Science Technology Company was a leading maker of computer-controlled automatic test equipment (ATE) that was utilized to keep an eye on and handle quality over the life process of electronic items. With 31% market share, the company was the dominant firm in the style and manufacture of testers and test software for printed circuit boards. Its second business was its semiconductor test operation, which produced intricate systems that cost in excess of $1 million and were used to evaluate modern huge scale integrated (VLSI) circuits.
Other Products consisted of a system to evaluate electronic products in the field; systems used to check a products mechanical and structural integrity under stress and computer aided engineering software utilized to check and verify designs prior to they were physically built, by producing electronic models and mimicing their performance in the software application variation.
Business Goals and Technique
STC’s main goal was to be the acknowledged international leader in supplying integrated quality management systems to producers of electronic gadgets and equipment.
This objective needed preserving its management in developing brand-new test innovations and brand-new products for all sectors of the style and test markets. This dedication to preserve fundamental superiority in test competence needed extremely heavy spending on research and development.
Case Analysis
Early in march 1985, Costs Watson, president of STC was examining a 5 year funding strategy gotten ready for the company by Harry Finson, Chief monetary officer. After some research study, Mr. Watson recognized several questions for additional factor to consider and resolution:
1. In view of the uneven growth in sales, inventories and receivables and earnings in the past were Mr.
Finson’s 5 year projection helpful?
Mr. Finson’s 5 year forecast is rather beneficial since the boost of 30% annual growth rate in projected sales is attainable knowing that the marketplace for computer system related innovation items specifically the ATE and VLSI products is quickly growing. From 1978 to 1984 we can see a sales boost of $359 million to $1.6 billion from the ATE market alone.
However because of the unpredictability of the past sales for 1978 to 1984, the ability to accurately project sales in the next 5 years will be low. Mr. Finson’s could either go directly to the sales and find out more accurately the seasonal demand not just the yearly sales of STC Company Products to further improve the accuracy of its sales projections.
As discussed last week about high risk of inventories, I could say the same with STC Company Inventory. Since accuracy of the sales projected for the 5 years are questionable they have a high risk in incurring over inventory thus leading to higher costs. Even though that inventories were lowered in the projected 5 year forecast, what they can do to manage inventory is to do a just in time. By lowering inventory they would be able to further reduce the costs.
2.What impact would a resurgence of inflation, fueled by massive budget deficits, have on STC?
I am not sure if Mr. Finson included the inflation rate in his 5 year forecast but if he didn’t there would be a big impact on its financial statements. As we can see in the financial statements, a lot of fixed expenses are put into product cost and when inflation hits it will increase product costs and therefore lower the profitability of the company.
We can assume that one of the major components of the product cost is labor cost. And I suggest that the company do an Activity Based Costing since they rely heavily on labor intensive jobs. By doing ABC they are able to eliminate low value-adding costs, improve effectiveness of the value adding activities and to remove distortions caused by poor assumptions and bad cost allocations thus reducing overall cost.
3.Was the company well positioned to finance the rapid sales growth that was anticipated?
The company was well positioned to finance the rapid sales growth because of the 3.45 million shares of common stock sold in 1982 and 1983.
However due to the accuracy of the projected sales for the 5 year forecast being low, there is a big chance that the company will incur a net loss since their strategy to decrease COGS by 41% is by increasing their sales which is very unpredictable due to the assigned percentage growths.
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