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Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign Computron's results were not satisfactory to put it mildly. Its board of directors, which consisted of its president and vice president plus its major stockholders (who were all local business people), was most poet when directors learned how the expansion was going Suppliers were being paid late and were unhapps, and the bank was complaining about the cut off credit. As a result, Al Watkins, Computron's president, was informed that changes would have to be made, and quickly, or he would be fired. Abo, at the board's insistence, Denna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computrue's chairman and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's assistance. Jamison began by gathering financial statements and other data shown below. The data show the dire situation that Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in Year 1, rather than the expected profit. Jamison examined monthly data for Year 2 (not given in the case, and she detected an improving pattern during the year. Monthly sales were rising costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data book somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales and for the new manufacturing facilities to aperate efficiently. In other words, the lags between spending money and deriving benefits were longer than Computron's managers had anticipated. For these reasons, Jamison and Campo see hope for the company provided it can survive in the short run. Jamisen must prepare an analysis of where the company is now what it must do fe regain its financial health, and what actions should be taken. Computron Diagnostics Statement of Opera Yr Actual Yr Actual Yr 3 Projected Revenue Net patient service revenue $8.432.000 $5.834.400 57.635.600 Other revenue Se SO Total revenues 55.832.400 57,835,600 Expenses Salaries and benefits 52.864.000 $4.980.000 $5.800.000 Supplies $240.000 5620,000 $512,960 Insurance and other S50,000 $50,000 S50,000 Drup 550.000 550,000 550,000 Depreciation SI5.00 $116,960 $120,000 Interest 562.500 S176,000 S80,000 Total expenses SILERS.200 55.992,960 56,612,90 Operating income $14660 -5138360 S422,640 Provision for income taxes $58.640 -563424 $169,056 Net income $87.960 -595.136 5253,584 Computron Diagnostics Balance Sheet Yr Actual Yr2 Actual Yr3 Projected Assets Current assets: Cash Marketable securities Net accounts receivable Inventories Total current assets Property and equipment Less secumulated depreciation Net property and equipment Total assets $9.000 SEX 600 $351.200 5715.200 $1.124.000 5-691.000 S146.300 55.44.00 $1.480 57.280 $20,000 56.32.160 SL287.360 51,946,803 $1,202,950 5263.160 5939,790 $2.86.392 $14,000 $71.632 5878,000 S1.716.480 52,680,112 51.220,000 $383.160 5836.840 SI56,931 Liabilities and shareholders' equity Current liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity S145,600 S136,000 $120,000 S80,000 S481,600 $323.432 5324,000 $284,960 S640,000 $80,000 $1,328,960 S1,000,000 5359,800 $380,000 $220,000 S80,000 $1,039,800 $500,000 S460,000 S203,768 S663.768 $1,468,800 S460,000 $97.632 $557.632 S2.886,592 S1.680,936 S296,216 S1.977.152 $3.516,952 Other data: Stock price Shares outstanding Tax rate Lease payments ANSWER $8.50 100,000 40% $40,000 $6.00 100,000 40% $40,000 $12.17 250,000 40% $40,000 Yr 1 Actual Yr2 Actual Yr 3 Projected Industry Average 3.6% 9.09 17.996 2.70 50.0% 25 Profitability ratios Total margin Return on assets Return on equity Liquidity ratios Current ratio Days cash on hand Debt management (capital structure) ratios Debt ratio Debt to equity ratio Times-interest-earned ratio Cash flow coverage ratio Asset management (activity ratios Fixed asset turnover Total asset turnover Days sales outstanding Other ratios Average age of plant Earnings per share Book value per share Price/earnings ratio Market/book ratio 8.00 7.00 2.50 32.0 6.1 16.20 2.90 Computron Diagnosties Common Size Statement of Operations Industry Average Yr 1 Actual Yr 2 Actual Yr 3 Projected 100.0% 0.0% 100.0% 84.5% Revenue: Net patient service revenue Other revenue Total revenues Expenses: Salaries and benefits Supplies Insurance and other Provision for bad debts Depreciation Interest Total expenses Operating income Provision for income taxes Net income 0.3% 4.09% 1.1% 94.1% 5.9% 2.4% 3.5% Computron Diagnostics Common Size Balance Sheet Industry Yr Actual Yr 2 Actual Yr3 Projected Averal Assets Current assets Cash Marketable securities Net accounts receivable Inventories Total current assets Property and equipment Less accumulated depreciation Net property and equipment Total assets 0.3% 0.3% 22.3% 41.2% 64.1% 53.9% 18,0% 35.99% 100.0% Liabilities and shareholders' equity Current liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 10.2% 9.5% 2.4% 1.6% 23.7% 26.3% 20.0% 30.0% 50.0% 100.0% Donna Jamison, a recent UNC graduate with four years of for-profit health management experience, was recently brought in as assistant to the chairman of the board of Computron Diagnostics, a manufacturer of clinical diagnostic equipment. The company had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign Computron's results were not satisfactory to put it mildly. Its board of directors, which consisted of its president and vice president plus its major stockholders (who were all local business people), was most poet when directors learned how the expansion was going Suppliers were being paid late and were unhapps, and the bank was complaining about the cut off credit. As a result, Al Watkins, Computron's president, was informed that changes would have to be made, and quickly, or he would be fired. Abo, at the board's insistence, Denna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computrue's chairman and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's assistance. Jamison began by gathering financial statements and other data shown below. The data show the dire situation that Computron Diagnostics was in after the expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in Year 1, rather than the expected profit. Jamison examined monthly data for Year 2 (not given in the case, and she detected an improving pattern during the year. Monthly sales were rising costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data book somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message across, for the new sales offices to generate sales and for the new manufacturing facilities to aperate efficiently. In other words, the lags between spending money and deriving benefits were longer than Computron's managers had anticipated. For these reasons, Jamison and Campo see hope for the company provided it can survive in the short run. Jamisen must prepare an analysis of where the company is now what it must do fe regain its financial health, and what actions should be taken. Computron Diagnostics Statement of Opera Yr Actual Yr Actual Yr 3 Projected Revenue Net patient service revenue $8.432.000 $5.834.400 57.635.600 Other revenue Se SO Total revenues 55.832.400 57,835,600 Expenses Salaries and benefits 52.864.000 $4.980.000 $5.800.000 Supplies $240.000 5620,000 $512,960 Insurance and other S50,000 $50,000 S50,000 Drup 550.000 550,000 550,000 Depreciation SI5.00 $116,960 $120,000 Interest 562.500 S176,000 S80,000 Total expenses SILERS.200 55.992,960 56,612,90 Operating income $14660 -5138360 S422,640 Provision for income taxes $58.640 -563424 $169,056 Net income $87.960 -595.136 5253,584 Computron Diagnostics Balance Sheet Yr Actual Yr2 Actual Yr3 Projected Assets Current assets: Cash Marketable securities Net accounts receivable Inventories Total current assets Property and equipment Less secumulated depreciation Net property and equipment Total assets $9.000 SEX 600 $351.200 5715.200 $1.124.000 5-691.000 S146.300 55.44.00 $1.480 57.280 $20,000 56.32.160 SL287.360 51,946,803 $1,202,950 5263.160 5939,790 $2.86.392 $14,000 $71.632 5878,000 S1.716.480 52,680,112 51.220,000 $383.160 5836.840 SI56,931 Liabilities and shareholders' equity Current liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity S145,600 S136,000 $120,000 S80,000 S481,600 $323.432 5324,000 $284,960 S640,000 $80,000 $1,328,960 S1,000,000 5359,800 $380,000 $220,000 S80,000 $1,039,800 $500,000 S460,000 S203,768 S663.768 $1,468,800 S460,000 $97.632 $557.632 S2.886,592 S1.680,936 S296,216 S1.977.152 $3.516,952 Other data: Stock price Shares outstanding Tax rate Lease payments ANSWER $8.50 100,000 40% $40,000 $6.00 100,000 40% $40,000 $12.17 250,000 40% $40,000 Yr 1 Actual Yr2 Actual Yr 3 Projected Industry Average 3.6% 9.09 17.996 2.70 50.0% 25 Profitability ratios Total margin Return on assets Return on equity Liquidity ratios Current ratio Days cash on hand Debt management (capital structure) ratios Debt ratio Debt to equity ratio Times-interest-earned ratio Cash flow coverage ratio Asset management (activity ratios Fixed asset turnover Total asset turnover Days sales outstanding Other ratios Average age of plant Earnings per share Book value per share Price/earnings ratio Market/book ratio 8.00 7.00 2.50 32.0 6.1 16.20 2.90 Computron Diagnosties Common Size Statement of Operations Industry Average Yr 1 Actual Yr 2 Actual Yr 3 Projected 100.0% 0.0% 100.0% 84.5% Revenue: Net patient service revenue Other revenue Total revenues Expenses: Salaries and benefits Supplies Insurance and other Provision for bad debts Depreciation Interest Total expenses Operating income Provision for income taxes Net income 0.3% 4.09% 1.1% 94.1% 5.9% 2.4% 3.5% Computron Diagnostics Common Size Balance Sheet Industry Yr Actual Yr 2 Actual Yr3 Projected Averal Assets Current assets Cash Marketable securities Net accounts receivable Inventories Total current assets Property and equipment Less accumulated depreciation Net property and equipment Total assets 0.3% 0.3% 22.3% 41.2% 64.1% 53.9% 18,0% 35.99% 100.0% Liabilities and shareholders' equity Current liabilities: Accounts payable Accrued expenses Notes payable Current portion of long-term debt Total current liabilities Long-term debt Shareholders' equity: Common stock Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 10.2% 9.5% 2.4% 1.6% 23.7% 26.3% 20.0% 30.0% 50.0% 100.0%

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