Testing for Fools Gold

1. It is suggested that an investment of $200 per month in an advanced copier feeder upgrade will save 15 hours per month of clerical time. Clerical direct wages average $20 per hour with $7 per hour of benefits and overhead.

   Impact = $4,860 per year savings and increased profit: The total cost of the saved clerical time is $405 per month yielding a net savings of $205 per month or $4,860 per year.

   Impact = $1,260 per year savings and increased profit: The direct cost of the saved clerical time is $300 per month yielding a net savings of $105 per month or $1,260 per year.

   Impact = $2,400 per year increased costs and decreased profit: The increased lease cost on the copier feeder is not recovered.

   None of the above

2. It is suggested that $100,000 that have been already budgeted for building roof repairs this year not be spent.

   Impact = $100,000 savings and increased profit: Since this expense was already built into the budget, the full benefit should flow to this fiscal year.

   Impact = $10,000 savings and increased profit: The expense would have been capitalized with 10-year amortization so the impact to any one fiscal year is $10,000.

   Impact = $10,000 savings and increased profit: The expense would have been capitalized with 10-year amortization so the impact is $10,000 every future fiscal year.

   None of the above

3. The decision is made to take on a new account outside the historical service area. Gross revenues are estimated to be $1,000,000 per year. The average cost of product is $700,000 yielding a potential margin of $300,000. The average cost of service is 20% of gross or $200,000 in this case. Thus the net profit is $100,000 per year.

   TRUE: Impact = $100,000 per year increased profit. This calculation is correct as it stands.

   FALSE: Impact = $50,000 per year decreased profit.

4. The operating crews complain loudly and very often that their feet and backs hurt after standing at their stations on the hard concrete floors for much of their shifts tending the process. They suggest that if 50 soft rubber anti-fatigue mats were purchased at a cost of $58.33 each or $3,500 total that they could improve their attitudes and productivity enough to more than double the cost (to $7,000) to provide a net cost savings of $3,500 per year.

   Impact = $3,500 savings and increased profit. The calculation is correct as offered. The operating crews will somehow generate the savings to pay for the mats as they promise.

   Impact = $7,000 savings and increased profit. After the first year expense, the full contribution applies. The operating crews will somehow generate the savings to pay for the mats as they promise.

   Impact = much greater than $3,500 savings and increased profit. The frequency and intensity of complaints indicate there is more to this issue than meets the eye.

5. A Six-sigma analysis determines that the process flow for the claims processing department can be considerably streamlined. The net impact is that 6 claims processors (each $70,000 per year with benefits and overhead (5%)) can be transferred to other jobs to avoid a layoff. The net salary savings is $420,000. In addition, 700 square feet of space are transferred to another department for use at a net lease cost of $19 per square feet or $13,300 per year. The project claims a total savings of $433,300 per year. The team participants share a bonus of 10% of the savings or $43,300.

   Impact = $433,300 savings and increased profit. The calculation is correct as offered.

   Impact = $420,000 savings and increased profit. The $13,300 lease cost cannot be taken as a savings since the lease footprint for the company overall did not actually change.

   Impact = $355,700 savings and increased profit. The $13,300 lease cost cannot be taken as a savings and the 5% fixed component of overhead (5% of $420,000 = $21,000) cannot be taken as savings since it does not change either. Also subtract the bonus cost of $43,300.

   Impact = $47,000 or more increased cost and negative impact on profit.

6. The third shift manufacturing team sweeps the department floor and accumulates all the trash for a week. They claim that the materials that are ending up on the floor are valuable and saving them would be worthwhile (they would get 10% of the first year savings).

   Impact = zero: The superintendent says that housekeeping is part of their job and they shouldn't get anything extra for it.

   Impact = significant: Raw materials, work in process, finished goods, and supplies all have value.

   Neither of the above.

7. The quality improvement team determines that the application of statistical process control to a product line can reduce the product reject rate from 10% to almost zero. They estimate significant savings on this $2,000,000 revenue product line.

   Impact = $200,000 savings and increased profit. This is based on 10% of the $2,000,000 gross revenue.

   Impact = $150,000 savings and increased profit. Based on 10% of the total cost of production that is $1,500,000 (75% of net).

   Impact = $110,000 savings and increased profit. Based on 10% of the total cost of production that is $1,500,000 (75% of net) less $40,000 in fixed overhead included in the cost of production.

   None of the above. There's more to this.

8. An employee suggestion program in a 100- person company pays $50 per approved suggestion. There are about 60 suggestions submitted and approved each year. The average value of each suggestion is estimated to be $15,000 per year. What is the net impact on profits from this $3,000 bonus payout?

   Impact = $900,000 savings and increased profit. Calculate 60 suggestions times an average of $15,000 savings each.

   Impact = $873,000 savings and increased profit. Calculate 60 suggestions times an average of $15,000 savings each les the bonus payout.

   Indeterminate from the information given

9. A purchasing review team determines that the average cost of handling each purchase request for the organization is $17.88. Annual purchase requests have averaged 22,000 for the last three years. The annual cost then is about $393,000. It is proposed that a Purchasing Card Program be adopted that will allow staff to use the card to purchase any materials under $5,000 as long as the items are clearly identified in the approved annual budget. The team estimates that this will save about $200,000 in handling costs each year based primarily on improved productivity in the purchasing and accounting departments. Staff will be reduced by 2 through normal attrition.

   Impact = somewhat less than $200,000 savings and increased profit.

   Impact = somewhat more than $200,000 savings and increased profit.

   Neither of the above.

10. A proposal is made to sell existing products into a new market segment in existing territories. An analysis using standard costs of production, service, and distribution shows that it will be break-even at best and possibly produce a loss. Should this 15% increase in sales be undertaken anyway or not? Why or why not? There is a rancorous debate and reputations are on the line. Where will you stake your reputation?

   No. Unprofitable revenue is not worth it even if the top line looks a lot better. Don't touch it with a ten-foot pole!

   Yes. This is a significant increase in revenue and eventually we will be able to turn a profit on it. Go for it!

   Neither of the above.