TENPOMATIC

MANUAL DEL PROFESOR

CHAPTER 1 GETTING STARTED

Before you get started, you should have the following items on hand:

1. TENPOMATIC IV: A Management Simulation, Third Edition (Student Text)

2. TENPOMATIC IV: A Management Simulation, Third Edition, Instructor's Manual

3. TENPOMATIC IV: A Management Simulation, Third Edition, Computer Center Manual

4. TENPOMATIC IV Computer Tape, containing computer program, test data, quarter 9 carry-over data and checker program

You need to prepare yourself in three areas. The first area is familiarization with the texts,curriculum, and class organization. These subjects are covered in the first three chapters of thismanual.

The second area is the mechanics of interfacing with the computer. Please be assured that-thismanual assumes little or no knowledge of the computer. Chapters 4 and 5 discuss the installationof the program and the mechanics of processing computer runs each quarter.

The third and last area is the operation of the simulation. Chapters 6 and 7 give instructions onhow to use the various options in the simulation, and Chapter 7 lists the questions that studentsask most frequently about the simulation.

If you have never used a computerized simulation before, you should first read the preface of thisInstructor's Manual, then the Student Manual, and finally the rest of this manual. Then forward acopy of Appendix B of the Instructor's Manual, together with the Computer Center Manual andthe computer tape, to your computer center director. When the director has had time to read theinstructions, make an appointment to discuss the simulation. Chapter 4 and Appendix B suggesttopics you will want to discuss with the director.

If you have used a simulation before, scan the preface and Chapters 1, 2, and 3 of this manual.Then read in detail Chapters 4 through 7. Read the student text carefully. Forward a copy ofAppendix B of the Instructor's Manual to your computer center with the program source tape andthe Computer Center Manual. Finally, make an appointment with the computer center director todiscuss any changes in your routine that you feel are applicable.

1

TENPOMATIC IV can be integrated into your curriculum in a variety of wa _. It can be used as aregular part of classroom sessions in conjunction with lectures or case analyses in a businesspolicy course or an introductory business course. It can also parallel the regular classroomsessions, with all simulation work done outside the classroom and only a few minutes of eachclass devoted to discussion of the simulation. As a laboratory course it can accompany or followthe business policy or introductory course, with class sessions fully devoted to analysis anddiscussion of the game. In all cases, at least one to two hours of classroom time is needed tointroduce the game.

If TENPOMATIC IV is used in an advanced course, it is best introduced at the beginning so thatthe game can run for three full company years (twelve decisions). With this procedure, thestudents can be held accountable for longrange planning. In an introductory course, however, it isbest to wait until mid-semester to start the game and to let it run for only one or two companyyears (four or eight decisions). This timing allows the instructor to introduce the materialnecessary to a basic understanding of the game. The instructor should be careful not to introducetoo many topics, for the student can easily become confused and fail to master any of the topicswell.

Most of the first class meeting should be spent explaining the play of the simulation, althoughstudents can simply be turned loose with the text and told to make a trial decision without anyassistance from the instructor. The best approach, however, is to introduce the objectives andphilosophy of the game briefly and then cover one by one the points outlined on the summarysheet shown in Chapter 5 of the student text. Although it may seem ridiculous to start in soelementary a fashion, this procedure does help minimize the frustrations that come with trying tokeep twelve or more major variables and their interrelationships in mind at one time. Instructorswill find slides or transparencies of the figures in the student text particularly helpful for thisclass meeting.

The next chapter discusses the curriculum and how the simulation can be integrated into yourcourse in a variety of ways.

2

CHAPTER 2 DESIGNING YOUR CURRICULUM

Course content and methodology depend on your objectives and on departmental requirements.You may use TENPOMATIC IV in business policy courses, introductions to business, or relatedcourses. TENPOMATIC IV can be the focal point of the course; it can be used as a supportactivity with lectures on business, case analysis, problem solving, and other text readings; or itcan be used with some combination of the above. The course can be designed for highlevelanalysis or for basic understanding of the workings of a business. Two course syllabi arepresented here to give you some idea of the range of possibilities.

SYLLABUS 1

Syllabus 1 illustrates the use of TENPOMATIC IV in a two-hour, one-semester undergraduatecourse in which the students concentrate exclusively on TENPOMATIC IV. The students meetfor a lecture hour and a lab hour. The class discussions of the functional areas utilize the data ofTENPOMATIC IV, and students should be instructed to search for the applicable data inTENPOMATIC IV: A Management Simulation, Third Edition, to illustrate the class discussions.

Objectives

A basic objective of this course is to integrate the specialized areas of business administration byrequiring the students to analyze and make decisions in the environment of a computer-processedmanagement simulation. Throughout the course the students are immersed in dynamic data toshow the application and integration of theory explained in previous course presentations.

A second objective is to interject the use of the computer in decision analysis, whenever possible,by having the students use the computer to work out illustrative problems the instructor maygenerate.

A third objective is to provide an environment in which the students can report their companies'performance by providing financial statements.

Discussion and Laboratory

In the discussion hour, the instructor examines various techniques presented in courses that thestudents have already taken, with emphasis in the

3

simulation on the applicability of such techniques to strategy and policy formulation. Thecohesive factor for the discussion of universal business problems is the management simulationgame.

The laboratory hour reinforces the material covered during the preceding discussion periodthrough various techniques. First, the instructor assigns illustrative situations for work both inand out of lab. Second, negotiations for bonds, new plants, and labor contracts and disputes arecarried on between the administrator or lab instructor and individual student teams. Third, theinstructor holds discussions with individual teams to aid the members in their decision making.

Weekly Guidelines

Following are some weekly and hourly objectives the instructor will want to meet in a semesterof fourteen weeks, with each week divided into two periods, one a discussion class and the othera laboratory. Because the duration of semesters differs from school to school, the objectives areexpressed as tasks the instructor might wish to schedule, depending on the individual needs andabilities of the students. In the period numbers, D designates a discussion hour and L designates alaboratory hour.

Week Period Task

1 1D Introduce the course, the text, the syllabus, the grading system, and the courseassistant. The text is Scott/Strickland, TENPOMATIC IV: A Management Simulation,Third Edition.

2D Answer questions, make up the teams, and make a set of hypothetical decisions toexplain the game's method. Emphasize that the first eight quarters' results are found inAppendix B of the student text and that the students' first decisions will be for quarter9, their second for quarter 10, and so on. (Transparencies of print-outs flashed enlargedon a scr=en are useful.) You may want to co~'bine these first two discussion periods asone.

2 3L Help students make a decision for quarter 9. (This will be their first decision.)Assign a time for decisions to be submitted and specify when print-outs will beavailable. Be specific on procedure.

4D Discuss corporate organization and strategy. Request each company to submit inperiod 6 a statement of its organization and strategy.

3 5L Work with students in making a decision for quarter 10. (This will be their seconddecision.) A session to negotiate bond issues may be desirable.

6D Discuss financial and management reporting. Request each company to determine andstate by period 8 what reports it needs.

4

Week Period Task

4 7L Work with students in making a decision for quarter 11.8D Discuss marketing forecasting techniques. Request each company to submit its

forecast by period 10.

5 9L Companies make decision for quarter 12.10D Discuss production and inventory analysis. Require of each company, in period

12, an analysis of its inventory.

6 11L Companies make decision for quarter 13.

12D Discuss financial analysis. Ask each company to submit, in period 14, an analysisof one year's performance or status.

7 13L Companies make decision for quarter 14.

14D Discuss debt-equity financing. Select a situation in which teams analyze andchoose a method of financing to be submitted in period 16.

8 15L Companies make decision for quarter 15.

16D Discuss profit-volume analysis. Request each company to submit, in period 20, ananalysis of its present profit-volume situation.

9 17L Companies make decision for quarter 16.

18 Midterm exam.

10 19L Companies make decision for quarter 17.

20D Discuss labor contract negotiations. Start negotiations with individual companies.

11 21L Negotiate.

22D Discuss capital budgeting and present-value analysis. Assign individual problems,dictated by the situation of each company, to be completed by period 26.

12 23L Companies make decision for quarter 18.

24D Discuss marketing, finance, and production mix.

13 25L Companies make decision for quarter 19, the last one.

26D Discuss reporting company operations to top management.

14 27L Prepare for presentation of semester's results to the board of directors. Eachcompany makes a twenty-minute presentation.

5

Week Period Task

28L Invite people from business to act as boards of directors to hear and examinestudent presentations.

29 Final exam.

GradesThree possible compositions of the final grade are, in percentages:

Midterm exam 25 30 35Final exam 25 30 35Team performance 40 30 20Homework 10 10 10

Many instructors include peer evaluation in their grading plan. One useful way of quantifyingpeer evaluations is by issuing to each team a fictitious $1,000 and asking them to distribute itamong the team members according to value. Other instructors prefer to increase the percentageof the part of the final grade that is allocated for homework. Still others prefer to reduce thepercentage assigned to team performance. All instructors are, of course, free to compose the finalgrade as they wish.

SYLLABUS 2

Objectives

Syllabus 2 illustrates the use of TENPOMATIC IV in a three-hour, onesemester advancedundergraduate business policy course in which the principal classroom activity of the students isdiscussion and case analysis. Thus, this syllabus is based on the traditional method of caseinstruction, with minim~.un classroom time used in discussion of TENPOMATIC IV.

This course should serve as a capstone for students majoring in business administration,accounting, or economics. It requires students to utilize effectively knowledge gained fromprevious courses in economics, marketing, management, accounting, production, finance, andstatistics for the implementation of business decisions and for the design and implementation ofbusiness policies.

During the last weeks of the semester, the course will emphasize operations research, with thestudents developing statistical models to stimulate the simulation in order to develop their ownmanagement information systems. It is mandatory, therefore, that all historical data developed inthe course be saved for this part of the instruction.

The textbooks required for Syllabus 2 are TENPOMATIC IV: A Management Simulation, ThirdEdition; and A. A. Thompson and A. J. Strickland's Strategy and Policy: Concepts and Cases,Second Edition (Dallas: Business Publications, 1981).

6

Weekly AssignmentsWeek Period Assignment1 1 Course introduction.

Read for period 2:1. TENPOMATIC IV: A Management Simulation, Third Edition2. Thompson/Strickland, Strategy and Policy, Chap. 1 Quarter 9 trial decision

due one day in advance of period 2.

2 Discuss business simulation; analyze trial decision.Introduce to business policy.Read for period 3: Thompson/Strickland, Chap. 2Quarter 9 decision due one day in advance of period 3.

2 3 Discuss business policy and strategy: types, functions, purposes.Read for period 4: Case: United ProductsQuarter 10 decision due one day in advance of period 4.

4 Discuss financial cash flow forecasting, financial operation ratio analysis,development of corporate financial policy.Read for period 5: Case: Steadman RealtyQuarter 11 decision due one day in advance of period 5.

3 5 Discuss market forecasting techniques, policy, and strategy; pricing policy;marketing mix.Read for period 6: Thompson/Strickland, Chap. 3Quarter 12 decision due one day in advance of period 6.

6 Discuss production and procurement.Read for period 7: Case: Bright Coop Co.Year 3 (quarters 9 to 12) annual report and strategy report due in period 7.

4 7 Discuss personnel policy and industrial relations. Labor negotiations begin.Quarter 13 decision due one day in advance of period 8.

8 Discuss union-management relations, manpower planning, and labor contractpolicy and strategy. Labor negotiations end. Quarter 14 decision due one day inadvance of period 9.

5 9 Discuss economic analysis of the firm and price elasticity in the oligopolisticindustry.Read for period 10:1. Thompson/Strickland, Chap. 42. Case: Builders Homes, Inc.Quarter 15 decision due one day in advance of period 10.

Week Period Assignment

10 Discuss expansion policy, mergers, and acquisitions.Read for period 11:1. Thompson/Strickland, Chap. 52. Case: The Southland CorporationQuarter 16 decision due one day in advance of period 11.

6 11 Discuss organizational analysis and decision-making strategy.Read for period 12:1. Thompson/Strickland, Chap. 62. Case: Narragansett Bay ShipbuildingYear 4 (quarters 13 to 16) annual report and strategy report due in period 12.

12 Discuss central management policy and decision-making strategy.

7 13 Read for period 14: Case: Dresser Industries Inc.Quarter 17 decision due one day in advance of period 14.

14 Discuss policy, planning, and control.Read for period 15: Case: ExxonQuarter 18 decision due one day in advance of period 15.

8 15 Discuss expansion and growth strategy of conglomerates and multinationaloperations.Quarter 19 decision due one day in advance of period 17.

16 Utilize the simulation as an exercise in quantitative decision making" methods.Quarter 20 decision due one day in advance of period 17.

9 17 Discuss quantitative analysis for decision making and management informationsystems for policy and decision making.

18 Preparation for presentation of semester's results to the board of directors. Eachcompany will make a twenty-minute presentation.

10 19 Invite people from business to act as board of directors to hear and examinestudent presentations.

20 Final exam.

GradesThe management simulation game runs for twelve quarters. The class standing of each team atthe end of each quarter and the cumulative standings at the end of the game will togetherrepresent a maximum of 30 percent of each student's grade. Annual reports and an oral casepresentation will represent another 10 percent of each student's grade. A midterm exam and afinal exam will each represent 30 percent of each student's final grade. Part of the final

examination will consist of each student's running the game individually (without a team), so it isimperative that each student learn to make all the decisions required in the game. Following is atabulation of the percentage composition of each student's final grade:

Twelve quarters of game grades at 1 percent each 12Final standing in the game 18Two annual reports at 2.5 percent each 5One oral case presentation 5Midterm exam 30Final exam 30

ROLE PLAYING

One of the more exciting aspects of TENPOMATIC IV is the possibility of role playing, labornegotiations, financial transactions, board of directors, and government regulators.

Labor negotiations are discussed in detail in Chapter 6. However, we can say at this point thatlabor negotiations tend to be one of the highlights of our term.

We invite leading businesspeople to serve as a board of directors for the student companies. Thebusinesspeople add a dimension of realism to the class, and their participation usually leads themto become involved further in other ways, such as by later sponsoring internships.

Federal, state, and local leaders are used to role-play environmental and energy-related situations.These role-playing sessions give our students a taste of government regulations.

SOME PROBLEMS AND QUESTIONS

This section is an outline of problems to present to the class during the course of the semester.Some are stated as points of definition and identification; others are phrased as questions thatstudents ought to be able to resolve. They are of varying degrees of complexity, and the instructorwill wish to choose and present problems with the particular abilities and achievements of eachclass in mind. They are not presented here in an ascending degree of difficulty, however, becauseit must be left to the instructor to determine the level of sophistication of the students. Thus theproblems and questions, if aired and examined thoroughly, should provide followers of eitherSyllabus 1 or Syllabus 2 proper groundwork for successful attack on midterm andfinal exams.

Strategic Management

1. Develop some definitions of corporate strategy and identify points of strategy for yourfunctional area (marketing, production, finance), for the next four quarters.2. Define the components of corporate strategy and formulate alternative solutions to strategicproblems.

9

3. Distinguish between long- and short-run planning. Give specific relation to your company.4. Why is it necessary to plan when one faces uncertainty? How does planing help inTENPOMATIC IV?5. As members of management, what responsibilities do you have to the board of directors,stockholders, employees, and general public? Is it possible to please all groups at the same time?How are you fulfilling these responsabilities now in TENPOMATIC IV?

Financial Reporting

1. Discuss the need for a reporting system and identify the various types o: statements, togetherwith their significant differences, that should be cluded in managerial reports.2. Distinguish the following accounting statements: cash flow statement; income statement;balance sheet. Explain the need for each statement.3. What is the significance of the retained earnings account on the balance sheet? Is it possible tospend retained earnings? Explain in detail.4. List five important users of accounting information and identify the type of financialinformation about the business organization that would be most useful to each user.5. What is meant by full disclosure in TENPOMATIC IV? How much would you disclose?6. What is the importance of establishing a record of TENPOMATIC IV history?

Market Forecasting

1. Why must a company forecast the moods and demands of the market? What techniques canmanagers use in market forecasting?2. Discuss prediction by association. Does it work in TENPOMATIC IV?3. Having studied the least-squares technique of curve fitting, can you say what use it is inbusiness planning? Can the technique be used to obtain a market forecast in TENPOMATIC IV?Why or why not?4. Using least-square analysis, determine the best equ:ations for analyzing (a) demand for thenext eight quarters and (b) the Business Week Index (BWI) for the next eight quarters.

Financial Analysis

1. What is the need for financial analysis in TENPOMATIC IV? Discuss the purpose of short-and long-run analysis and alternative methods of analysis that might be considered whenformulating short- and long-term goals.2. Discuss the methods and merits of computer-assisted analysis.3. What are financial ratios and standards? How do they operate in TENPOMATIC IV?4. Using quarter 11 and 12 print-outs, perform the following financial analysis for quarter 12:

a. Earnings per shareb. Price to earningsc. Return on common stockholder's equityd. Amount of working capitale. Number of times interest is earned

10

f. Common size income statementg. Debt to total assetsh. Equity to total assetsi. Current ratioj. Quick ratiok. Inventory turnover1. Dividend yieldAre these ratios high or low? What do the ratios tell the team members about thecondition of the company?

5. Assume that ABC Company's net income was 20 percent of sales this quarter. Did it performbetter than your company? In what specific ways did your company outperform ABC?6. Was your company in a better financial position in the short run in quarter 12 than in quarter11? What about the long run? Use whatever financial ratios you deem necessary to answer thisquestion.7. State whether each of the following transactions would increase, decrease, or have no effect onthe amount of net working capital and on the current ratio:

a. Selling TENPOMATICs on creditb. Selling TENPOMATICs for cashc. Borrowing cash on a short-term noted. Purchasing a plant with bondse. Recording periodic depreciation

8. You will find that your current ratio has changed in quarter 12 from quarter 8. What is thechange? Is this good or bad? Explain.

Production and Inventory

1. How does inventory relate to sales and production in TENPOMATIC IV?2. What is the.cost of inventory record keeping? Discuss the importance of inventory evaluation.What method are you using in TENPOMATIC IV?3. How do you determine the number of kits to order and the number of TENPOMATICs toproduce?4. What minimum inventory of kits and TENPOMATICs should you have at any given moment?How do you include the loss of salespersons when your calculations cause you to over- orunderstock. How do you plan for the possibility of not receiving al-1 the kits you order?5. How would your inventor-1 policy change if your kits contained perishable matter that spoiledby the end of a quarter?6. Kits are hard to get. If there were a two-quarter delay in receiving them after ordering, whatspecifically would you do?7. What is your policy on hiring production workers? Make an economic analysis to determineyour production plan if there were a forecasted drop in demand of 20 percent for one quarter.

Debt-Equity Financing

1. List the advantages of equity financing.2. List the advantages and disadvantages of debt financing.3. Using your quarter 12 print-out, determine whether your company is benefiting from tradingon equity. You must show your analysis.

11

4. Are there any limits to how much your company can finance through debt? If such limits exist,list them and explain how each operates to stop the company from financing with debt.5. Discuss the possibilities of financial leverage. What are the differences in the assumptions youmake in risk financing and in leverage techniques?6. Suppose that you need $500,000 for a fixed-asset investment. Develop arguments for financingby means of bonds. Do the same for equity financing.

Profit-Volume Analysis

1. Derive the equation for calculating the break-even point.2. Of what use is the equation in the long run?3. Calculate the break-even point for quarters 14 and 15. Explain any change that took placebetween quarter 14 and quarter 15 that might have affected the break-even point. Examinequarters 1 through 8 with break-even analysis4. What are the fixed and the variable costs in TENPOMATIC IV? How do you measure profitlevels?5. How many units must be sold in quarter 16 in order for your company to make $50,000 aftertaxes?6. What present-value considerations must you take into account with profitvolume analysis?7. How does the short-run cash flow affect the profitability of your company?8. What are the limitations of profit-volume analysis?

Contract Negotiations

1. Discuss the purposes of collective bargaining.2. How does a union formulate its demands? How should management respond?3. What are the costs of a labor strike to management and to the workers? How do you determinethese costs?4. Consider the points of strength from which you feel that you as a manager of your companycan bargain.5. What advantages would you emphasize in negotiations for your company?6. Prepare a contract to offer the union as your first response to its demands. ya preparad tobargain in good faith on behalf of management for basic wage rates, overtime wage rates, fringebenefits (vacation policy, insurance plans, profit-sharing plans), safety compensations, and hiringand promotion policies.8. Discuss the social responsibility of your company. Does the concept have a real place in labor-management negotiations?9. Should the companies in your industry bargain as a team?

Capital Budget and Present-Value Analysis

1. List five uses of present-value analysis in managing your company.2. Consider the time value of cash. For example, how much should you pay for a plan today thatwould yield $10,000 eight years from now at 10 percent interest compounded annually?3. Show your analysis of the logic of building a plant versus purchasing a plant.4. How does the inflation forecast affect your present-value analysis?

12

5. What is your optimum inventory size? Suppose that the present demand equals productioncapacity and that you forecast an increase in demand of 300 units per quarter in an area whereyou do not have a plant. When would you buy a plant in that area?6. Study the feasibility of plant expansion versus plant contraction.7. Your company needs a truck that costs $5,000. The seller offers to finance one over a two-yearperiod with an interest rate of 10 percent per year compounded monthly. Should you accept hisoffer?8. Ussing present-value analysis, make the decision either to build or to buy a 5,000-unit plant.Assume the following: (a) the purchased plant will cost $60,000; (b) profits from the new plant,whether built or bought, will be $15,000; (c) the interest rate for debt is 10 percent per year.Make any other assumptions that you deem necessary.9. How does a company determine its capitalization rate? What is your rate? What effect wouldyour rate have on the above questions?

Market, Finance, and Production Mix

1. What are your company's response functions with regard to placement of salespersons andnational and local advertising in the current market given your present production capacity?2. Determine absolute levels of marketing inputs such as price, advertising, salespersons, andproduct improvements.3. Select the appropriate marketing mix for TENPOMATIC IV.4. Discuss the merits of optimization versus suboptimization.

Simulation in Business

1. List five uses of simulation in managing your company. How would these aid your managerialability?2. What are the advantages of simulation models for inventory? For market strategy?3. What are the fundamental differences between simulation models and quantitative models?

Board of Directors Presentation

1. What should you emphasize in your presentation? Why?2. Consider the advantages of visual aids.3. How much information are you obliged to furnish the board of directors? Be sure to considerrelationships with stockholders.4. What items should you present objectively and what items can you emphasize when presentingincome statements to the board?

Business Future

1. What innovations are you developing in TENPOMATIC IV? How otherwise are you preparingfor the future?2. What role can you expect free eneterprise to play? Is free enterprise dead?3. What should you do about wage and price controls?

13

4. Is expanded use of computers desirable?5. How will the social responsibility of companies to employees and change in the near future?6. What are the implications of multinational business?

Miscellaneous Topics

The following are some alternative topics that might substitute for one or more of the problemsand questions listed in the preceding sections:

1. Expected-value analysis2. Sales-promotion analysis3. Cash flow analysis4. Cost analysis5. Scheduling6. The decision-making process7. Motivation and leadership8. Current events

EXAMINATION QUESTIONS

This section consists of three parts: (1) two alternative midterm exams, the first one part open-book and part closed-book (for use with Syllabus 2), the second one to be directed at theinstructor's discretion (for use with Syllabus 1 or Syllabus 2); (2) two alternative open-bookexams, based primarily on the semester's simulation experience, one requiring approximately oneand a half hours, the other two and a half hours; and (3) a group of loosely structured long- andshort-answer questions that might be administered at relevant points during the semester in theform of spot quizzes or might be substituted individually for questions in the more structuredexams. The instructor should read through all these questions carefully before proceeding witheither syllabus.

Midterm Exams: Exam 1

Part A (closed book): 10 short answers of 2 points each; total 20 points.

1. List the factors that affect the stock price of a TENPOMATIC company.

2. What would be the total selling and administrative expense of a firm that has 8 regularsalespersons, including 2 salespersons in training who have recently been hired, and that hasmade 2 product improvements and bought 8 pages of national advertising, 4 pages of localadvertising in each area, and the market newsletter?

3. List the factors that determine the demand for a TENPOMATIC firm in any given area.

4. What factors determine the manufacturing costs of goods sold?

14

True / False Questions (subject to changes made during play)

F 5. The notes-payable item on the TENPOMATIC balance sheet includes both short-term loans and payments on plants.

T 6. A firm that has 60 production workers at the end of one quarter in which 4 newworkers have been hired would expect to be able to produce 16,000 units withoutworking overtime in the next quarter, if it had enough kits on hand.

F 7. The cost of carrying a unit of finished inventory over into the next quarter is $1per unit.

T 8. A salesperson hired in quarter 9 will be in training in quarter 10 and in productionin quarter 11.

T 9. Sales potential purchased for one quarter costs $7,500.

F 10. Bonds are required by the game administrator to be paid off within 5 years afterthe money is received.

Part.B (closed book): 2 essays of 20 points each; total 40 points.1. Explain the relationship between a firm's major policy (or strategy) areas, list some majorexamples of each type of policy (or strategy), and discuss the development of company policy (orstrategy).

2. What internal and external factors are usually relevant and what information is required forpolicy and strategy analysis based on a firm's environment?

Part C (open book): 2 essays of 20 points each; total 40 points.N.B.: Be sure to turn in Parts A and B before beginning Part C.

1. Survival strategy has been illustrated in several cases discussed in class. Contrast the problemsfacing two companies and the strategy used to overcome them.

2. Leadership and management were key elements in several cases examined in class. Discuss theformation of effective or ineffective leadership. Then,. referring to cases studied in class, statewhat applications you can from your study of marketing, economics, finance, and managementthat would have helped managers avert or solve some of their problems. (If possible, citeexamples from your team decision-making sessions.)

Midterm Exams: Exam 2Part A: 10 short answers of 2 points each; total 20 points.

1. What is the total manufacturing cost in quarter 1 for a TENPOMATIC company whosemanufacturing operations consisted of

a. 10,000 units produced.b. material purchased in 10,000-unit orders.

15

c. 32 production workers available (20 in Area 1 and 12 in Area 2).d. no overtime.e. quarterly depreciation of $100,000.f. 2 workers hired for quarter 2.

2. A firm had a beginning inventory of 1,200 units. After manufacturing additional units, ittransferred 2,100 units to Area 2 and 900 units to Area 3. What is the total cost of its warehouseoperations?3. What items make up the selling and administrative expense analysis?

4. How may sales effort be increased?

5. What determines cash receipts for a company during any particular quarter?

6. A company finds itself $25,000 short of cash for necessary operations. What is the mostexpedient way to overcome this problem?

7. What broad categories of expense does a company normally incur?

8. What do assets of a TENPOMATIC company consist of?

9. A new 6,000-unit plant is ordered on a regular basis in quarter 10.a. When should material be ordered?b. When should production workers be hired?c. When should salespersons be hired?d. What is the down payment?

10. A company manufactured 8,500 units. Beginning inventory was 1,160 units. Endinginventory was 760 units. How many units were sold?

Part B: 15 true/false questions worth 2 points each; total 30 points.(Subject to changes during play of game)T 1. Quantity discounts apply only within an area, not for all areas.

F 2. Material costs are recognized when material is ordered.

F 3. A crew is always composed of 4 workers.

F 4. Stock price is a function of profit only.

T 5. If a company desires a third bond, it must retire its first bond.

F 6. Labor plus variable overhead is equal to production labor costs plus next quarter, and

10 percent in the third quarter.

F 7. The collection rate is 40 percent in the quarter sold, 50 percent in the next quarter, and

10 percent in the third quarter.

F 8. Administrative expenses vary with production.

F 9. Local advertising has a lag effect.

16

T 10. The training program for salespersons is 2 quarters.

F 11. Under normal conditions, salespersons are lost at a rate of 1 per 20.

T 12. Manufacturing cost of goods sold is comprised of four items: (a) direct material, (b)direct labor, (c) overhead, and (d) depreciation of production facilities.

F 13. The cost of material transfer is $2.

T 14. Plant construction takes 2 quarters.

F 15. A plant may be purchased at a minimum cost of $500,000.

Part C: 3 essays totaling 50 points.

1. What, if any, is the relationship between a firm's marketing policy (or strategy), financialpolicy (or strategy), and production policy (or strategy)? Use an example to illustrate youranswer. Distinguish between longand short-run considerations. (20 points)

2. Because future costs and revenues are used in analyzing alternative courses of action availableto management, it follows that all historical costs and revenues are irrelevant. Do you agree withthis statement? What forecasting tools does the manager have at his or her disposal? How reliableare they? How can they be improved? (15 points)

3. In the future, what should be your firm's (a) inventory policy (raw materials and finishedgoods), (b) forecasting technique, and (c) pricing policy? (15 points)

Part D: 10 points.

N.B.: Be sure to turn in Parts A, B, and C of your exam before proceeding. Ask the instructor forthe print-out required to answer Part D.

Using the print-out of the sample TENPOMATIC firm, determine the firm's breakeven point.Discuss the recommendations you would make as a consultant to this firm. (10 points)

Open-Book Exams: Exam 1

Time: 1 1/2 hours. Questions are of equal value.

1. Suppose you change your company's credit policy on sales of TENPOMATICs to 20 percentdown, 40 percent the first quarter, and 40 percent the second quarter. Show the change in yourfinancial picture for quarter 10 or 11 (the first quarter of change). Would this change your abilityto obtain short-term credit? Do you have a good position now? Explain. Be sure to show allrelevant statement figures.

2. What did you state as your company's strategy (or strategies)? What evidence shows that youhave followed that plan? What evidence shows that you have not followed the plan?

17

Why did you diverge from your stated strtt__: or strategies? Show all relevant statement figures.(This question pertains to any time in the course after the game has begun.)

3. Show your economic analysis to justify an increase or decrease in expenditures for one of thefollowing from your quarter 10 or 11 operation:(a) finished goods inventory, (b) national advertising, (c) plant investre : in one area.

Open-Book Exams: Exam 2

Time: 2 1/2 hours.

Part A: Answer any 4 for a total of 50 points. Use quarters 15 or 16 where applicable.

1. Compute your current ratio. Is it too high or too low? Explain.

2. A policy of a 1 percent discount on payments of cash when a sale is made will result in a 30percent down payment. Should your company accept this?

3. Suppose that the government has required you to rebate 10 percent of the profit from the lastquarter in which you made a profit, based on the present control of profits. State what majorchange in your decision making this will cause and show your reasoning.

4. How much would you raise your price to cover your negotiated wage increase?

5. How did you determine how to allocate money for sales promotion?

6. Name one innovative proposal that you made to your team during,the term. Why was itinnovative? How was it received? What happened with it, and why?

Part B: 2 essays of 25 percent each; total 50 points.

1. Analyze the management-union negotiations from the standpoint of management. Were youprepared for the union's demands? Were the results of negotiation satisfactory to the company?What procedures and decisions would you have changed? Why?

2. What did you originally state as your company's functional strategy? How did you follow ornot follow it? What would your strategy be as reflected in quarters 15 and 16? Explain yourreasoning in all instances.

Long- and Short-Answer Quiz Questions

Set 1

1. How does business policy differ from business (or corporate) strategy? In your answer, defineboth terms and give specific examples of each that could apply to TENPOMATIC IV.

18

2. What is the significance of the retained earnings account on the balance sheet? Is it possible tospend retained earnings? Explain in detail.

3. Distinguish between long- and short-run planning. Give specific examples relating to yourcompany.

4. State whether each of the following transactions would increase, decrease, or have no effect onthe debt ratio and on the return on assets of your company:

a. selling TENPOMATICs on accountb. selling TENPOMATICs for cashc. borrowing cash on a short-term noted. purchasing a plant using bondse. recording periodic depreciationf. paying a dividendg. retiring a bond

5. From the attached print-outs, calculate the following for quarter 15:a. Price-earning ratiob. Return on equityc. Quick ratiod. Debt to total assets ratio

6. Which of the following will appear on the current quarter's income statement as an expense?a. Cost of materials purchasedb. Plant purchasing costc. Hiring additional workersd. Paying a regular wagee. Quarterly depreciationf. Paying plant mortgage

7. In the attached print-out, is the company benefiting from trading in equity? Explain what ismeant by "trading on equity." Discuss the criteria used in the test. Determine whether theattached company is benefiting.

8. Is committee management a workable management style in your company? List the advantagesand disadvantages of committee management. Explain your company's procedure in makingdecisions. How is responsibility assigned in your company? What would you change in yourcompany's decision-making process? Explain why.

9. Using examples from your company, discuss the following concept: In the very short run, allexpenses are fixed; in the long run, all are variable.

10. Using the attached print-out, determine whether the company should finance a planned capitalexpansion of $750,000 by debt or equity. Be very specific in your answer.

19

Set 2Twenty-five true/false questions (Subject to changes during play)The first fifteen questions also appear in Midterm Exam 2T 1. Quantity discounts apply only within an area, not for all areas.F 2. Material costs are recognized when material is purchased.F 3. A crew is always composed of 4 workers.

F 4. Stock price is a function of profit only.

T 5. If a company desires a third bond, it must retire its first bond.

T 6. Overtime is a function of units produced above regular labor capacity.

F 7. The collection rate is 40 percent in the quarter sold, 50 percent in t:.= next quarter, and 10 percent in the third quarter.

F 8. Administrative expenses vary with production.

F 9. Local advertising has a lag effect.

T 10. The training program for salespersons is 2 quarters.

F 11. Under normal conditions, salespersons are lost at a rate of 1 per 20.

T 12. Manufacturing cost of goods sold is comprised of four items: direct material, directlabor, overhead, and depreciation' of production facilities.

F 13. The cost of material transfer is $2.

T 14 Plans ordering and construction takes 2 quarters.

F 15. A plant may be purchased at a minimum cost of $500,000.

F 16. The simulation is planned for a specific industry.

F 17. In this simulation, you live with your past decisions but not with the other company'sdecisions.

T 18. A business simulation differs from a case analysis in that in a simulation there aregroups of participants who have formed companies to compete against each other.

T 19. The simulation is designed to be as simple or as complex as the business knowledgeof the player.

F 20. Any number may be placed within any decision block.

T 21. The student is responsible for filling out the last two decision "cards."

20

T 22. The effects of product improvement are cumulative.

F 23. You are allowed to pay dividends in any circumstance.

T 24. Stock retirement is used to reduce the equity position of your company.

F 25. The cash flow statement of any quarter shows the next quarter's actual flow.

21

CHAPTER 3 ORGANIZING THE CLASS

This chapter discusses how your class might be organized for the use of TENPOMATIC IV.Much of the information in this chapter is drawn from the authors' experiences and those of manyof our colleagues across the country in teaching business policy and other management courses.The information in this chapter is organized in the form of a checklist based on the assumptionthat you have not used a computer-based simulation before.

In organizing the class, you must establish the mechanics of processing the team decisions. Cardsor terminals can be used to input the decision data. If cards are used, each team can punch its owncards, or a person can be assigned to receive the decision sheets and punch the cards for allteams. If students process the data, students should be shown how to operate the machines, andhours should be established to assure processing of data by the proper time for the computer run.In all cases, be sure data are secured so that no team's decisions can be seen by competitors.Locked boxes and special identification numbers have been used in some cases for security.

On the day the simulation is introduced, the students should be warned not to expect or desirecomplete realism. The real business world has, of course, far more variables than TENPOMATICIV does. But TENPOMATIC IV approaches the limit of what the typical student can keep inmind at one time. Certainly more realism can be programmed into the game, but the average teamtakes four hours to prepare its first decision, and any greater realism would produce an unrealisticif not impossible workload for the students. The compromise is to concentrate on a simulation ofthe major variables of an industrial firm rather than to give the student more small details thancan be handled within the limits of the course.

Once the summary sheet has been explained, the instructor should next turn to the student quarter8 decision sheet (Chapter 4) and print-outs (Quarter 8). Starting with the decision sheet, theinstructor should explain that each line represents one of the six cards that must be submitted byeach company or team playing the game. Then, beginning with national advertising for Area 1(the first entry on the first card of the decision sheet), the instructor should direct the students'attention to the entry on line 5 of the print-out of selling and administrative expense analysis. Iftime permits, each entry on the decision sheet should similarly be located on the print-out, so thatthe students leave the first session with an understanding of the relationship between the decisionsheet and the print-outs. Since the students do not need an understanding of the last two cards fortheir initial decisions, Cards 5 and 6 are, best explained after the initial decision has been madeand the first four c have been mastered.

22

Toward the end of the first session, the students should be assembled into management teams orcompanies of three or four people each. We have found it best for administrative purposes tohave one industry per class section and from three through twelve teams per industry; however,the simulation will accommodate as many as fifteen teams. We have formed teams of two to fivemembers each, but our observations are that two-person teams do not have enough interchangeand arguments, and that, on the five-member teams, one or more members loaf. On two-personand four-person teams there can be no tie-breaking vote. Thus, we start organizing around three-member teams.

Make no apologies for the necessity that students be graded not solely on their own efforts butalso on the results of their team. This, too, is a simulation of the real world and an actual test of astudent's managerial skills and abilities to work in committees. Authority in big business is sofragmented today that many major decisions are made by group effort. It is recommended that thesimulation represent only 20 to 40 percent of each student's total course grade; the instructor cantherefore make plenty of room in the grading scheme for the recognition of individual effort.

The names of the companies can be anything that the students desire as long as no name exceedssix characters. Each class is assigned an industry number, and each team in an industry isassigned a company number so that the decision cards and the print-outs can be collated properly.Team numbers within an industry must be consecutive (1, 2, 3, up to 15).

When organizing the class into teams, the instructor usually allows the students to participate tothe fullest extent possible. One method is to have students introduce themselves and describetheir academic backgrounds and work experiences. It should be stressed that no team should becomposed solely of accountants or marketing majors or whatever, but rather should be balancedso that members will benefit from each other's experience and training. Since the teams will findit necessary to meet out of class once or twice a week, geographic grouping should also beconsidered. Those who live near each other may find it convenient to be on the same team. Afterthe above introductions, the instructor should announce a ten- or fifteen-minute break time, inwhich the students should freely mill around the room to discuss and suggest specific teamformations. Many instructors, of course, prefer to assign specific students to specific teams tohelp ensure a proper balance of skills.

Once the students are grouped into teams, each team should come forward to sign the sign-insheet. The instructor should request that the students sign this sheet in the order in which theywould like to be called in the event of a decision error. A team will occasionally make an error,and at such times it will be necessary for the game administrator or the student assistant tocontact one or more members of the team to ask them to correct the decision. If the members ofeach team indicate the priority to be used in calling them, this task will be facilitated.

The ranking system utilized in TENPOMATIC IV allows both you and the students to knowexactly how everyone is performing. (The ranking system is explained in detail in Chapter 6.)The print-outs showing the results and the relative performance may be posted to increase thecompetition.

23

Normally the teams are allowed to make a trial decision for quarter 9 during the first week of thecourse. This decision should not affect the grade and is usually merely to acclimatize the studentsto the game. During the first class session it should be emphasized that this trial decision will bethrown away and that a real quarter 9 decision will follow. (Students who place first in the trialdecision often do not do as well in the real decision, because, after the trial, other teams changestrategy to correct poor performance.)

Students should be instructed to submit their decisions to a secretary or clerk or to insert them ina locked box in the computer center (one for each industry, for sorting convenience). In additionto the decision cards, students should also be required to submit a copy of their marketinformation request and a checker program print-out (see Chapter 5) to show that their decisioncards have been run through the checker program to catch errors. After computer run, print-outscan be returned in class or by a secretary or clerk.

The importance of having students run their cards through the checker program, which can beactivated by five or six control cards, cannot be emphasized too strongly. This process minimizesthe possibility of a team's "bombing out" because of a gross mistake or keypunch error.

Here is a summary of items to be covered in the first class meeting:1. Course objectives

2. Simulation objectives

3. Team organizationa. Sizeb. Balancec. Geography

4. Change of game from previous semesters (students not to listen to advice of former students;the game changes each semester; last semesters demand and weighting of the game is differentfrom this semester's)

5. Playa. Number of quartersb. Use of cards or terminalsc. Time schedule for submitting game decisionsd. Where to submit decision sheetse. What to submit

(1) Six punched decision cards or the equivalent(2) Decision sheet(3) Market information request(4) Checker program print-out

f. Penalty for input errorsg. Roles of the game administrator (instructor) may be:

(1) Bond broker(2) Stockbroker(3) Union president(4) Chairman of the board of directors(5) U.S. government antitrust officer

24

(6) Management consultant(7) Other as needed

6. Grading system

25

RANKING OF PERFORMANCE OF TEAMS

Any grading or ranking system with so many contributing factors is subject to the objectives ofthe administrator. Instructor card 6 allows the administrator to assign the weights from whichteams are ranked.

The grading of TENPOMATIC IV is based on each company's ranking on seven items: (1) sales(dollar volume), (2) income after taxes, (3) earnings per share, (4) return on sales, (5) return onassets, (6) return on equity, and (7) stock price. Each company in an industry is given its rank onthese items based on the weighting scheme and scale entered by the instructor on instructor card6, columns 1 through 15 (see Chapter 5). An illustrative percentage weighting for the quarterindex is as follows:

Sales 10Income after taxes 20Earnings per share 30Return on sales 5Return on assets 5Return on equity 20Stock price 10

A game-to-date index (starting with quarter 9) based on the companies' rankings on theircumulative performance is also computed, so that the instructor can emphasize long-rangeplanning. This is a new ranking based on the companies' total or cumulative sales, income aftertaxes, and so on. It is not an average of the quarter rankings.

Figure 6.1 shows nine print-outs from quarter 8, for illustrative purposes. Teams are listed bynumber.

Page 1 of the print-outs shows the data from which rankings are developed. It shows the data foreach team, for each category, and for current quarter and game to date.

Page 2 ranks the teams by category. Performance is shown as a percentage of the first-place team.Information is listed by position number (first place, second place, and so on), then thepercentage; after the slash comes the team number.

Page 3 is an example of the results of multiplying the selected weights times the percentages onpage 1. The overall ranks are the sums of the category values. Category weights are shown at thetop of each category column. The overall rankings are shown in the last three columns to theright.

Pages 4 through 9 are self-explanatory.

We emphasize that the indexes are relative performance ranks and not grades. Table 6.3 is ahandout that the authors have used to explain the ranking system to our students.

The authors have converted the indexes to grades by looking at the groupings of the indexes. Forexample, the indexes and grades may look like this:

54

FIGURE 6.1 (continued)

Position Index/Company Grade

1 96/6 A2 91/3 A-3 89/4 A-4 65/1 C5 62/5 C6 20/2 D-

Notice that letter grades are based on groupings, not on absolute rank.

In addition to pages 1, 2, and 3, which rank the teams, the computer prints one page ofratios and five pages of industry summaries for the instructor.

59

Table 6.3 Handout to Explain Grading System

GBA 525Grading System for TENPOMATIC IV

Your performance on the management simulation game counts 25% of your total grade in thecourse. This is equivalent to 250 points out of a total of 1000 possible points in your total coursegrade.

The allocation of the 250 points among the various performance criteria will be as follows:

(1) Income after taxes (game-to-date total) ……………...……………………………… 25 points(2) Sales revenue (game-to-date total) ………………………………………………… 30 points(3) Stock price (at end of game) ………………………………………………………… 40 points(4) Return on assets (game-to-date average) ……………………………………………. 20 points(5) Return on sales (game-to-date average) …………………………………………….. 20 points(6) Return on stockholders' equity (game-to-date average) …………………………….. 40 points(7) Earnings per share of common stock (game-to-date total) ………………………….. 75 points

250 points

Items (1) through (7) have been incorporated into a computerized program which reports arelative performance index (weighted according to the above percentages) for each quarter'sdecision and also reports a cumulative (game-to-date) performance index. The indexes, as well asvarious industry-wide information, are made available weekly to all students after each quarter'sdecision results are handed out. The computer printouts of the industry statistics and individualcompany performances will be posted on the bulletin board in the hall across from 233 Bidgood,and a copy is also placed on reserve in the Business Library (feel free to make a photocopy foryour own personal use).

It should be emphasized that the computer index is an indication of how your company'sperformance stacks up relative to that of other companies. The letter grade you are assigned at theconclusion of the __mulation might be higher than the performance index calculated by thecomputerized procedure. Hence, if your performs.-:.:: index is 43.5, it does not necessarily followthat your simulation game grade is an F; the 43.5 does clearly mean, however, that your team isnot faring as well as are other teams. Consideration is given to whether companies with "low"performance indexes are still generating acceptable results or whether their operating results areclearly "poor" in the light of overall competitive and market conditions.

The final performance index each company achieves will be converted to a numerical grade bythe instructor at the conclusion of the simulation. The above weights for the various factors thusindicate how the performance of each company will be judged and suggest a set of goals andobjectives for your company.

60

CHAPTER 7 TYPICAL QUESTIONS AND THEIR ANSWERS

1. Question: What is the effect of the Business Week Index (BWI) on the game?Answer: The Business Week Index is an indicator of the general economy. It is usually publishedon Saturdays in Business Week. (The school library may not get the magazine on the shelvesuntil the next week.) Students should be encouraged to check the BWI regularly. The first thingthe TENPOMATIC computer program does is read the average sales forecast for each companyfrom the table in the program specified by the instructor on a data card or from the instructorforecast input. The program then multiplies this average by the number of teams participating inthe simulation to produce the total area aemana for each industry. This total area demand can bethought of as a pie to be split among the companies in proportion to their individual sellingefforts. The total pie can be increased or decreased before the slicing takes place, however. Thisis a function of the BWI. If the BWI, in any given quarter, increases in comparison to the BWI ofquarter 9, then the pie will be enlarged. If the BWI decreases in comparison to the quarter 9 BWI,the pie will shrink. Obviously there is no change in the pie in quarter 9 because the quarter 9 BWIis the standard against which the other quarters are measured. Moreover, the BWI change fromany other quarter to the next is not relevant, for the same reason. The BWI is changed in the gameonly on a specific and previously announced day (for example, every Wednesday) that remainsconsistent throughout the semester.

2. Question (from a student): I asked for market information on my decision card, but I didn'treceive any. Why?Answer: You may have made an error in one or more columns when requesting it. You mustdesignate the appropriate digits in columns 67 through 75 on student decision card 3 under theheading "market information," and you must also enter the correct sum of information requestedin the field on student decision card 3 marked "market information cost." The computer will sumup the individual columns indicating the cost of the requested information and check this sumagainst the column containing your total. The computer will fulfill your request only if your totalis a figure equal to or larger than the sum of the cost of the market information that yourequested. Otherwise, your request will be ignored, but you will not be charged anything for it.Market information is also the category under which errors for keypunching are entered andunder which the game administrator enters penalty costs.

3. Question (from a student): : Where do we begin in making our team's decision? Answer:Assess past operating statements and expected changes in demand.

61

4. Question: Does the program require that any values be set equal to zero in quarter 9 when thegame begins?Answer: No. The program automatically initializes all values in quarter 9. The initial quarter ofplay is no different from other quarters.

5. Question: Does the instructor have to change the team name on the carryover cards or in othervalues on the carry-over cards?Answer: No. The program will automatically insert the new team name on the carry-over cardswhen entering on the decision sh-et.

6. Question (from a student): Can I expect that the random number probabilities will strike ourteam only once or twice?Answer: The program does not keep track of the number of times a team has been hit by therandom number probabilities. Each quarter of the simulation is a mutually exclusive event.

7. Question (from a student): What is the checker program?Answer: It is a computer program that protects the students by reading the team's decision andthen warning the team of certain obvious errors before the decision is submitted. The programenables you to correct, in advance, errors that could be very costly to you, but it will not find allerrors. If, for instance, you assign three salespersons to Area 1, three to Area 2, and three to Area3 (a total of nine salespersons) but you have only eight salespersons, this error will not be pickedup by the checker program. Instead, the computer will allocate your salespersons for you, andyou may have to live with its decision, desirable or not. It is to your benefit, therefore, to studythe checker program printout very carefully.

8. Question (from a student): What happens when I make a keypunch error?Answer: Most keypunch errors are picked up by the computer. The computer's charge forcorrecting each error is $2000, billed to you as market information. A keypunch error that mustbe corrected by the game administrator, however, will carry a $5000 or $10,000 penalty:Disastrous errors not caught in advance of a run will require the program to be rerun aftercorrection. Correction information is taken from the handwritten decision sheets.

9. Question (from a student): What if I change my mind about my decision or detect an error afterI have put my cards into the locked box?Answer: Simply put a new card and a note into the box indicating the change. The studentassistant will make the substitution for you and destroy the card first put into the box. If the cardshave been picked up, it is too late.

10. Question: What is the most common error?Answer: Keypunching the sort codes. This is tricky because the code differs from card to card.On the first student decision card, each team adds 50 to its team number; team 1 sort code is thus51, team 3 code is 53, and team 12 code is 62. On the second decision card the code is radicallydifferent: team 1 sort code is 102, team 2 code is 202, team 3 is 302, and so on. For the thirddecision card, team 1 code is 103, team 2 code is 203, team 3 code is 303, and so on. The last twodigits of this code for all but the first decision card are preprinted on your student

62

decision sheets, but they must nevertheless be keypunched on the card. Properly entered, thesecodes enable the instructor to use a mechanical sorter.

11. Question: What can the instructor do if the program does not run properly?Answer: First, make sure that all the data cards are present and in the right order. (See Table 5.1for data deck arrangement and card numbers.) Second, make sure the information on theinstructor and student decision cards is correct. Third, if the first two steps do not solve theproblem, run the test data deck for quarter 8 and check the results for Gidget Company (quarter8) against those found in the student text. Fourth, ask the computer center director for assistanceto check if the control cards are correct. Fifth, call Alonzo J. Strickland or Charles R. Scott at theCollege of Commerce, The University of Alabama: (205) 348-6010.

12. Question: What are the formulas used to calculate ratios for TENPOMATIC IV?Answer:

Current = total current assets .total current liabilities

Quick = total current - total inventory . total current liabilities

Debt to total assets = total liabilities . total assets

Times interest earned = operating profit net interest

Inventory turnover = sales income . average quarterly inventory

Fixed asset turnover = sales income net plant

Total asset turnover = sales income total assets

Profit margin (or return) on sales = operating profit sales income

Return on total assets = operating profit total assets

Return on net worth = net profit after taxstockholders' equity

13. Question (from a student): What rate of interest am I paying on the two bonds nowoutstanding in quarter 9?Answer: You should be able to determine this. (The rate on bonds 1 and 2 is 9 percent.)

63

14. Question: How are bonds to be repaid?Answer: This is negotiated with the investment banker (the game administrator). Normally,bonds are paid off serially over twenty quarters (five years), with one-twentieth of the bondcoming due two quarters after receipt of the money and another one-twentieth due each quarterthereafter until the bond has been paid. A $100,000 bond negotiated in a quarter 9 decision wouldrequire the following entries in columns 25 through 53 on card 105 (205, 305...)

25-31 100,000 (amount)32-36 970 (9.7 percent negotiated interest rate)37-42 20,000 (amount of first payment)43-45 12 (quarter of first payment)46-51 20,000 (amount of subsequent payments)52-53 1 (payment due each quarter; the number 2 would, indicate every other quarter)

15. Question: What interest rate should students be charged to float a bond?Answer: This will be determined by current bond conditions. The game administrator will basebond interest rates on bond interest rated in sources such as Moody and Standard and Poor. Toachieve the lowest bond rates, students should package their proposals to best advantage, intel-ligently comparing financial ratios with industry ratios and past trends. Students should alsoprepare pro forma income statements and balance sheets that show what their company'sfinancial position will be after the bonds are sold and the money has been received. Proposalsshould state clearly the purposes for which the money produced by the bond issue will be used.

16. Question: If I issue a bond, when are the proceeds received?Answer: Bond proceeds are received at the beginning of the quarter in which the bond issuance isentered on the decision sheet.

17. Question (from a student): If I issue stock, can I pay off a bond with the proceeds of the saleon the same set of decision cards?Answer: Yes.

18. Question (from a student): At what prices can I issue and purchase stock?Answer: Stock issue price is negotiated with the' administrator. It will usually be lower than thecompany's stock price (but never less than par value of $10.00) because issuing costs must bededucted, diluting earnings per share. You purchase stock at the current market price plus 5 to 10percent, depending on the judgment of the instructor as to the quality of the stock.

19. Question: Can short-term investments be made for only one quarter?Answer: Yes, if a company will deposit and request withdrawal both in the same quarter.

20. Question: Are dividends declared based on the number of stocks outstanding before or afterstock retirement/issue?Answer: After stock retirement/issue.

21. Question: Can both a percentage of profit and cents per share dividend be declared in aquarter?

64

Answer: No. The percentage of profit is used first.

22. Question: What effect does declaring dividends have on the company's financial position?Answer: When a dividend is paid, both retained earnings and cash are reduced. Retainedearnings. are reduced in the quarter of declaration and dividends payable are increased. Thedividend is paid with cash the quarter following declaration at which time the dividend payablesare reduced. In addition, stock price will tend to rise if the dividend declared is in excess of anickel per share.

23. Question: What effect does retiring stock have on a company's financial position?Answer: A stock retirement will reduce a company's equity position. Common stock will bereduced by $10 per share of stock retired and retained earnings will be reduced by the amount bywhich the retirement price per share exceeds $10.

24. Question: What factors determine stock price?Answer: Stock price is determined by earnings per share (EPS); consecutive quarters that EPS ispositive, dividends declared exceed 5 cents, consecutive quarters of such dividends, and price-earnings ratio.

25. Question: Are losses carried forward or backward in computing income tax? Answer: Lossesare carried forward but not more than one cc'9ndar year.

26. Question: Can the average sales per company be less than market potential?Answer: Yes, if the industry as a whole is not putting in enough sales effort and if the BWI hasdropped. The former loss in overall sales is a result of substitute goods coming into play.

27. Question: Is there a limit to the number of pages of national or local advertising that can beused?Answer: Yes. The error messages in the student text (see Appendix A in the student manual)detail the limits. There are diminishing marginal returns, after reasonable levels, on the use of allforms of sales effort; the more advertising that is used, the smaller will be the incremental unitsof additional demand that is generated. Increasing national advertising from 12 to 14 pages, forexample, may increase demand by one hundred units (these are purely arbitrary figures forpurposes of illustration), and increasing again from 14 to 15 pages may further increase demandby only. fifty units, continuing until you have, say, 25 pages generating one thousand units ofdemand. If the curve is level at this point, sixteen, seventeen, or even fifty pages of nationaladvertising will produce only one thousand units of demand.

28. Question (from a student): What happens if I put no local advertising or salespersons in agiven area?Answer: You will still generate some demand with national advertising and productimprovements. If you stock-out, you will still lose a salesperson from your total.

65

29. Question: (from a student): Do I need to buy product improvements? Answer: It depends onyour strategy. You are not required to buy product improvements.

30. Question: If my company loses a sale due to a stock-out, will another company get thosesales?Answer: No. If the buyer goes to a particular company and cannot get what he wants, he will notseek to purchase the good elsewhere.

31. Question: Will the sale of a plant have any effect on my net income?Answer: This will depend on the price negotiated by the game administrator. In most instances,the game administrator will purchase plants at book value; thus there will be no gain or loss.When a plant is sold a paragraph is printed at the bottom of the cash flow statement explaining indetail the transaction.

32. Question: What happens if I order a plant and forget to order workers or material?Answer: You will have to wait an extra quarter before bringing your new plant into production.This is a very costly error as depreciation will begin when the plant is ready for productionwhether or not there is actual production.

33. Question (from a student): What happens if I sell an entire plant from an area and havematerial left over?Answer: You cannot transfer materials or workers. The materials will continue to be carried inthe area, and you will not be able to recover their cost. Plant sales should be planned in advanceto avoid this problem.

34. Question (from a student): What will happen if I fire several workers?Answer: You may find that some of the remaining workers, fearing additional firings, will quit.This matter will be left to the administrator's discretion.

35. Question (from a student): Can I sell a plant in Area 1 and purchase a plant in Area 2 or 3?Answer: Yes.

36. Question: (from a student): If I sell a plant, when do I reduce capacity and when do I get mymoney? How much money do I get?Answer: You get your money and reduce your capacity in the quarter following your request. Ifyou make a request for plant reduction in quarter 12, for example, the plant is sold in quarter 13.The sale price is negotiated.

37. Question (from a student): Can I construct a plant and purchase another plant at the sametime?Answer: Yes, but they will not go into production at the same time. The purchased plant will gointo production one quarter before the constructed plant.

66

APPENDIX A SALES-FORECAST TABLES AND CURVES

Choice of sales demand is important for determining the types of decisions the students willmake. Consumer demand in an industry is influenced by (1) students' sales promotion, (2)Business Week Index (BWI), and (3) sales forecast table used.

Industry sales will be lowered when too low sales promotion has been requested. Students cannotincrease industry sales, but individual company promotion can change the distribution of salesamong companies in the industry.

The BWI changes the sales forecast in accord with demand as it moves up or down relative to thequarter 9 BWI level. This is not controllable the instructor or student. In the past, radical changesin BWI, such as when there has been a rapid change from boom to recession or vice versa--asoccurred in 1981 and 1982--have severely changed the forecast. Thus, students had some of theexperiences with which actual business managers were faced. Ordinarily, the BWI causes up to 5percent change and sometimes 15 percent change.

The instructor has the choice of the curve to use (see Figure A.1). This choice can be based on thetype of student decisions desired. Neglecting the effect of the BWI changes, curves 1 and 2 haveforecasted rapid sales increases. These require expansion of industry capacity. Sales promotion isless important than producing needed goods. Curve 1 rises faster, then drops off rapidly, causinga shift in strategy earlier than caused by curve 2.

Curves 3 and 6 show increasing sales but to a lesser extent than 1 and 2. Curves 4, 5, and 7 aremuch flatter, probably resulting in more competition for sales. Curves 8 and 9 show increases inforecasts but show seasonal characteristics.

Following Figure A.l are nine tables and curves which show the forecasts by area for each of thecurves in Figure A.1 (the totals in the tables were used to plot the points for Figure A.1). Notehow some forecasts may require a =ixture of strategies or may differ by areas.

67