Budgets and Managing Money |

Decision 1
Analysis

Your first step in analyzing the data would be to project your space needs for five years,
similar to this:
Employees
(20% annual growth)

Space required
(500 square feet per person)

Current

11

5,500

Year 2

13

6,500

Year 3

16

8,000

Year 4

19

9,500

Year 5

23

11,500

Now lets compare the alternatives, using the major requirements as a basis.

Loc.

Size
(sq. feet)

Lease

Commute

Rent/year
(thousands)

Expense

Savings

First Yr.
Cost

3yrs

5yrs

N/A

10

$1,500
(move)
$833
(rent
penalty)

$0

$12,333

9,000

5 yrs

12,000

3 yrs
(plus
option)

10 minutes 10

10.5
(2 yr
opt.)

$2,000
(move)
$2,000
(reno)

$700
(month
rent)

$13,300

6,000

Any

5 minutes

$1,200
(repairs)

$0

$9,200

12,000

3 yrs

5 minutes

9.5

N/A

$1,500
(move)
$3,000
(repairs)

$0

$14,000

2007, www.velsoft.com

Budgets and Managing Money |

All locations are acceptable from the standpoint of commuting. However, by analyzing
the two breakdowns further, it should be obvious that Location C is not suitable. Even
though its the least expensive space, you would outgrow it within a year. Location A can
be eliminated also because you would be committed to a long-term lease (5 years), but
you would have outgrown the space needs. Since you can only stay at D for three years,
you will be paying for space you dont need.
On the surface, D seems cheaper by $500 per year, but when you figure in the first year
cost the savings disappears.
B

First year cost

$13,300

$14,000

Second year cost

$10,000

$9,500

Third year cost

$10,000

$9,500

Three year cost

$33,300

$33,000

Youll definitely be forced to move from D at the end of three years, so the $300 savings
will be consumed by the expense and hardship.
Decision

Location B is the best decision because it:

Meets your staff commutation needs
Solves your space problem for three and five years
Gives you more flexibility (can move after three years)
Scoring

If you chose...

You get this profit

$500

$10,000

$5,000

2007, www.velsoft.com

Budgets and Managing Money |

Decision 2
Analysis

To properly evaluate your options, you should first project your copy needs for the next
three years. Our projections look like this:
Copies
Files

Per day

Per Month

Current

40

600

12,00

Goal for this year

75

1,125

22,500

Projected Year 2
(20% increase)

90

1,350

27,000

Projected Year 3
(20% increase)

108

1,620

32,400

Now, lets compare the alternatives.

Hire Reproduction Aid
This will bring your production capacity up to 750 copies per day. It may eliminate your
problem temporarily, but as you can see from the chart above it will do little for your
long-term needs. Youll probably be backlogged again by the end of the year, and this
time the problem will be compounded by an additional $12,000 of overhead (the new
persons salary) and a high reproduction cost of 6 cents per copy.
Purchasing New Copying Equipment
Equipment Expense
Machine

Cost

Service
(3 yrs)

Transfax

1,500 500

Reprodata 3,000 1,500

Flocopy

3,600 N/A

2007, www.velsoft.com

Total

Copy Expense
Amortized
cost/yr

Copies
/day

Copy Cost

20000 30,000
/mth
/mth

2,000 667

1,152

0.04/copy

800

1,200

4,500 1,500

1,920

10,000@.10
10,000@.05
Rest@0.03

1,500

1,800

3,600 1,200

1,800

8.5x11@.055
5x8@.025

901

1,350

Budgets and Managing Money |

Working across from left to right, the chart breaks down the cost of the equipment for
three years and adds service costs to arrive at a total cost. If you divide this cost by three
(the life of the equipment), you then get the amortized cost per year.
The next column shows the copies per day capacity; this is followed by the Cost Copy
column which shows the method used to determine cost per copy. The last two columns
project monthly costs for 20,000 copies per month (which you may reach this year) and
30,000 copies per month (which youll probably require in three years).
Your comparison may not look exactly like the above chart, but in order to make an
effective decision, you should structure the data so you can analyze all the essential
elements.
Decision

Based on the above data, this is the decision.

Transfax, even though it is the least expensive to own and operate, must be eliminated
because it has insufficient copy capacity. At a rate of 1,152 copies per day, it will only
relieve your immediate problem.
Both the remaining copiers will provide substantial capacity that will cover your needs
for the projected life of the equipment (three years) and then some. Your final decision,
therefore, boils down to a matter of cost. The Flocopy model not only costs less to own or
lease (by $300 per year); more importantly, you will save over $7,000 in copying costs
per year (at 20,000 copies per month) and over $5,000 per year when you reach 30,000
copies per month.
Based on this analysis, your decision should be Flocopy.
Scoring

If you chose...

You get this profit

Transfax

$500

Flocopy

$10,000

Reprodata

$3,000

2007, www.velsoft.com

Budgets and Managing Money |

Decision 3
Analysis

Until this point, we have dealt with decisions that have been largely objective in nature.
Not so for this one; while there are certain items that can be quantified, many of the
influencing factors are judgmental. Heres how we would analyze and compare the
alternatives.
Alternative

Advantages

Disadvantages

Bill Buttons

Available immediately
Knows staff
Knows entire
operation
Well-liked by staff
Sincere and reliable
Can take over
immediately

No previous
supervisory
experience
Questionable desire to
be supervisor
May have difficulty
assuming role of
leadership w/peers
Has been associated
w/unsuccessful
operation
Will have to hire
replacement for Bill

$3,000 (raise)
$20,000 ( replacement)
Cost of your time to hire
another Expediter

Pat Heddon

Has supervisory
experience
Familiar with
company and
procedures
History of success
No past relationship
with staff that would
inhibit supervision

Not available for 60

days
Not familiar with staff
capabilities and
special problems of
operation
Will have to absorb
moving costs

$1,000 (moving expenses)

$25,000 (salary)

Hire locally

Fresh approach, no
pre-conceived ideas
Would have
supervisory
experience

May be hard to find

$25,000 (salary)
Will need training,
$4,000 (approximate cost
significant time
of your time)
investment
High risk (finding
qualified candidate,
low chance of success)
Take 3+ months to get
on board and
operating efficiently

2007, www.velsoft.com

Cost Factors

Budgets and Managing Money |

In comparing and analyzing the alternatives, its essential that you weigh the judgmental
factors heavier than the tangible cost factors. Besides, there isnt a great difference in cost
when you add in all the items for each case. Initially Bill Buttons might appear to be a
less expensive option, but if you consider the cost of your time to hire his replacement,
the expense may level out with that of the other two options.
Decision

Hiring locally bears the most risk and can be eliminated quickly as a viable decision. It
should be obvious that the disadvantages outweigh the few advantages.
This leaves two alternatives. The main issue should be, Who can do the most effective
job? The analysis as weve done it points to Pat Hedden. The advantages of selecting Pat
for the job outweigh the advantages for Bill Buttons. In addition, the disadvantages listed
for Pat Hedden could be classified as inconveniences rather than as serious shortcomings
involving risk.
Scoring

If you chose...

You get this profit

Pat Hedden

$10,000

Bill Buttons

$5,000

Hire locally

$1,000

2007, www.velsoft.com

Budgets and Managing Money |

Decision 4
Analysis

Pat Hedden
If Pat handles the training, it will take him six months to achieve the desired goal of 60
per day or 1,200 per month. During the first three months, production can be expected to
drop 10% from normal (to 900 per month from 1,000). During the next three months, it
should adjust back to 1,000 per month.
Home Office
You can get all your people trained in three weeks by running them through the school
continuously. This means a 25% drop for this period, giving you a production total for the
three weeks of 562. The following week it will return to normal (250), giving you a onemonth total of 812.The second month after starting you will produce 1,000 files; the third
1,040; and so on until you eventually reach the magic number of 1,200 in the seventh
month.
Consultant
The consulting firms approach would enable you to maintain production at 1,000 for the
first two months after starting the project, with an immediate increase to 1,200 during the
third month.
Lets compare the figures for the first six months.
Month

Pat Hedden

Home Office

Consultant

900

812

1,000

900

1,000

1,000

900

1,040

1,200

1,000

1,080

1,200

1,000

1,120

1,200

1,000

1,160

1,200

Totals

5,700

6,212

6,800

Decision

Its apparent from this analysis and comparison that the consultant will get your
production up to the desired level more quickly than the other two methods. This chart
also gives us a way to compare costs for the different choices. The consultants fee of

2007, www.velsoft.com

Budgets and Managing Money |

$6,000 is a tangible cost, whereas the other approaches dont cost anything on the
surface. However, when we compare production for the first six months, we find that the
consulting firms approach will produce about 600 files than any other method. If we use
the gross profit figure of $15 per file and multiply it by 600, this gives us an additional
$9,000 in revenue. This is more than enough to cover the consulting fee, so the best
decision would be to have the consulting firm handle the job.
Aside from costs, another factor that would support the consulting firm decision is the
expertise that it would bring the job. In real life, a move of this nature might be difficult
to implement internally and the specialized know-how of the firm may well be an
overriding plus.
Scoring

If you chose...

You get this profit

Pat Hedden

$0

Home Office

$7,000

Consulting firm

$10,000

2007, www.velsoft.com

Budgets and Managing Money |

Decision 5
Analysis

In order to raise production to the desired level of 75, you need an increase of 15 files per
day. Lets view the operation graphically before we proceed. With the job enrichment
program installed, the new organization and production flow looks like this:

As you can see, any increase in production must come from the programmers. Since they
are currently handling 60 files a day (an average of 15 each) and operating at 90% of
capacity, the extra 10% from each, if achieved, would add a total of 6 additional files per
day. (An increase in productivity for each programmer is actually a 1/9 increase: 10%
divided by 90%.)
If you multiple 1/9 by 15 you get 1.7 additional files per programmer, or a combined total
of 6 additional files per day if all four programmers were working at 100% capacity.
Conclusion: another programmer is required. Assuming s/he meets the same quota as
other Programmers, this station will be capable of initiating and processing the 75 files
per day.

The next station is Quality Controller. Operating at 75% capacity and currently handling
60 files, the Quality Controller could conceivably process an added 20 files. His total
capacity is arrived at like this: a 25% increase in capacity, from 75% to 100%, is actually

2007, www.velsoft.com

Budgets and Managing Money |

a 1/3 (25/75) increase in productivity. Therefore, if he can produce 60 at 75%, he can

produce 1/3 more (20) at 100%, for a total capacity of 80 files per day.
In Decision 2, we anticipated the extra workload for the Reproduction Aid, so no problem
there.
The Expediter, at first glance, may seem to be a problem. However, if you analyze his
productivity like we did for the Quality Controller, youll see it this way. To move him
from 80% to 100% capacity is a production increase of (20/80). If he is capable of
expediting 60 files currently, a increase would raise him 15, to a total of 75. It might be
tight, but he could handle the load.
The Data Entry Clerk is in the same situation as the Quality Controller and can handle up
to 80 per day.
Decision

Somethings missing in our analysis. We hope you discovered it. You dont have enough
information to make an accurate decision in this case as no data is available for the two
secretaries. If you assumed that they could handle the extra load (or even assumed that
they couldnt) you made your decision too hastily. We created this situation to reinforce
this point: delay the decision when essential information is lacking.
Scoring

If you chose to add...

You get this profit

One programmer

$10,000

One programmer and one expediter

$5,000

Any other staffers (by themselves or in

addition to the Programmer and/or Expediter)

$0

Regardless of which decision you arrived at, give yourself an extra $2,500 if you
recognized that key information about the two secretaries was missing.

2007, www.velsoft.com

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