Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 1

Many benefits of advanced manufacturing technology are difficult to quantify in dollar amounts or even in numbers. To make matters worse, these benefits, more often than not, are long-term in nature, and the firm will see no immediate tangible results. A large confectionery firm rejected an automated storage and distribution facility because it did not include the benefits that better customer services would bring. Better customer services often lead to higher sales volume and market share and, eventually, higher profits. Realizing these difficulties, middle managers of a kitchen unit manufacturer, with an established reputation for innovative design, forced an investment in computer-assisted design equipment by exaggerating financial benefits—a practice that should be discouraged and disallowed!

Appraisals of investments in advanced manufacturing technology need to be evaluated in terms of quantitative analysis and strategic consideration. Advanced manufacturing technology can expand the firm’s product portfolio, enhance corporate image, and increase manufacturing flexibility, in addition to potentially decreasing production time and costs. Firms need to assess both the quantifiable shortterm incremental cash inflows and the long-run strategic benefits in judging an investment’s merits. In addition to cash-flow analysis, an investment proposal can go a long way if it also includes the investment’s strategic benefits. A firm manufacturing high-pressure casings decided to convert its manufacturing operations to cell manufacturing. The firm enjoyed such unplanned benefits as a 50 percent reduction in inventory, a 75 percent improvement in quality, substantial reduction in lead times, and flexible machining with overall labor reduction. An electrical switch gear products manufacturer with sales of $32 million and a total staff of 550 invested in CAD to increase its design capacity in anticipation of a 25 percent growth. The firm’s original expectations included reduced lead time in the drawing office and reduced number of employees and WIP inventory. The additional benefits offered more accurate and timely transfer of data that greatly improved the firm’s competitive edge and propelled the firm into a new marketing position.

Based on Michael Bromwich and Al Bhimani, “Strategic Investment Appraisal,” Management Accounting, March 1991, pp. 45–48. See also M. J. Liberatore, T. F. Monahan, and D. E. Stout, “Strategic Capital Budgeting Analysis for Investments in Advanced Manufacturing Technology,” Journal of Financial and Strategic Decisions, Summer 1993, pp. 55–72; and M. J. Liberatore, T. F. Monahan, and D. E. Stout, “A Framework for Integrating Capital Budgeting Analysis with Strategy,” The Engineering Economist, Fall 1992, pp. 31–43.

Step 1 of 2

The present value analysis is the analysis which analyzes the economic feasibility of the investment by converting all the financial costs and revenue to present using the discount rate.