Unit One: Case Study (MIP)
Kaplan University – GB519 Measurement and Decision Making
What is the ROI for MIP based on original estimates?
• Operating assets ( development costs were $140 million
• Sales ( annual operating income was expected to be approximately $25 million
ROI for MIP = 25 million / 140 million = .18%
What is the ROI if Richard Lawrence’s new revenue projects are used?
• likely generate operating income of just $17.5 million per year
ROI for MIP with new figures = 17.5 million / 140 million = .13%
Elaine feels pressure to deliver “good news” to Blake. What advice would you give to her? Given the possible personal financial rewards that Elaine may enjoy if GSM goes public, would your advice change?
The truth in the figures is exactly what Elaine should be showing to Blake. Although the numbers are less than satisfactory to Blake and his expectations, the numbers are the numbers and should be reported appropriately. It would prove Elaine less than assertive and capable of doing her new job if she sugar coated the news. Managers and executives require solid information in order to make sound decisions.
What responsibilities does Elaine have to other GSM employees, the board of directors, and the venture capitalists?
Elaine’s duty is to report to Blake. However, this is information that also affects all those involved with the possibility of MIP going public. Because of this, Elaine should share this information with all pertinent management at MIP. If she knows information that MIP is not doing as well as everyone thinks, she has an ethical responsibility to do the right thing and share this information.
Briefly examine the differences between ROI, Residual Income, and EVA. Is ROI the best technique to apply in this particular scenario? Why or why not?
Return on Investment (ROI) measures the rate of return generated by an investment center’s assets. The use of ROI has some
References: Jackson, S., Sawyers, R., Sweeney, D., & Adnderson, D. (2008). Managerial Accounting and Statistics. Mason: Cengage Learning. Appendix I Chapter 1: Case 53 Elaine Shumate has been working for GSM, a pharmaceutical research company, for more than seven years. It is her first job since finishing her graduate work in molecular biology and her performance evaluations have been exemplary. She has received increasing responsibility as opportunities have become available at GSM. Unfortunately, her knowledge and experience have not prepared her for the situation she currently faces. GSM has invested heavily in a molecular identification process (MIP) that the company’s top management believes holds tremendous promise for the future. If all goes well, the company plans to patent the process and license the process to large pharmaceutical companies for their use in medication production. Elaine is the lead manager on MIP and she is worried that the latest research results do not look as promising as earlier results. The vice president of research, Blake Walton, has asked Elaine to meet with him to discuss the results. After a brief discussion in the hallway, Blake suggests that Elaine take another look at the latest results. He doesn’t believe that her interpretation of the data is correct. In preparing for their meeting, she looked over the company’s earlier cost estimates and operating income projections for the project. Records indicate that the estimated research and development costs were $140 million and annual operating income was expected to be approximately $25 million. Given the latest results, MIP may have fewer applications in the pharmaceutical industry than originally believed. Elaine spoke with Richard Lawrence, vice president of sales, to get an updated estimate of the potential market value for MIP. Richard suggested that MIP would likely generate operating income of just $17.5 million per year if the recent results hold up after further testing. Elaine knows that Blake is not going to be happy with this news. Blake is scheduled to meet with the company’s board of directors next week to discuss the need for additional investment capital from venture capitalists in the next year and the company’s plans for a public stock offering in the next several years. Elaine stands to benefit substantially from stock options if the company goes public. GSM’s future may ride on the outcome of that meeting.