QUESTION1 - CASESTUDY{20 MARKS}
THE DIM LIGHTING COMPANY
The Dim Lighting company is a subsidiary of a major producer of electric products. Eachsubsidiary
operates as a profit centre and reports to regional, group, and product vice-presidents at
corporate headquarters. The Dim Lighting subsidiary produces electric lamps and employs about
2000 workers. The general manager is Jim West. He holds an MBA from Tri State University and
has been running this subsidiary successfully for the past 5 years. However, last year the division
failed to realise its operating targets, and profit margins dropped by 15 percent. In developing
next year's budget and profit plan, Jim West feels that he is under pressure to have a good year
because two bad years in a row might hurt his long -term potential for advancement.
Mr. Spinks - Director of R&D
Spinks has submitted a budget request for a major research project, the micro miniaturisation of
lighting sources so as to greatly reduce energy requirements. He sees this as the lamp of the
future, and if successful, it would be the successor to LED lights. The proposed budget would
require $1.2 million per year for two years, plus another $500 000to begin production . Jim West
immediately contacted corporate headquarters, and although top management praised the idea,
they were reluctant to spend on the proposed project. Spinks feels the project has a 70 % chance
of success. Profits should increase by 20 % each year for the fourth through eight years. Beginning
of the ninth year, profits will likely hold steady at around $ 3 million and then decline as new
competitive products enter the market.
The Budget Meeting
West called a meeting with of his management group on Wednesday morning to discuss the
proposed budget. Spinks presented a well-reasoned and high-powered sales pitch for his project.
He suggested that the energy crunch had long-term implications and if they failed to move into
new technologies, the company would be competitively obsolete. Carol Preston, accountant,
presented a financial analysis of the proposed project, noting the high risk, the uncertain results
and the length of time before it would contribute to operating profits. Bill Boswell, production
manager, agreed with Preston. "We need new machinery for our current production line also,
and that has a very direct and immediate payback". Pete Newell, marketing manager, agreed
with Spinks. "I do not think we can put our heads in the sand. If we do not keep up competitively,
how will our salespeople be able to keep selling obsolete lighting products? A stormy debate
followed, with heated arguments both for and against the project, until West called the meeting
to a halt.
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