SIMON COMPANY Simon Company is one of the major producers of generic and store brand hand and body lotion cream. There is generally not much difference in Simon’s products across different store brands. The total production capacity is 30,000,000 units per year. The company has always been profitable except in the last two years when it lost almost $500,000 each year. Exhibit 1 presents the financial picture for Year 2018. Exhibit 1 Average selling price per unit Total manufacturing fixed cost Average variable manufacturing cost per unit Total marketing and administrative fixed costs Average variable marketing and administrative cost per unit Sales in units Production in units No beginning or ending inventories. Operating loss $2.00 $8,400,000 $1.00 $600,000 $0.50 17,000,000 units 17,000,000 units ($500,000) Simon’s current CEO resigned in December of Year 2018 under pressure from the board of directors. The board approached a competent outside executive Stan Fox to turn-around the company. Stan was an optimistic soul and agreed to become CEO at the same salary as the departing CEO. However, his contract provided for a year-end bonus amounting to 20% of operating income (before considering the bonus or income taxes) for the first year and 10% thereafter. The annual income is to be certified by a public accounting firm. Stan, filled with rosy expectations, promptly raised the advertising budget by $1,600,000 and stepped up production to an annual rate of 25,000,000 units ("to fill the pipelines," he said). The advertising campaign was launched immediately. Sales for 2019 increased -- but only to a level of 20,000,000 units. On the last day of 2019 (soon after the end of year board and audit committee meeting), Stan resigned to take a job with another corporation having difficulties similar to those that Simon 1 27 Company had a year ago. Stan remarked, "I enjoy challenges. Now that Simon Company is in the black, I'd prefer tackling another knotty difficulty." The certified income statement for 2019 contained the following data: Sales Production cost Total Less: Inventory (5,000,000 units) $40,000,000 $33,400,000 6,680,000 Cost of goods sold Gross margin Marketing and administrative expenses Operating income $26,720,000 $13,280,000 $12,200,000 $1,080,000 Questions: 1. As a member of the board of directors, evaluate the current year's operating income and the CEO’s performance? 2. Going forward, what would you recommend for company’s operating policies and the CEO’s incentive contract? 2 28 Simon Company incurred a loss of 500,000 for the year 2018. The loss was brought about by the decrease in sales in 2018 and incurred higher variable and fixed costs. The assignment of Stan Fox as CEO helped the company to increase its sales in 2019. The CEO has made an effort to market and advertise the product to generate more sales and thus, maximize income. Revenue generation and production improved, enabling the CEO to maximize resources even if planned production was not 100% realized(30,000,000). The increase in costs is justified by the revenue generated, or by matching the total cumulative revenue, which is why revenue is still generated. The operating income of Simon Company has increased in 2019 and the company earned a profit out of it. The performance was good and the CEO is performing well since he was able to develop strategies on how to increase sales. The CEO's performance was indeed very remarkable since he was able to help the company cover its loss over the past two years. The company earned 1,080,000 operating income in 2019 with a 316% increase in income based on 2018. Due to this result, the CEO was able to improve operational profitability as well as efficiency. Profitability is the sense that the CEO was able to turn a loss into profit through its marketing strategy which is a good thing for the firm. 2018 Sales =17,000,000 x 2 $34,000,000 Variable manufacturing cost = 17,000,000 x 1 $17,000,000 Variable marketing & admin = 17,000,000 x 0.50 $8,500,000 Fixed costs $8,400,000 Marketing & admin costs $600,000 Operating loss $-500,000 34,000,000-17,000,000-8,500,000-8,400,000-600,000 = -500,000 operating loss 
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