February 5, 2013
Harper Chemical’s forecasting for its new project called Domanite was very inaccurate. Expenses were estimated with a failure to account for unexpected expenditures, and spending was not regulated well. Sales figure estimates were inflated, and did not account for the difficulty of opening a new market.
It was originally estimated that the sales volume of Domanite would hit 55,000 tons per year by 1983. However, between 1981 and 1985, annual sales of Domanite only hit 8,700, or 46,300 tons short of the original estimates. It was also projected that the Domanite operation would break even in a year and a half and would have a 10% after-tax profit in the fifth year. Neither of these projections came anywhere close to happening. In the first 5 years of operation, the Domanite operation incurred a net loss of $(4,034,610) (see Exhibit 1). Jim Hood, general manager of the Special Products Department, believed the failure to reach projected sales figures was because of a severe underestimation of the requirements for market development. As with bringing any new product to market there are going to be great costs, many of them unforeseen. Not running a tight ship and leaving the door open for unnecessary spending can wreak havoc on the books, as well as destroying the potential for projected earnings.
Inaccurate Forecasting and Excessive Expenditures
When attempting to become a profitable venture, particularly for a new product in the market, it is imperative to manage and even micro-manage all expenditures as to eliminate any semblance of waste. It appears that the Domanite project made the mistake of forecasting low in nearly every area, as well as having unsupervised and unanticipated spending. There were two major reasons for missing the forecasted budget. The first is a failure to account for unexpected variables. The second is failure to enforce strict...