jaclyn smith- VP-Automotive and Aerospace Division (AA) I would…

jaclyn smith- VP-Automotive and Aerospace Division (AA)

I would like to go next unless anyone objects?

The AA division manufactures and markets products for the automotive and aerospace industries. We have accounted for 60% of Rosveld’s total sales for the past 4 years. Unfortunately AA’s profits and ROI have deteriorated in the last four yearsand while we used to contribute substantially more, in 2022 we contributed only 40% of the company’s total net income before taxes. This decrease in the contribution to the company’s net profits is causing concern within our division as well as within the company generally.

To give you some financial background, we have increased our sales prices by about 15% over the past 4 years but these have not kept up with increasing product costs. Increases in direct labour costs have been significant. The wage rates and employee benefit costs have increased and the number of labour hours and workers seemed to have increased even though our production levels have not really changed over the same time period. I think we need to control our labour costs with some sort of incentive program. Hopefully this will improve our profitability.

What I am proposing is an incentive program tied to labour costs. The incentives would be calculated on the reduction in the labour expense ratio (LER) and be computed by dividing the labour cost, including benefits, by the “incremental value” (IV) of the products we produce. The IV would be calculated by deducting all costs except labour and benefits from sales. The key aspects of the program are as follows:

1. The improvement in the LER over the prior years ratio multiplied by the labour expense of the prior year will be defined as the expense savings to be shared equally between the management employees and the company.

2. The management employees’ share will be divided equally between the 30 employees who are affected.

3. Reporting of each years’ results and payment of the incentives will be made no later than 30 days after

the end of each year.

Here are the details of the financial data from the past 4 years to allow you to review, analyze and evaluate my proposal (Exhibit A).

My questions to you are as follows:

a) Do you think this sort of proposal would be effective in motivating my managers? Please explain your reasoning and ensure that you comment on the sharing between the employees and the company, the sharing equally amongst the 30 employees and the payment details including timing.

b) Explain whether the formula proposed based on the improvement in the LER only measures the effect of changes in labour costs or are there other potential cause/effect relationships being incorporated due to the methodology?

c) Are the factors that affect changes in the LER within our control or not?

d) Based on the results of the past 4 years have we identified the primary cause of the profit decline? Explain your answer.


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