Reference no: EM132731473

Micro Electronics case study: Forecasting Income statement

Micro Electronics Inc. has been averaging a 5 percent sales growth every year and by the end of 2019 they reached a one billion dollar in Sales. Their competitors were growing the sales at 4 % a year, lower growth then Micro Electronics, but the stock price of their competitors was growing at a much higher rate. Board was concerned and they hired Mary Sullivan as a new CEO. Mary came from one of the competitors.

Mary started at the end of 2019 and she met with her direct report and staff. She has four senior directors reporting to her. Julie is the Director of Sales, John was Director of Engineering, Michele was Director of Engineering, and "you" are her CFO.

Mary and her staff met for a few days and evaluated all the possible options. They concluded that their problem was not Sales growth, as their sales were growing at 5 % versus the industry average of 4 %. It was the operating performance. How well they were managing the business, especially their costs.

She highlighted that the stock price is dependent not only on sales growth but also on profit performance. Measured by profit margin percent: Net Income divided by Sales. Profit margin % for the competitors has been around 10 % whereas Micro Electronics Profit margin has been averaging 7 %.

Moreover, she also indicated that Micro Electronics not only has to get to the current industry average of 10 percent soon but has to continue to expand the profit margin % and achieve 15 %. As she expects that the competition that is currently at 10%, and when they see us getting our performance better will not sit idle. They will also focus on growing their profit margin. Thus, she suggested that they should set a goal to increase their Profit margin %

Overall goals: Achieve 10 % profit margin by 2022 and 15 % by 2025

Analyisis-1: Team collectively decided on following targets:

• Grows sales at 6 % a year
• Apply lean manufacturing and keep Cost of Goods cost growth at 5 % a year
• EngineeringDirector: Be selective in new technology investment and keep cost growth at 3.5 % a year
• Maintain Selling and General Administration cost growth at 3.5 % a year.
• No new debt so the interest expense stays constant
• Tax rate= 30 %

Mary asked the CFO to conduct a forecast based on their targets. Analysis was conducted using Excel with following results (including the graph):

Based on their targets, they expect the profit margin to get better but do not achieve their goals. 10 % by 2022 and 15 % 2025.

Analysis-2:  Mary and her team decided to set more aggressive targets.

• Grows sales at 6% a year
• Apply lean manufacturing and keep Cost of Goods cost growth at 4 % a year
• EngineeringDirector: Be selective in new technology investment and keep cost growth at 3.0 % a year
• Maintain Selling and General Administration cost growth at 3.0 % a year.
• No new debt so the interest expense stays constant
• Tax rate= 30 %

Assignments: Templates are provide in the excel file.

1. Redo the first analysis (Analysis-1), where the answers are provided. But not formulas. Create the Excel file with the "formulas." This will allow you to figure out the right formulas ( 40 % of the grade)

2. Conduct Analysis-2 with new targets that Mary and her team decided ( 60 % of the grade)

a. Complete the Excel file ( 30 % of grade)

b. Create graph for profit margin (10 %)

c. Cut and paste the excel file and graph (similar to what is in the case study above) on a word document and provide your analysis. Did they achieve their goals? And what would you recommend to Mary as her CFO (Chief Financial Officer). For example, your recommendation to either grow the sales % or lower cost growth. Provide a scenario and the excel results and graph that will satisfy their goals. (20%)

NOTE: You will post both the word document with cut and paste for Analysis-2, graph and  your recommendation. And also post the Excel file.