Cheap Land Offer Case Analysis

ISSUE 1:
Swap land offer

ANALYSIS

JCL got an offer from Sleepside developer to purchase the land that main Sleepside lumberyard occupies and to relocate the lumberyard to another comparable site. The developer has offered to provide a lot, to build comparable store, move all shelving, racking, and inventory to new facility and pays $5 million. Per year increase in net income is estimated to be 11% for the first ten years and after that there will be no significant difference between the existing and proposed alternatives.

RECOMMENDATION:
JCL should reject this offer, as new facility would not provide any additional income. The NPV of proposed facility is 4.5 million whereas NPV of future cash flow of existing facility is 9.8 million (Exhibit
1). Moreover, after paying the taxes on capital gain, NPV of this offer would be $8.3 million, which is still below than the NPV of the cash flows of existing facility.
Moreover, this offer will cause interruption in the operation of Lumberyard division. Long-term customers are already stopped dealing with lumberyard division due to late deliveries. This will make the situation worse as there could be more delays that could upset the customers more and consequently, JCL can loose its long-term customer permanently. Also, some employees from lumberyard division might leave their jobs due to commute problem. This will increase JCL’s hiring and training cost. It could also lead to quality or issues due to limited knowledge of new employees.

ISSUE 2
Transfer price between the divisions

ANALYSIS
Manufacturing department sells lumber to lumberyard division at cost plus 25% mark-up, which is significantly higher than market price. In 2001, manufacturing department has charged $375 per 1000 board feet whereas the long-term discount rate in market was $310. Therefore, the manufacturing’s profitability is difficult to verify because of the large sales made to lumberyard division.

RECOMMENDATION:
Transfer price at cost plus should be changed to market-based price. It will help Edward to get better picture of economic conditions regarding both divisions and measure their performances separately. The adjusted net income for both departments would be $ 1,090K and 1,030 K respectively and ROI would be 15% and 16%. These adjusted figures will also help in planning of manufacturing division as either a cost or profit center.

ISSUE 3
Control and strategic planning

ANALYSIS

From interviewing various mangers, it is evident that most mangers are not aware of their objectives, responsibilities and authorities within their divisions, which results in difficulty in decision-making process. Many divisional mangers are reporting to president whereas the profitability of their divisions is the responsibility of their general manager. The excessive load in the president’s work increased the time for decisions. This has caused confusion and has interrupted the smooth operations. Consequently, manufacturing division were shut down for 3 times due to the lack of logs and lumberyard division had times when it has to purchase lumber from competitors to meet delivery commitments. Lon-term customers are dealing less due to problem in on time delivery.
Moreover, Both divisions are not aware of their purpose of whether to act as an independent profit center or to support the other division.
JCL mangers prepares budget late by three months and performances is measured on the basis of sales.

RECOMMENDATION

Some changes to the management control are required to maintain effective communication and pursue opportunities. Mangers should be allowed to have some direct control over their areas of responsibilities such as vacation schedules and hiring employees. Manager should be engaged in setting budget targets. Also, the timeline should be strictly followed to ensure those budgets are prepared on time. New performances measure such as speed of delivery should be added to evaluate the performances and managers should be held responsible.
General managers and president should come with a decision of whether both units should be treated as cost or profit center. At present, 68% of manufacturing’s sales are outside the firm, therefore, it should be treated as a profit center rather than cost center. However, almost 63% of Lumberyard’s lumber is supplied by manufacturing division and, if manufacturing start acting as completely independently then lumberyard division may experience difficulties finding other
suppliers.