Chapter 13, Problem 52P

1.

To determine

Compute the income in case only the results of the financial plan are considered.

Answer to Problem 52P

Income of IT and SM regions are $54,945,900 and $65,937,500 respectively.

Explanation of Solution

Business Sustainability:

Business sustainability is increasing the business worth for a long term, by analyzing and managing threats and opportunities of the organization for achievement of organizational strategic plans and communicating the results transparently.

Computation of income:

Particulars	IT ($)	SM ($)
Year one	9,000,000	5,000,000
Year two	9,900,000	7,500,000
Year three	10,890,000	11,250,000
Year four	11,979,000	16,875,000
Year five	13,176,900	25,312,500
Total operating income	54,945,900	65,937,500

Table (1)

Thus, income of IT and SM regions are $54,945,900 and $65,937,500, respectively and based on the results of financial plan only, SM region should be chosen as the operating income is higher in this region.

Working Notes:

Income of IT region is computed by adding 10% of the income of the previous year. Income of SM region is computed by adding 50% of the income of the previous year.

2.

To determine

Compute the impact on operating income, according to the results of business sustainability analysis.

Answer to Problem 52P

Income would reduce by $15,000,000 and $36,000,000 in IT and SM regions due to the four key stakeholders.

Explanation of Solution

Computation of impact on operating income:

Particulars	IT ($)	SM ($)
Suppliers:
Creation of adequate supply chain $\left(\$5,000,000\times 2\right)$		10,000,000
Employees:
Training of store managers $\left(\$2,000,000\times 5\right)$	10,000,000
Regulators:
Environmental regulations $\left(\$1,000,000\times 5\right)$	5,000,000
Ethical training $\left(\$3,000,000\times 5\right)$		15,000,000
Local community:
Spending on community $\left(\$1,500,000\times 5\right)$		7,500,000
Approvals		3,500,000
Reduction in operating income	15,000,000	36,000,000

Table (2)

Thus, income would reduce by $15,000,000 and $36,000,000 in IT and SM regions due to the four key stakeholders. Therefore, operating income would reduce by $21,000,000$\left(\$36,000,000-\$15,000,000\right)$, in case, SM region is chosen.

3.

To determine

Compute operating income in both the options considering both the financial plan as well as key stakeholder’s impact.

Answer to Problem 52P

Adjusted income would be $39,945,000 and $29,937,600 in IT and SM regions respectively.

Explanation of Solution

Computation of impact on operating income:

Particulars	IT ($)	SM ($)
Operating income:
Year one	9,000,000	5,000,000
Year two	9,900,000	7,500,000
Year three	10,890,000	11,250,000
Year four	11,979,000	16,875,000
Year five	13,176,900	25,312,500
Total operating income (A)	54,945,900	65,937,500
Reduction in operating income:
Less: Impact due to suppliers:
Creation of adequate supply chain $\left(\$5,000,000\times 2\right)$		10,000,000
Less: Impact due to employees:
Training of store managers $\left(\$2,000,000\times 5\right)$	10,000,000
Less: Impact due to regulators:
Environmental regulations $\left(\$1,000,000\times 5\right)$	5,000,000
Ethical training $\left(\$3,000,000\times 5\right)$		15,000,000
Less: Impact due to local community:
Spending on community $\left(\$1,500,000\times 5\right)$		7,500,000
Approvals		3,500,000
Total Reduction in operating income (B)	15,000,000	36,000,000
Adjusted operating income $\left(\text{A}-\text{B}\right)$	39,945,000	29,937,600

Table (3)

Adjusted income would be $39,945,000 and $29,937,600 in IT and SM regions respectively. Therefore, IT region would be selected since it would have higher operating income.

4.

To determine

Discuss one qualitative factor that could be considered before making the decision. Also, explain how the factor could potentially affect the answer computed based on the quantitative data.

Explanation of Solution

A qualitative factor that could be considered before making the decision is lack of completion in SM region. Also, since, the region is less developed; incurring costs to provide value addition to the community, conducting ethical training and establishing supply chain management would benefit the society which would have positive impact on goodwill of the company.

Therefore, company may opt for SM region after considering all these factors.