Cumulative review: The first management decision
Combine customer value, profit and cash, opportunity cost, and evidence in one management recommendation.
Solve a new decision that combines value creation, profit versus cash, strategic trade-offs, opportunity cost, and evidence quality.
Overview
Westhaven Office Services has two requests for next week's spare team capacity.
Allow two minutes for recall, twelve for the questions, and eleven to check answers.
Westhaven, its policies, and all figures are fictional teaching assumptions.
Recall from memory
Without looking back, distinguish revenue, profit, and cash. Then recall Willow Market from Lesson 020: why did Maya need to compare the pop-up with improving her original store, even though the pop-up was expected to add profit?
The business and its money
Westhaven is an established company that sets up office furniture for small businesses moving into new premises. Customers want usable workspaces ready on the agreed day, with little disruption. They can hire another installer or have their own employees do the work.
Westhaven offers standard packages and predictable schedules. It limits custom work that would make those schedules harder to keep. Property-manager referrals bring customers; installers, tools, vehicles, and a booking system support delivery.
The most recent month ended yesterday. All ten jobs were completed and accepted. Expenses below belong to that month. There were no opening customer receivables or supplier payables. Ignore taxes and assume no other transactions.
| Monthly item | Amount |
|---|---|
| Completed jobs | 10 at $1,000 each |
| Cash collected from these customers | $6,000 |
| Total expenses incurred | $7,000 |
| Expenses paid during the month | $5,500 |
| Beginning cash | $3,000 |
The unpaid supplier bill must be paid tomorrow. The remaining customer invoices will be collected after next week's work. No earlier collection, deposit, borrowing, or owner funding is available. After paying that bill, all remaining cash is available for either proposed job option; existing obligations require no further reservation in this simplified case.
The choice for next week
One team has 40 hours free after existing commitments. Each option below uses all 40 hours, including travel and preparation. The work cannot be moved or outsourced. Customers will accept the stated terms, but neither option has been approved.
| Option | Additional revenue | All additional costs |
|---|---|---|
| A: One custom installation | $4,000 | $2,400 |
| B: Three standard installations | 3 × $1,000 = $3,000 | 3 × $600 = $1,800 |
All additional costs must be paid before work begins. Customers pay the following week after completion. Assume full collection, no other differing costs, and unchanged existing expenses.
Westhaven spent $700 on custom-design work two months ago. That payment cannot be recovered or reused. The sales manager says five prospects expressed interest in custom installations, so accepting A will “surely create repeat business.” None has committed to a later order.
The branch manager may approve standard work within available capacity and cash. The general manager must approve custom work. Neither may spend cash reserved for the supplier bill.
Review questions
- State the customer benefit, one substitute, and Westhaven's strategic trade-off. Name one activity and one resource separately.
- Calculate monthly revenue, profit, ending cash, customer receivables, and supplier payables. Reconcile profit with the change in cash.
- Calculate A's and B's additional profit and cash needed before collection. Which can be funded after tomorrow's supplier payment? Show the remaining cash or shortfall.
- If A were funded, what benefit would using the team for A give up? Compare the options without counting that benefit twice. Explain how the $700 affects today's decision.
- Identify an unsupported assumption in the sales manager's argument and one way to check it. Name a measure that could improve while customer service worsens.
- Write a three-sentence recommendation naming the decision, approving manager, main risk, and implementation check. State what would need to change before reconsidering A.
Try the questions before reading the worked explanations.
Answer
Value and strategy
Customers want workspaces ready when promised, with minimal interruption. Using their own employees is a substitute; another installer is direct competition.
Westhaven serves small businesses through standard packages and dependable schedules, limiting customization that could disrupt that promise. Scheduling installers is an activity. A vehicle or booking system is a resource.
Profit and cash
Revenue is 10 × $1,000 = $10,000. Profit is $10,000 − $7,000 = $3,000. Ending cash is $3,000 + $6,000 − $5,500 = $3,500, an increase of $500.
Customers owe $10,000 − $6,000 = $4,000 in accounts receivable. Westhaven owes $7,000 − $5,500 = $1,500 in accounts payable.
Reconcile the difference: $3,000 profit − $4,000 increase in receivables + $1,500 increase in payables = $500 cash increase. Uncollected revenue increased profit before cash arrived; unpaid expenses reduced profit before cash left.
The SEC's introductory guide distinguishes the income statement's financial results from the cash flow statement's receipts and payments. Both are needed to understand the business. Source
Tomorrow's supplier payment leaves $3,500 − $1,500 = $2,000. The $4,000 owed by customers cannot fund next week's upfront costs under the stated timing.
Compare the work
A adds $4,000 − $2,400 = $1,600 to profit. B adds $3,000 − $1,800 = $1,200. These are improvements before unchanged expenses, not total company profit.
A requires $2,400 before collection and has a $400 shortfall against available cash. B requires $1,800 and leaves $200. Its later $3,000 collection brings these funds to $3,200, excluding collection of the earlier month's invoices.
If A were funded, choosing it would forgo B's $1,200 contribution. That is its opportunity cost. A's advantage would be $1,600 − $1,200 = $400, before any financing cost or additional consequences.
The $700 design payment is sunk: today's choice cannot recover it. Include future costs that differ between options. Do not let an unrecoverable past payment determine how to use next week's team.
Evidence and recommendation
Five expressions of interest do not establish repeat orders. Ask those prospects about specific work, timing, budgets, and willingness to commit. Check the claim independently before assigning future value to it.
Revenue could rise while on-time completion falls. Track the share of jobs ready by their original promised dates, alongside defects or rework. A larger sales number alone would leave customer disruption hidden.
A reasonable recommendation is: “Approve B after confirming staffing and the $1,500 supplier payment. The branch manager can authorize the standard jobs; operations will check original completion promises, and finance will monitor the narrow $200 cash cushion. Reconsider A only after securing funding on known terms and obtaining general-manager approval of its operational and strategic implications.”
Recall answer: Revenue is earned sales, profit deducts the period's expenses, and cash records money available and moving in or out. Maya's time had another productive use. Comparing the pop-up with that alternative prevented her from treating any positive profit as the best choice.
Applying this review
Correct one gap in your notes and keep your recommendation. Tomorrow begins the business-math week.
Sources
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