pricing approach because the 25% is applied to the direct manufacturing cost. As the cost of manufacturing increases, so does the price it sells to the lumberyard (Exhibit 2).

Recommendation: Apply the transfer pricing approach and use market price to sell products to the lumberyard division. Instead of increasing selling prices, the manufacturing division should focus on reducing manufacturing costs.

Issue 3: There are issues with management and reporting structure that has led to bottleneck decisions and other decision making inefficiencies

Concept(s): Strategic planning, management and internal control

Qualitative Analysis: The current organizational chart indicates that major decisions are made by the president, not by lower-level managers. The president is micromanaging the company which impedes the decision making process. There is a lack of segregation of duties by managers which indicates internal control issues. The president can bypass the budgetary process hindering the effectiveness of financial risk planning. The managers agree that there is no clear direction and objective for them to work towards, they are not working together to benefit JCL as a whole, but instead working against each other as separate profit centers. There are personality issues that impede the operations, there should be a proper HR personnel who handles the hiring and employee relationships.

Quantitative Analysis: Lumberyard’s sales turnover has mainly decreased over the years, with a large 16% decrease in 1997, the year before manufacturing division was added. The competition has only experienced minor decreases of 1% to 2% over the last decade (Exhibit 4).

Recommendation: The president takes a more passive role and allow main managers to focus on their own departments so decision making will be more efficient. Hire an HR personnel to handle internal control issues. Clearly define the direction of the company.