| Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was | |
| recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of |
| clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its |
| home territory, and launched an expensive advertising campaign. Computron's results were not satisfactory, |
| to put it mildly. Its board of directors, which consisted of its president and vice president plus its major | |
| stockholders (who were all local business people), was most upset when directors learned how the expansion |
| was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the cut off |
| credit. As a result, Al Watkins, Computrons president, was informed that changes would have to be made, and |
| quickly, or he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of |
| assistant to Fred Campo, a retired banker who was Computron's chairman and largest stockholder. Campo |
| agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's assistance. |
| | | | | | | | | |
| Jamison began by gathering financial statements and other data, shown below. The data show the dire situation |
| that Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the | |
| forecasted level, costs have been higher than were projected, and a large loss occurred in Year 2, rather than |
| the expected profit. Jamison examined monthly data for Year 2 (not given in the case), and she detected an |
| improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early |
| months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly |
| data. Also, it appears to be taking longer for the advertising program to get the message across, for the new |
| sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, |
| the lags between spending money and deriving benefits were longer than Computron's managers had anticipated. |
| For these reasons, Jamison and Campo see hope for the companyprovided it can survive in the short run. |
| Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, |
| and what actions should be taken. | | | | | | |
| | | | | | | | | |
| | | | | Computron Diagnostics | | | |
| | | | | Statement of Operations | | | |
| | | | | Yr 1 Actual | Yr 2 Actual | Yr 3 Projected | | |
| Revenue: | | | | | | | | |
| Net patient service revenue | | $3,432,000 | $5,834,400 | $7,035,600 | | |
| Other revenue | | | $0 | $0 | $0 | | |
| Total revenues | | | $3,432,000 | $5,834,400 | $7,035,600 | | |
| Expenses: | | | | | | | | |
| Salaries and benefits | | | $2,864,000 | $4,980,000 | $5,800,000 | | |
| Supplies | | | | $240,000 | $620,000 | $512,960 | | |
| Insurance and other | | | $50,000 | $50,000 | $50,000 | | |
| Drugs | | | | $50,000 | $50,000 | $50,000 | | |
| Depreciation | | | $18,900 | $116,960 | $120,000 | | |
| Interest | | | | $62,500 | $176,000 | $80,000 | | |
| Total expenses | | | $3,285,400 | $5,992,960 | $6,612,960 | | |
| Operating income | | | $146,600 | -$158,560 | $422,640 | | |
| Provision for income taxes | | $58,640 | -$63,424 | $169,056 | | |
| Net income | | | $87,960 | -$95,136 | $253,584 | | |
| | | | | | | | | |
| | | | | Computron Diagnostics | | | |
| | | | | Balance Sheet | | | | |
| | | | | Yr 1 Actual | Yr 2 Actual | Yr 3 Projected | | |
| Assets | | | | | | | | |
| Current assets: | | | | | | | |
| Cash | | | | $9,000 | $7,282 | $14,000 | | |
| Marketable securities | | $48,600 | $20,000 | $71,632 | | |
| Net accounts receivable | | $351,200 | $632,160 | $878,000 | | |
| Inventories | | | $715,200 | $1,287,360 | $1,716,480 | | |
| Total current assets | | | $1,124,000 | $1,946,802 | $2,680,112 | | |
| Property and equipment | | $491,000 | $1,202,950 | $1,220,000 | | |
| Less accumulated depreciation | | $146,200 | $263,160 | $383,160 | | |
| Net property and equipment | | $344,800 | $939,790 | $836,840 | | |
| Total assets | | | $1,468,800 | $2,886,592 | $3,516,952 | | |
| | | | | | | | | |
| Liabilities and shareholders' equity | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | | $145,600 | $324,000 | $359,800 | | |
| Accrued expenses | | | $136,000 | $284,960 | $380,000 | | |
| Notes payable | | | $120,000 | $640,000 | $220,000 | | |
| Current portion of long-term debt | $80,000 | $80,000 | $80,000 | | |
| Total current liabilities | | $481,600 | $1,328,960 | $1,039,800 | | |
| Long-term debt | | | $323,432 | $1,000,000 | $500,000 | | |
| Shareholders' equity: | | | | | | | |
| Common stock | | | $460,000 | $460,000 | $1,680,936 | | |
| Retained earnings | | | $203,768 | $97,632 | $296,216 | | |
| Total shareholders' equity | | $663,768 | $557,632 | $1,977,152 | | |
| Total liabilities and shareholders' equity | $1,468,800 | $2,886,592 | $3,516,952 | | |
| | | | | | | | | |
| Other data: | | | | | | | |
| Stock price | | | $8.50 | $6.00 | $12.17 | | |
| Shares outstanding | | | 100,000 | 100,000 | 250,000 | | |
| Tax rate | | | | 40% | 40% | 40% | | |
| Lease payments | | | $40,000 | $40,000 | $40,000 | | |
| | | | | | | | | |
| ANSWER | | | | | | | | |
| | | | | | | | Industry | |
| | | | | Yr 1 Actual | Yr 2 Actual | Yr 3 Projected | Average | |
| Profitability ratios | | | | | | | |
| Total margin | | | | | | 3.6% | |
| Return on assets | | | | | | 9.0% | |
| Return on equity | | | | | | 17.9% | |
| Liquidity ratios | | | | | | | |
| Current ratio | | | | | | 2.70 | |
| Days cash on hand | | | | | | 22.0 | |
| Debt management (capital structure) ratios | | | | | |
| Debt ratio | | | | | | 50.0% | |
| Debt to equity ratio | | | | | | 2.5 | |
| Times-interest-earned ratio | | | | | 6.2 | |
| Cash flow coverage ratio | | | | | 8.00 | |
| Asset management (activity) ratios | | | | | |
| Fixed asset turnover | | | | | | 7.00 | |
| Total asset turnover | | | | | | 2.50 | |
| Days sales outstanding | | | | | 32.0 | |
| Other ratios | | | | | | | |
| Average age of plant | | | | | | 6.1 | |
| Earnings per share | | | | | | n/a | |
| Book value per share | | | | | | n/a | |
| Price/earnings ratio | | | | | | 16.20 | |
| Market/book ratio | | | | | | 2.90 | |
| | | | | | | | | |
