Devin Sports Cars (DSC) has implemented a balanced scorecard to measure and support its just-in-time production system. In the learning and growth category, DSC measures the percentage of employees who are cross-trained to perform a wide variety of production tasks. Internal business process measures are inventory turns and on-time delivery. The customer perspective is measured using a customer satisfaction measure, and financial performance using operating income. DSC estimates that if it can increase the percentage of cross-trained employees by 5%, the resulting increase in labour productivity will reduce inventory-related costs by $100,000 per year and shorten delivery times by 10%. The 10% reduction in delivery times, in turn, is expected to increase customer satisfaction by 5%, and each 1% increase in customer satisfaction is expected to increase revenues by 2% due to higher prices.
REQUIRED
1. Assume that budgeted revenues in the coming year are $5,000,000. Ignoring the costs of training, what is the expected increase in operating income in the coming year if the number of cross-trained employees is increased by 5%?
2. What is the most DSC would be willing to pay to increase the percentage of cross-trained employees if it is only interested in maximizing operating income in the coming year?
3. What factors other than short-term profits should DSC consider when assessing the benefits from employee cross-training?