2023年-财务管理案例（LAURENTIANBAKERIES）.docx

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1、LAURENTIAN BAKERIESThe decision-maker must make a recommendation on a large expansion project. Discounted cash flow analysis is required.In late May, 1995, Danielle Knowles, vice-president of operations for Laurentian Bakeries Inc., was preparing a capital expenditure proposal to expand the companys

2、 frozen pizza plant in Winnipeg Manitoba. If the opportunity to expand into the U.S. frozen pizza market was taken, the company would need extra capacity. A detailed analysis, including a net present value calculation, was required by the companys Capital Allocation Policy for all capital expenditur

3、es in order to ensure that projects were both profitable and consistent with corporate strategies.COMPANY BACKGROUHDEstablished in 1984, Laurentian Bakeries Inc. (Laurentian) manufactured a variety of frozen baked food products at plants in Winnipeg (pizzas), Toronto (cakes) and Montreal (pies). Whi

4、le each plant operated as a profit center, they shared a common sales force located at the company head office in Montreal. Although the Toronto plant was responsible for over 40% of corporate revenues in fiscal 1994, and the other plants was accounted for about 30% each, all three divisions contrib

5、uted equally to profits. The company enjoyed strong competitive positions in all three markets and it was the low cost producer in the pizza market. Income Statements and Balance Sheets for the 1993 to 1995 fiscal years are in Exhibits 1 and 2, respectively.Laurentian sold most of its products to la

6、rge grocery chains, and in fact, supplying several Canadian chains with private label brand pizzas generated much of the sales growth. Other sales were made to institutional food services.The companys success was, in part, the product of its managements philosophies. The cornerstone of Laurentian op

7、erations was its including a commitment to a business strategy promoting continuous improvement; for example all employees were empowered to think about and make suggestions fbr ways of reducing waste. As Danielle Knowles saw it: Continuous improvement is a way of life at Lauremtian. Also, the compa

8、ny was known fbr its above - average consideration for the human resource and environmental impact of its business decisions. These philosophies drove all policy-making, including those policies governing capital allocation.Danielle KnowlesDanielle Knowless career, which spanned 13 years in the food

9、 industry, had included positions in other functional areas such as marketing and finance. She had received an undergraduate degree in mechanical engineering from Queens University in Kingston, Ontario, and a master of business administration from the Western Business School.THE PIZZA INDUSTRYMajor

10、segments in the pizza market were frozen pizza, deli-fresh chilled pizza, restaurant pizza and take-out pizza. Of these four, restaurant and take-out were the largest. While these segments consisted of thousands of small-owned establishments, a few large North American chains, which included Dominos

11、, Pizza Hut and Little Caesars, dominated.Although 12 firms manufactured frozen pizzas in Canada, the five largest firms, including Laurentian, accounted for 95% of production. McCain Foods was the market leader with 44%YesDivisionalReview &ApprovedFinishTrack ResultApprovalAFEClass1&2 SpendingSavin

12、gs3&4 SpendingEXHIBIT 5BUSINESS REVIEW CRITERIAUsed to Assess Divisional Commitment to Continuous ImprovementSafety Lost time accidents per 200,000 employee hours workedProduct Quality Number of customer complaintsFinancial Return of investmentLost Sales Market share % - where data availableManufact

13、uring Effectiveness People cost (total compensation $ including fringe) as a percentage of new sales Plant scrap (kg) as a percentage of total production (kg)Managerial Effectiveness/Employee Empowerment Employee survey Training provided vs. Training planned Number of employee grievancesSanitation S

14、anitation audit ratingsOther Continuous Improvement Measurements Number of continuous improvement projects directed against identified piles of waste/lost opportunity completed and in-progressYear1996199719981999200020012002200320042005EXHIBIT 6ELIGIBLE CCA DEDUCTIONDeduction $434,000 $768,000 $593,

15、000 $461,000 $361,000 $286,000 $229,000 $185,000 $152,000 $1731,000EXHIBIT 7MARKET INTEREST RATESON MAY 18,19961-Year Government of Canada Bond 7.37%5-Year Government of Canada Bond7.66%10-Year Government of Canada Bond8.06%20-Year Government of Canada Bond8.30%30-Year Government of Canada Bond8.35%

16、market share, while Laurentian had 21%. Per capita consumption of frozen products in Canada was one-third of the level in U.S. where retail prices were lower.ECONOMIC CONDITIONSThe North American economy had enjoyed strong growth since 1993, after having suffered a severe recession for the two previ

17、ous years. Interest rates bottomed-out in mid-1994, after which the U.S. Federal Reserve slowly increased rates until early 1995 in an attempt to fight inflationary pressures. Nevertheless, North American inflation was expected to average 3% to 5%annually for the foreseeable future. The Bank of Cana

18、da followed the U.S. Federal Reserves lead and increased interest rates, in part to protect the Canadian dollars value relative to the value of the U.S. dollar. The result was a North American growth rate of gross domestic product that was showing signs of slowing down.LAURRENTIAN,S PROJECT REVIEW P

19、ROCESSAll capital projects at Laurentian were subject to review based on the companys Capital Allocation Policy. The latest policy, which had been developed in 1989 when the company began considering factors other than simply the calculated net present value for project evaluation, was strictly enfo

20、rced and managers evaluated each year partially by their divisions return on investment. The purpose of the policy was to reinforce the management philosophies by achieving certain objectives: that all projects be consistent with business strategies, support continuous improvement, consider the huma

21、n resource and environmental impact, and provide a sufficient return on investment.Prior to the approval of any capital allocation, each operating division was required to develop both a Strategic and an Operating Plan. The Strategic Plan had to identify and quantify either inefficiencies or lost op

22、portunities and establish targets for their elimination, include a three-year plan of capital requirements, link capital spending to business strategies and continuous improvement effort, and achieve the company-wide hurdle rates.The first year of the Strategic Plan became the Annual Operating Plan.

23、 This was supported by a detailed list of proposed capital projects which became the basis for capital allocation. In addition to meeting all Strategic Plan criteria, the Operating Plan had to identify major continuous improvement initiatives and budget for the associated benefits, as well as develo

24、p a training plan identifying specific training objectives for the year.These criteria were used by head office to keep the behavior of divisional managers consistent with corporate objectives. For example, the requirement to develop a training plan as part of the operational plan forced managers to

25、 be efficient with employee training and to keep continuous improvement as the ultimate objective.All proposed projects were submitted on an Authorization for Expenditure (AFE) Form for review and approval (see Exhibit 3). The AFE had to present the project9s linkage to the business strategies. In a

26、ddition, it had to include specific details of economics and engineering, involvement and empowerment, human resource, and the environment. This requirement ensured that projects had been carefully thought through by forcing managers to list the items purchased, the employees involved in the project

27、, the employees adversely affected by the project, and the effect of the project on the environment.Approval of a capital expenditure proposal was contingent on three requirements which are illustrated in Exhibit 4. The first of these requirements was the operating divisions demonstrated commitment

28、to continuous improvement (C.L), the criteria of which are described in Exhibit 5. The second requirement was that all projects of more than $300,000 be included in the Strategic Plan. The final requirement was that for projects greater than $1 million, the operating division had to achieve its prof

29、it target. However, if a project failed to meet any of these requirements, there was a mechanism through which emergency funds might be allocated subject to the corporate executive committees review and approval. If the project was less than $1 million and it met all three requirements, only divisio

30、nal review and approval was necessary. Otherwise, approval was needed from the executive committee.The proposed Winnipeg plant project was considered a class 2 project as the expenditures were meant to increase capacity for existing products or to establish a facility for new products. Capital proje

31、cts could fall into one of three other classes: cost reduction (Class 1); equipment or facility replacement (Class 3); or other necessary expenditures for R&D, product improvements, quality control and concurrence with legal, government, health, safety or insurance requirements including pollution c

32、ontrol (Class 4). A project spending audit was required for all expenditures; however, a savings audit was also needed if the project was considered either 1 or 2. Each class of project had a different hurdle rate reflecting different levels of risk. Class 1 projects were considered the most risky a

33、nd had a hurdle rate of 20%. Class 2 and Class 3 projects had hurdle rates of 18% and 15%, respectively.Knowles was responsible for developing the Winnipeg divisions Capital Plan and completing all AFE forms.WINNIPEG PLANTS EXPANSION OPTIONSLaurentian had manufactured frozen pizzas at the Toronto pl

34、ant until 1992. However, after the company became the sole supplier of private-label frozen pizzas for a large grocery chain and was forced to secure additional capacity, it acquired the Winnipeg frozen pizza plant from a competitor. A program of regular maintenance and equipment replacement made th

35、e new plant the low cost producer in the industry, with an operating margin that averaged 15%.The plan, with its proven commitment to continuous improvement, had successfully met its profit objective fbr the past three years. After the shortage of capacity had been identified as the plants largest s

36、ource of lost opportunity, management was eager to rectify this problem as targeted for in the Strategic Plan. Because the facility had also included the proposed plant expansion in its Strategic Plan, it met all three requirements for consideration of approval for a capital project.Annual sales had

37、 matched plant capacity of 10.9 million frozen pizzas when Lauentian concluded that opportunities similar to those in Canada existed in the U.S. An opportunity surfaced whereby Laurentian could have an exclusive arrangement to supply a large U.S.-based grocery chain with its private-label-brand froz

38、en pizzas beginning in April, 1996. As a result of this arrangement, frozen pizza sales would increase rapidly, adding 2.2 million units in fiscal 1996, another 1.8 million units in fiscal 1997, and then 1.3 million additional units to reach a total of 5.3 million additional units by fiscal 1998. Ho

39、wever, the terms of the agreement would only provide Laurentian with guaranteed sales of half this amount. Knowles expected that there was a 50% chance that the grocery chain would order only the guaranteed amount. Laurentian sold frozen pizzas to its customers for $1.7 in 1995 and prices were expec

40、ted to increase just enough to keep pace with inflation. Production costs were expected to increase at a similar rate.Laurentian had considered, but rejected, three other alternatives to increase its frozen pizza capacity. First, the acquisition of a competitors facility in Canada had been rejected

41、because the equipment would not satisfy the immediate capacity needs nor achieve the cost reduction possible with expansion of the Winnipeg plant. Second, the acquisition of a competitor in the U.S. had been rejected because the available plant would require a capital infusion double that required i

42、n Winnipeg. As well, there were risks that the product quality would be inferior. Last, the expansion of the Toronto cake plant had been rejected as it would require a capital outlay similar to that in the second alternative. The only remaining alternative was the expansion of the Winnipeg plant. By

43、 keeping the frozen pizza in Winnipeg, Laurentian could better exploit economies of scale and assure consistently high product quality.The ProposalThe expansion proposal, which would require six months to complete, would recommend four main expenditures: expanding the existing building in Winnipeg b

44、y 60% would cost $1.3 million; adding a spiral freezer, $1.6 million; installing a new high speed pizza processing line, $1.3 million; and acquiring additional warehouse space, $600,000. Including $400,000 for contingency needs, the total cash outlay for the project would be $5.2 million. The equipm

45、ent was expected to be useful for 10 years, at which point its salvage value would be zero.The land on which the Winnipeg plant was built valued at 250,000 and no additional land would be necessary for the project. While the expansion would not require Laurentian to increase the size of the plants a

46、dministrative staff; Knowles wondered what portion, if any, of the $223,000 in fixed salaries should be included when evaluating the project. Likewise, she estimated that it cost Laurentian approximately $40,000 in sales staff time and expanses to secure the U.S. contract that had created the need f

47、or extra capacity. Last, net working capital needs would increase with additional sales. Working capital was the sum of inventory and accounts receivable less accounts payable, all of which were a function of sales. Knowles estimated, however, that the new high-speed line would allow the company to

48、cut two days from average inventory age.Added to the benefit derived from increased sales, the project would reduce production costs in two ways. First, the new high-speed line would reduce plant-wide unit cost by $0,009, though only 70% of this increased efficiency would be realized in the first ye

49、ar. There was an equal chance, however, that only 50% of these savings could actually be achieved. Second, other” savings totaling $138,000 per year would also result from the new line and would increase each year at the rate of inflation.Each year, a capital cost allowance (CCA), akin to depreciation, would be deducted from operating income as a result of the capital expenditure.