TABLE OF CONTENTS

The Simulation: an Introduction | Vision and Corporate Design | Decision Variables | The Contracts Program
The Market Reports | Firm Reports: Credit, Sales & Production | Firm Reports: Financial Statements
The Scent Industry | Plant and Location  | Subsidiaries | Bankruptcy | Forecasting Demand | NPV | Broker

This chapter will take an in depth look at the decision set. The main decision set presented here does not include contract decisions.

How the Online Database Records Information:

The online database records your decisions when you hit the "submit" button on any form. Your main decision set is not altered unless you alter it. These decisions will repeat each quarter unless you change them. Be certain that you check through ALL of your decision menus each quarter to make sure you have recorded the decisions you want. Contract decisions are cleared out each quarter, after the quarter is run. This is done, of course, because contract decisions change each quarter.

Do NOT use commas when entering decisions. The database will assume that your commas are periods. For example, do not enter 2,000 if you want an advertising budget of $2000.  Simply enter 2000 or the program will think you want only $2. This applies to all entries.

Marketing:

1. Advertising A1 P1 _____ A1 P2 _____ A2 P1 _____ A2 P2 _____

2. Price A1 P1 _____ A1 P2 _____ A2 P1 _____ECU A2 P2 _____ECU

3. Sales Reps Area 1 ______ Area 2 ______

4. + OR - Trainees ______

5. + OR - Salary Area 1 ______ Area 2 ______

6. + OR - Commission Area 1 P1 ______ Area 2 P1 ______
                                    Area 1 P2 ______ Area 2 P2 ______
7. Credit Policy ________
 

Production:

1. Shift 1 A1 P1 ______ A1 P2 ______ A2 P1 ______ A2 P2______

2. Shift 2 A1 P1 ______ A1 P2 ______ A2 P1 ______ A2 P2______

3. Maintenance A1S1 ______ A1S2 ______ A2S1 ______ A2S2______

Raw Materials Futures: (place order for delivery on last day of this quarter)

1. Area 1 T1 ________ T2 ________

2. Area 2 T1 ________ T2 ________

(Raw materials at market will be ordered by the computer for this quarter as needed)

Budget:

1. Engineering _______ (Entered in thousands)

2. Quality Control _______ Percent P2 _______

3. Product Improvement _______ Percent P2 _______

Financial:

1. Short Term Investment ________

2. Factor Receivables ________

3. Short Term Loan (new) ________

4. + OR - Term Loan ________

5. Issue Bonds ________

6. Repurchase Bonds ______

7. Issue Common Stock ______

8. Repurchase Common Stock

9. Issue Dividend ________
 

Shipping: Note: shipping is not a wholesaler decision (this option ships product from one area to another area the firm is selling in - i.e. shipping product from area 1 to area 2 to sell in area 2 to the simulated retail buyer). Shipping product to other firms is contained within the terms of the contract you create and costs are included in contract fees.

1. Area 1 to 2 P1 ______ P2 ______

    Area 2 to 1 P1 ______ P2_______

(a "1" = 1,000 units) (20 is the maximum)

2. Emergency Shipping Y or N? P1 ______ P2 ______
 

Capacity and Shift Change:

1. Add Plant A1 S1 _____ A1 S2 _____ A2 S1 _____ A2 S2 _____
(enter in 100s of hours/ limited to an entry of 299 per stage per quarter)

2. + OR - Second Shift Area 1 _____ Area 2 _____
(must be increments of 10%; that is 10, 20, 90 etc.)
 

Remember To:

1. Set price in A2 in Euro Dollars (ECU).

2. The following accounts are often overlooked by decision makers and not reset to zero when No Change is desired (if not reset to zero, the number will add to -not replace- the number shown on the corporate reports):

______trainees
______salaries
______commissions
______term loan
______bonds
______common stock
______second shift
______add plant
 

3. Have cash available, sometime in the quarter, to pay for 1/2 of the cost of adding plant hours.  Also have cash available for contract purchases, which occur prior to incoming sales revenue.

4. Review commissions; the entry is in dollars and cents per unit, not as a percentage of sales price.

5. Review plant capacity; the entry is in 100s of hours.

1. Advertising: Enter the budget by product and by area. All entries are in U.S. dollars. Each dollar makes a positive contribution to the sales effort but the marginal effectiveness of each new dollar spent declines. Each dollar spent has some carry-over impact in the following two quarters. Thus, a constant expenditure for advertising will not reach its full impact until the third quarter. 

2. Price: Enter prices for P1 and P2 in Area 1 which is NAFTA. Area 1 prices must be in US dollars. Use a decimal without a dollar sign such as 92.55 for a price of $92.55. Enter prices for the EU, Area 2, in Euro Dollars (ECU) and use decimals such as 89.65 ECU. Sales in Area 2 are made in ECU but are converted to US dollars to record sales revenue on the income statement. The conversion rate used is the unknown exchange rate at the end of the quarter, not the rate going into the quarter.

3. Sales Reps: Enter the number desired for NAFTA and the EU. It costs $12,000 to hire an experienced rep. Or, you can hire trainees, train them for 1 quarter, and then place them as sales reps. It costs $3,000 to hire a trainee and $3,000 to transfer a prepared trainee to Area 1 or Area 2. Thus, by waiting 1 quarter, you save $6,000 per rep.

The sales rep variable is not a change variable. Therefore, the number you enter is the absolute number. If, for example, you have 4 sales reps working for you in Area 1 and you enter 5 for sales reps in Area 1, an extra sales rep will be assigned to Area 1. If you have a pool of trained trainees, it will assign one of these trainees automatically. If you do not have a trainee available, the program will automatically hire an experienced sales rep for $12,000. Likewise, if you were, at the same time, to lower the number of Area 2 sales reps by 1, the program would assume that you were transferring a rep from Area 2 to Area 1.

If you wish to fire all of your sales reps, please ask your administrator to facilitate this for you. The program has a catch that ignores the number zero. So if you enter a "0" thinking all of your reps will be fired, they will not. This catch was developed to overcome the problem of firms which entered zeros in the belief that they were working with a change variable.

If you wish to move a sales rep from one area to another (from NAFTA to the EU, for example), the cost will be $3,000.  To do so, simply reduce the number of reps in one area and raise the number or reps in the other area by the same amount.

If the subsequent Industry Report shows fewer sales representatives than requested, it means the missing reps have quit. Sales reps usually quit because you are not paying them enough to represent your product. At the start of the simulation, there are no sales reps in either area.  This information should appear in a Sales Rep Quit Report at the bottom of your firm report.  Check your current number of reps listed on your reports to be sure all your reps are starting the next quarter with you.
 

4. + Or - Trainees: Enter the number of reps to be trained. The cost to prepare a rep is $3,000. They are ready in one quarter. The cost to place them, as discussed in item 3 above, is $3,000.

Note the + OR - designation. The Trainees Variable is a change variable. The number you enter this quarter will be added to, or if entered with a negative sign, will be subtracted from, the number of trainees currently in the firm's trainee pool. (Do not use the "+" sign.) Read your firm report to determine the number of trainees you currently have in the trainee pool. If you carry them over to another quarter instead of placing them, there will be another $3,000 charge per trainee. You don't want to keep them waiting around. If you have trained trainees, raise the number of sales reps you have in an area, this will automatically assign the trainee. There are no trainees at the start of the simulation.

We stress: When you want to assign trainees as sales reps, simply raise the number of sales reps. The program will automatically pull new sales reps from your trainee pool first. If you enter a negative number, then you will be subtracting from your trainee pool, not assigning them!
 

5. + Or - Salary: Enter the change you want to make to the reps' salary in each area. All entries are in US dollars. If you enter 1200 each sales rep will be paid an additional $1,200 in that area. If you do not reset the decision to zero the following quarter, each rep will be earning $2,400 ($1,200 on top of the previous $1,200). This can go on, if you do not catch it, until you are paying your sales reps more than your product is selling for.

Salaries in both areas are zero at the start of the simulation.
 

6. + Or - Commission : Enter the change in the amount you want reps to earn on each unit they sell that is actually shipped. Thus, an entry of .75 will add $.75 to the commission already in place. An entry of  -.75 will subtract $.75.

The entry is in US dollars for both areas. The entry is in dollars and cents per unit. There is no commission in place in either area at the start of the simulation.
 

7. Credit Policy: is determined by entering one of the following numbers.

• 0 = no policy
• 1 = accept all orders
• 2 = refuse sales to those with a poor credit history as per credit report
• 3 = same as 2 but requires a positive supplier reference
• 4 = same as 3 but provides only a small credit limit which expands slowly over time if the account proves credit worthy
• 5 = same as 4 above but also requires a positive bank reference and requires the purchaser to be in business for 2 years

1. Shift 1: Enter the number of units you want produced by product and by area. This is the normal day shift. It will work 13 out of 13 weeks, so long as there are at least two weeks of raw material supplies on hand. If there are no raw materials on hand, the program automatically orders raw materials at market. Labor has a two week delay waiting for these materials to arrive. Thus, labor can only work 11 out of the 13 weeks if you do not have raw materials on hand. Laborers are not paid if they do not work.

If you schedule more production than your Shift can handle, due to lack of plant hours, the computer program automatically schedules overtime and then subcontracting to meet your order. This becomes extremely expensive. Your Cost of Goods Sold can quickly exceed your sales price when subcontracting occurs.
 

2. Shift 2: Enter the number of units to be produced in the same plant but on the night shift. These workers earn a 5% wage premium over the day shift.

IMPORTANT: The day shift is ready to go once the plant is built, but the night shift must be hired and trained. You must make a decision entry to accomplish this. Failure to hire and train a night shift while still entering a shift 2 production request will cause the program to subcontract the units.
 

Subcontracted labor is 220%, 440%, or 660% of the normal labor rate!!!!
 

3. Maintenance: Enter in US dollars. This is an absolute number and NOT a per hour or per unit budget. Refer to industry specifications in the Scent Industry Section. These reports will provide some guidance as to maintenance required on a per hour basis.

Monitor how many plant hours are lost from one quarter to the next (hours available are stated on your firm report). If hours lost becomes excessive, maintenance must be increased. Constant but less than adequate maintenance will have cumulative consequences. That is, plant hours will be lost at an increasing rate even with the same dollar budget. Losses of .001 times plant hours in each stage will be impossible to stop even with excessive maintenance budgets.

Raw Materials

When you put in an order for raw materials, you are putting in an order for raw material futures. Futures are guaranteed to be cheaper than the market price in the next quarter.

These raw materials will come in during the quarter and will be ready for use in the following quarter. If you have no raw materials in inventory at the start of a quarter, yet you schedule production, the program will automatically order raw materials for you at market price. However, as discussed under production, you will loose 2 weeks of production time in waiting for these raw materials to come in.

Be aware that futures arrive the last day of the quarter, yet 70% of the bill must be paid during the quarter.
 

To Order Futures: Enter the number of units of TYPE 1 raw materials and the number of units of TYPE 2 raw materials that you wish to have shipped to the firm for arrival on the last day of the quarter. Enter in raw material units, not dollars.

Note: The report lists prices at market and future prices. The future prices listed are for the coming quarter. The market prices are for the current quarter. Therefore, on occasion the report may show a higher price for futures versus at market. This is because the at market price in the coming quarter is still unknown, but you can be assured it WILL be higher then the current listed futures price.

1. Short Term Investment: enter the US dollar amount you want to put into investments. Your firm is limited to cash on hand (above a $10,000 cash minimum which you must maintain) at the start of the quarter. Note that contract purchases come out of cash prior to the start of the quarter and should be taken into consideration when determining cash available for investment. Your short term investments will earn a profit (or loss) for the corporation instead of sitting idle. Earnings are reported on the income statement. Any earnings or losses from your investment will come into cash prior to any cash outflows for the quarter, as does the original investment.

As you make the entry, a set of investment choices will appear numbered as 0, 1, 2 or 3. Select one of the following choices.

• Choice 0 = A portfolio of US Treasury Bills.
• Choice 1 = EU government obligations with a yield comparable to US treasury bills. The return is adjusted by the change in the exchange rate. This can be used as a one quarter hedge against changes in the Euro Dollar used to pay labor in your EU plant.
• Choice 2 = An investment in the Bear/Bull Index fund.
• Choice 3 = An investment in the Bear/Bull Index fund through an EU investment house.

2. Factor Receivables: If your firm foresees a shortage of cash, this option will allow you to sell your forthcoming new credit sales. Accounts Receivable shown on your balance sheet will all become cash anyway. Credit sales are about 40% of total sales. Estimate next quarter's sales, multiply the estimate by 40% and enter the dollar amount you want the factoring agent to buy.

If you request more than the total of your unknown credit sales, the computer program will only sell up to the total available. This is a good source of fast credit for firms experiencing difficulty in raising funds.

Factoring is dependent on sales. No sales, no factoring, no money. The service fee and interest charge on factoring is 4.25% of the receivables factored.
 

3. Short Term Loan: Enter the loan amount desired. Your corporate printout will identify your firm's unique borrowing rate which changes quarterly. At the start of the simulation the interest rate on short term loans will be 9.2% annually (2.3% quarterly).

Repayment of the short term loan is automatically made by the computer program the first day of the following quarter along with interest. You do not need to make an entry for repayment. If you can't afford repayment or need even more money, then place a request for another loan (referred to as rolling the loan over).

There is no set limit on short term borrowing. However, bank audits are conducted throughout the simulation. If your firm is audited and your debt-to-equity ratio is over the 1.5 limit, the bank will automatically move any borrowed funds, above and beyond $1,000,000, into a special loan. A special loan carries a rate of 36% annually. This creates a heavy interest charge on the income statement.
 

4. + Or - Term Loan: Enter the change you want to make to a term loan. If you want to borrow $100,000 dollars than enter 100000. Note that this is a change variable. An entry with a negative sign will reduce the loan. No action on your loan balance (except interest charges) will be made by the program if you enter zero. Rates are the same for all firms and have been fairly stable from one quarter to the next. The rate at the start of simulation is 12% per annum (3% per quarter).

The loan limit is $1,000,000. The bank usually allows the limit to be exceeded until the firm's debt-to-equity ratio equals 1.5. After 1.5 no additional bank loans may be taken; if caught violating the limit and exceeding a 1.5 debt/equity (during a bank audit), excess dollars above and beyond $1,000,000 will be turned over to a special loan or all lines of credit may be withdrawn.

*On occasion, in a tight money period, the banks severely limit the availability of both short term and long term credit. In a financial crisis, only the most credit worthy customers might be able to borrow. In low interest rate periods, banks are somewhat lax in enforcing the 1.5 debt-to-equity ratio limit.
 

5. Issue or Repurchase Bonds: Enter the dollar amount of bonds you wish to buy or sell. Note that there is one entry box for an issue and one for a repurchase, thus you do not need to use a negative sign as with other change variables.  The bonds mature in five years, and therefore do not have to be paid back during the simulation. If bonds are bought back by the firm, it will be at face value plus a 4% prepayment penalty. Bond buyers demand a discount from the face value of a bond when it is sold. The discount demanded by the buyers increases as:

A. the firm's credit standing falls, or;
B. the amount of bonds issued becomes too large for the market to accept, or;
C. interest rates on treasury bills move
higher.

Interest paid by the firm is always 10% (2.5% per quarter) on the face value. If the proceeds from the sale decline due to the discount, the effective bond rate could increase substantially. A firm might only receive $850,000 from a sale of $1,000,000 but must pay interest on the full $1,000,000. The full $1,000,000 must be repaid, thus a liability of $150,000 is instantly created.

The face value is always recorded as a liability under BONDS. The fact that the full face value was not received into cash is reflected as a loss to the stockholders. See their equity section on the balance sheet and find the negative stockholder account called AMORTIZED DISCOUNT. In the above example, the discount (or loss) would be $150,000. This loss is charged off the income statement at 5% per quarter.

Note that after a 1/1 debt to equity ratio has been reached, the bond market may close on a firm so that no bonds, or fewer bonds, will be sold.
 

6. Issue or Repurchase Common Stock: Enter the number of shares to be sold. Common Stock is a change variable. Note that there is one entry box for an issue and one for a repurchase, thus you do not need to use a negative sign as with other change variables.

A firm must issue at least 300,000 shares in order to begin operations. A minimum of 300,000 shares must be outstanding at all time. Slipping below this number will result in a fine.

There is a 10% limit when repurchasing shares of stock in subsequent quarters. Repurchase of stock exceeding 10% of outstanding shares is restricted except for special permission of the instructor, granted generally on proof of extreme need.

Intent to issue or repurchase stock must be made public. Post these message to WebCT. Be sure you meet all stated deadlines for such postings. Failure to issue timely notice could result in a law suit brought against you by stockholders.

The accounting entries for a sale of stock are: increase cash; show the increase of the cash asset as coming from $1 per share of COMMON STOCK sold and the balance of the per share sale in PAID IN CAPITAL.

The accounting entries for a repurchase of stock are: decrease cash; reduce COMMON STOCK by $1 per share repurchased, reduce paid in capital by an average of paid in capital per share, AND reduce retained earnings by any excess paid to repurchase the stock.

For example, a repurchase of one share at $22.50 would reduce cash by $22.50, reduce COMMON STOCK by $1.00, reduce PAID IN CAPITAL by the average of paid in (say $4 in this case), and reduce retained earnings by the balance (which in this case would be $17.50 per share).
 

7. Dividend: Enter the amount to be paid in US dollars. An entry of .45 will take $.45 multiplied by outstanding shares, directly from cash, and pay it to stockholders. There is a $.50 maximum dividend addition. In other words, dividends may be increased each quarter by $.50. No more. Dividends have a major impact upon Net Present Value. You can reduce dividends by more than $.50 per quarter. In other words, your firm could go from a quarter in which it paid $1 in dividends to a following quarter in which is paid $0 dividends. However, you would be limited again in the next quarter to a dividend of $.50 given the restriction in increase per quarter.

The accounting entry to offset the loss of the cash asset will be a corresponding reduction in retained earnings. Therefore, retained earnings must be positive prior to a dividend payment and remain positive after the dividend has been paid.
 

1. Shipping A1 to A2: Enter the number of P1 units to be shipped from A1 to A2. Next, enter the number of P2 to be shipped. You must ship in lots of 1,000. The costs to ship will depend upon the type of product you are working with. See the industry specifics in the Scent Industry Section.
 

Shipping A2 to A1: A firm can also ship from A2 to A1. The factors are the same, enter in lots of 1,000 up to 20,000 units. For the cost of shipping, see specifics in the Scent Industry Section

The client pays shipping within any market area. Shipping costs are only paid by the firm when shipping overseas. Receiving and distribution are at a public warehouse if a plant does not exist in the other market area. No additional costs are incurred unless the finished goods are carried over to the next quarter.
 

2. Emergency (also called Just in Time) Shipping: Say yes or no, when prompted, regarding shipping. "YES" for P1 and/or P2 will allow that product to be shipped air freight, one unit at a time, in order to satisfy a customer in that market area. The program will only ship if a unit is demanded in the needed market area and all regular customers are satisfied in the surplus market area. On rare occasions, when demand is heavy in one area and light in another, some finished goods are retained for the next quarter instead of being shipped. There is a premium for air freight. For specific shipping costs refer to the Scent Industry Section

1. Plant Addition: Enter the number of hours to be built by STAGE and by AREA. Make the entry in 100's of hours. An entry in A1S2 of 20 will build 2,000 hours of Stage 2 facilities in the NAFTA area. The cost to build 1 hour of capacity is given in your industry specifications for your industry type, as is the number of hours needed in each stage to build one unit. Be sure to build Stage 1 and Stage 2 in the appropriate mix to match desired product mix.

There is a cap on adding plant capacity of 299 (29,900 hours). This is due to building restrictions. If you want more hours than this, you will have to order additional plant in the following quarter.

This is a change variable. Reset the decision to "0" the following quarter or another factory of the same size will be built. Remember it takes two quarters to build. One half is paid for in the quarter you place the order and the second half in the quarter the plant is finished. The facility is ready for production in the third quarter. There is also a one time site fee in the first quarter of $80,000 dollars.
 

2. + Or - Second Shift: You can hire a second shift to work at night. The night shift uses the same facilities as the day shift. No second shift exists at the start of the simulation, whereas the day shift exists as soon as you add plant hours. Thus, you must add a second shift. A second shift is added in 10% increments up to 100% of the day shift (full plant capacity).

There is a one time charge for each 10% hired of $2,000. Enter how many 10% increments you want to add. An entry of 30 will add 30% of the day shift hours to the existing night shift hours. Do not use a "+" sign.

To reduce the second shift hours, use a "-" sign. There is a one time severance payment of $1,000 for each 10% of the second shift you reduce.

Workers are not paid if they do not work. If they do work, they earn a 5% night premium over the day shift wage. Whether workers work or not, overhead charges of $350 per 10%, per quarter will apply.

It should be evident that you do not want to continually open and close second shift hours. It is less expensive to leave your night crew idle for a quarter or two and pay overhead costs, than to hire and fire your second shift labor as needed.