Subject name:

E3

Exam sitting:
September 2011

Question number:
Q2b)i) (10 marks)

Question

Question Two
SAH is a family owned company employing 32 people, which builds and sells medium sized yachts which normally retail at
100,000. SAH operates in a very competitive market. SAHs yachts are usually bought by amateur sailors with high disposable
incomes who value quality, reliability and performance. In 2011 it plans to sell 25 yachts. SAH's Managing Director, N, has a
vision for the company to be 'regarded as the best yacht builder for the private owner'.
SAH has always emphasised the high quality of its yachts and knows that its customers are very knowledgable. Each yacht is
built to a specific order and there is usually a period of at least one year between an order being placed and the yacht being
delivered to the customer. SAHs construction process is very traditional: most of its designs are at least 20 years old and much
of the construction work on its yachts is done by hand. SAH regards its workforce as craftspeople who have learned their skills
through their work experience. SAH employs school-leavers and provides apprenticeships lasting seven years. However, most
of its competitors employ university graduates who have studied yacht design and construction.
SAH designs all its yachts manually which is very time consuming, although most of its competitors now use CAD/CAM* suites
for their designs. SAH does not have any staff with CAD/CAM experience. SAH uses natural materials: for example, cotton for
the sails. However, recently some natural materials have become difficult to obtain and the prices of these have risen by as
much as 40% in the last two years. Many of SAHs competitors have replaced natural materials with synthetic ones as these are
easier to obtain, cheaper and give enhanced performance.
In 1985, SAH employed a consultant who designed a standard costing system for use in its manufacturing operations. This
system is still in use at SAH today. N, relies on the standard costing system which is his only control system for the company. N
knows that the manufacturing cost of a yacht amounts to 60% of its total cost and believes that if he is in control of 60% he is in
control of the majority of cost. However, N has experienced some difficulty in his role as the control system only reports financial
results. N would like a system that gives him integrated control over all aspects of the business and has been considering the
use of a Balanced Scorecard.
SAHs business comes from repeat orders and recommendations. However, it has experienced criticism in the last year
because it failed to meet the promised delivery time for 30% of its orders and has lost business because the potential customers
said that SAHs yachts looked old- fashioned and were too slow.
Cash flow is particularly important for SAH, because of the long lead times for each yacht, and has been under pressure
recently. SAH has had to increase its overdraft facility by 50,000 to 150,000 and this is nearly fully used. Every year since its
inception SAH has reported a profit but in 2010 its Return on Capital Employed was 3% which N has stated is unacceptable.
*CAD/CAM: Computer-Aided Design, Computer-Aided Manufacturing

Required

(b)Advise N:
(i)
how the Balanced Scorecard could be applied and used within SAH. You should also suggest and justify ONE measure
for each of the balanced scorecard's perspectives.
(10 marks)

Suggested approach

b)i)
Candidates are expected to present a sound application of the BSC model to SAH. Answers should present one measure only
for each of the four BSC perspectives which must be clearly justified in the context of the scenario information. Candidates who
merely describe the model or who fail to present one clearly justified measure for each perspective will not be awarded a pass
mark. Generic measures not directly relevant to the current issues faced by SAH will not be awarded a pass mark.

Answer

Requirement (b)(i)
The Balanced Scorecard is designed to translate mission and strategy into measures and objectives. Its purpose is to inform
employees about the drivers of success and direct their attention towards actions that will help to deliver the organisations
Vision and Strategy. The Vision and Strategy should be made explicit within the Balanced Scorecard.
Financial perspective: Proposed measures

Aggregate contribution margin: An improvement in this measure should improve ROCE which is currently unacceptably
low.

Receivables: Cash flow is very important for SAH and it has been under pressure recently. A reduction in receivables will
improve SAH's cash flow.
Customer perspective: Proposed measures
Performance against delivery dates: This was a weak area for SAH in 2010/2011. SAH would want to improve its
performance here and so improve its image to its customers and potential customers.
Order book: As each yacht is built to order and takes at least a year to build, it is important that SAH knows it has
continuity of demand. SAH can gauge the popularity of its yachts by the number of people who have placed an order
for one.
Learning and growth: Proposed measures
Number of staff with advanced craft and academic qualifications: SAH has had a policy of developing its staff from within.

However, it has experienced criticism because its yachts look 'old fashioned'. It may be that SAH's ability to change and
improve has been inhibited by a lack of staff with advanced qualifications.
Number of design innovations: This measure would demonstrate SAH's ability to change its manufacturing processes to
improve efficiency and reduce cost and its product designs to meet customers' needs.
Internal business perspective: Proposed measures

Materials price variance: This would focus attention on a current area of difficulty for SAH, which is having to deal with
increasing material prices.

Build time per yacht: If SAH could reduce its build time it might be able to avoid late deliveries, sell more yachts and use
its working capital more efficiently. This could improve its profitability.
The introduction of Balanced Scorecard into SAH does not necessarily mean that it should abandon its standard costing system.
As this deals with 60% of the total cost of a yacht, the standard costing can still give valuable control information.
Examiners comment: Although only one measure was required there are a great deal of possible measures which SAH could
use within a Balanced Scorecard. Two possible ones have been given for each perspective. Candidates who proposed
alternative, credible measures were appropriately rewarded.