Dollars & Tons

Introduction
Welcome to Dollars & Tons, a game designed to simulate how Nucor earns its
profits and the competitive environment under which all Nucor divisions
operate. We hope that this game will help introduce a variety of important
financial concepts and deepen your understanding of Nucors business.
Lets begin.
Nucor has decided to open a Steel Mill in the rural town of Iverson, Kansas.
Your team has been given control of a $100 million budget to open and
operate this new Nucor Steel Division. 100 million is not much money, in real
life you may need more, so youll have to use it wisely. If you run out of
money, the corporate office will not give you more, it will be up to you to
raise it. So, before you start spending that money, well need to have some
unique identifiers for your teams since we cannot have 6 Nucor Steel Kansas.
Well also need to establish some roles for your division just like in real life.
Although your facility is obviously part of the Nucor family, Nucor believes
strongly in operating each division as if it were an independent business.
Your division will be expected to begin turning a profit within a few months
and to meet its own cash needs. In other words, dont expect the corporate
office to provide any additional funding after this initial investment.
Your new division will be subjected to many of the same pressures that other
Nucor Steel divisions face. For example, you must decide:
How many people to hire, and what kind of training theyll need.
How much equipment to buy, and when to buy it.
How much advertising to do.
Which orders to bid on, and the pricing and terms of your bid.
If and when to borrow money, and how much to borrow.
How to optimize your assets to improve profitability
At the end of the year, Nucor management will evaluate the competitive
landscape and decide which division from this group will continue operating.
The remaining divisions will be closed and sold for scrap to other Nucor Steel
Mills. Management will look at several factors in deciding which division to
keep. These include:

Which division earned the greatest return on assets in the first year?
Which division was most profitable?
Which division has best managed its working capital?
Which division has the strongest balance sheet? If two divisions earned
similar profit levels and had similar cash flow, but one of the divisions
has a large loan outstanding while the other is debt-free, management
will choose the debt-free division.

At the end of the game, this group must prepare a brief report to senior
management that recommends which division should remain open.

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Your Game Board

Your game board is designed to make it easy for you to track the money your
division receives and spends. The board is divided into a number of important
areas:

Cash: The most important area of all. If you run out of cash, youre
out of business unless you can find a way to raise some more. As you
spend money on different things, youll transfer chips from Cash to the
appropriate area.
Shareholder Equity: This area tracks the ownerships investment in
your division, beginning with the initial $100 million from the corporate
office. (The corporate office, in effect, is your divisions sole owner.)
Production Area: This area will show how much money youve
invested in your land, plant and equipment. This is where your
production workers will make steel. (They will be paid separately.)
Raw Materials Inventory: You will need to purchase raw materials
scrap and alloys so that youll be able to fill any orders you receive.
As you purchase inventory, youll transfer chips in steps from Cash to
Raw Materials Inventory so you can know how much youve invested in
inventory and how much you have available in materials for future
production.
Payables/Loans: Youll be able to buy most of what you need on
credit, if you choose. If you buy on terms of 30, 60, 90 or 120 days,
youll place red chips representing the payment amount into Payables,
then move the chips each month as the time to pay the bill
approaches. When the payment is due, youll take the chips off and
lower your cash total.
Receivables: Likewise, you might want to give your customers the
option of buying on credit. If so, when you make a sale, youll place
green chips in the Receivables area until the payment is due, when it
will go into the Cash pile.
Income Statement Circle: This is where you will track the expenses
you had to produce and sell your steel. Expenses are divided into 2
categories: Conversion Costs and Sales, General and Administrative
(SG&A). We will discuss these expenses in more detail in Month 4.

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Managing Your Gameboard:
Managing your game board is the most important thing that you can do to
help you stay organized and on track. It is recommended that your General
Manager follow this simple, tried and true concept for managing your chips:
1. Controls include defined responsibilities for tasks, check lists, audits,
and anything that will help ensure that things get done properly. A
control that every team should adhere to is having only one
person move the chips (Controller or delegated teammate)
and one teammate check behind to make sure the moves have
been made correctly. Also, every team should have a
designated banker who holds all the spare chips. He/she will
allocate chips to the designated chip mover as needed and will
gather all spare chips and hold them.
2. Procedures include the steps youll take to run the game. Well
provide you with these. GM, it is your responsibility to hold your
team accountable for this. You can be fined for not living up
to this. Well talk about this later.
3. Documentation will largely be your financial statements that your
Controller is responsible for.
As with any start-up business, you will need to spend some money and time
getting the business off the ground before you make your first sale. Namely,
you must:

Acquire a site and facility (You have found idled assets for pennies on
the dollar)
Purchase equipment
Build a start-up inventory of scrap and alloys
Hire and train people

Youll do these one at a time in Months 1-4. In Month 5, youll enter the
marketplace and begin making sales.

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Month 0: (Getting Your Business Off the

Ground)
Key Concept: Balance Sheet:
A Balance Sheet is a record of the things your company owns, and how it got
the money to pay for them.
The top half (or, in some cases, the left side) of the Balance Sheet records
what you own, known as Assets. These are divided into Current Assets and
Fixed Assets.
The bottom half (or right side) of the Balance Sheet records how you paid for
your assets. Every company has two sources of funds:
1) The owners can pay for it with their own money or with profits from
the company, or
2) You can borrow money from somebody else.
You can borrow money from a bank. You can also borrow money from your
suppliers for a short period of time, by agreeing to pay for your supplies a
month or two (or three) after you receive them. These are known as
Accounts Payable. Together, Loans and Accounts Payable are known as
Liabilities.
Assets are what you own. Liabilities are what you owe. Shareholder Equity, or
just Equity, is the difference between the two. If a company has $100 million
in assets and $30 million in liabilities, that must mean that the owners paid
for the rest of the assets with their own money or profits from the company.
So this company has $70 million in Shareholder Equity.
One final, important point: As the name suggests, a Balance Sheet needs to
balance. That is, every change on the Top Side (Assets) should be matched
by an equal change in the Bottom Side (Liabilities and Equity). If you think
about it, this makes sense: The Bottom Side is merely recording the sources
of funding for the Assets you acquire. So, in summary, the balance sheet
can be simplified into a simple equation:
Assets = Liabilities + Equity

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The Game Begins

Month 1: Acquire facility

You have located a site and building that would be perfect for a steel mill. The
building is available immediately, so go ahead and purchase the site and
building for $5 million in cash. Of course, in real life, you are not going to
wander across a building that perfectly matches your needs for a steel mill.
However, this is a very unusual case that you are more than happy to take
advantage of.

Key Concept Current vs. Fixed Assets

Current Assets are cash and other assets that can be converted into cash
quickly and easily. Inventory, the raw materials and finished product that
youve stored at your division, is a Current Asset, because your workers can
quickly manufacture raw materials into finished goods, which you can sell for
cash. So are Accounts Receivable, which we will discuss next month. Fixed
Assets, on the other hand, cannot be converted into cash quickly and easily.
These include your factory, the equipment in it and the land on which your
factory sits.

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Month 2: Buy equipment

Now that youve purchased your plant, the next step is to equip it. You have
decided to purchase the idled assets of a nearby mill including an EAF,
caster, roll mill, and finishing end. Because these are idled assets, you will
only pay pennies on the dollar for these assets. The mill currently has
capacity to produce 40,000 tons per month and will cost you $35 million.
Once again, this will be a straight cash transaction.

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Month 3: Buy raw materials

Key Concept Receivables and Payables
When you buy materials from your suppliers, often your supplier will give you
a choice: You can pay cash, or you can take delivery of the materials without
paying right away, promising to pay your supplier at some point in the future
(usually 30 or 60 days). In effect, youre paying for your materials with an
IOU, or a short-term loan. That IOU is recorded on your Balance Sheet under
Accounts Payable. In other words, you acquired an asset (raw materials
inventory) and paid for it by borrowing money from your supplier.
Sometimes, you might want to give your customers the same payment
choice. When a customer pays for your products with an IOU, you call that
IOU a Receivable and record that transaction under Accounts Receivable. Its
an asset because you know (unless your customer decides not to pay) that
this IOU will become cash in a few days or months.

Raw Materials
Youll need to purchase raw materials scrap and alloys so that youll have
material available to convert into finished steel when you make a sale. It
costs $4 million to buy enough scrap and alloys to make 10,000 tons of
steel.
Your supplier provides these materials immediately upon order. Your supplier
also offers the following terms: You pay list price 30 days after placing the
order (also known as Net 30 days).

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Key Concept Working Capital
Working Capital is the difference between your Current Assets and Current
Liabilities. This measurement helps gauge the ability of a company to meet
its short-term obligations. Current Assets include cash and assets that you
can quickly convert to cash, including Accounts Receivable (IOUs from your
customers) and Inventory. Current Liabilities include accounts payable (IOUs
from you to your suppliers), plus loan repayments that are due within a short
period of time. Most companies consider any payments that are due within a
year as Current Liabilities.
You need to manage your working capital so that you dont tie all your money
up. Youll soon learn that having cash available is very important in running
your business. The diagram on the next page illustrates how working capital
can affect your ability to fund your business.

Month 4: Hire staff

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The equipment and raw materials inventory have arrived. Youre ready to hire
employees and prepare to begin making steel. Remember, since this is a
Nucor division, once you hire workers, you cannot lay them of.
Each work team earns $1 million per month in base wages and
benefits, plus a bonus of $1 million for every 10,000 tons of steel it
produces (Iverson, Kansas is a very expensive labor market). This includes
the cost of medical, dental and disability benefits, employment taxes, 401(k)
contributions, and workers compensation insurance.

Introduction to Income Statement

Key Concept Income Statement
Think of the Balance Sheet as a snapshot of what you own and owe, on a
given day. The Income Statement measures changes in the financial condition
of your division over a period of time. Every time your division makes a sale,
it brings in Revenues dollars you receive in return for providing goods and
services.
In the process of making the products you just sold, your division used up a
variety of resources. You had to pay your workers, buy raw materials, pay the
power bill, etc. These are known as Expenses.
Did you receive more for your products than you paid to produce them? If the
answer is yes, then your division turned a Profit. If not, your division posted a
Loss. Profits, also known as Net Income or Division Contribution, are simply
your divisions revenues minus its expenses.
Lets analyze your divisions expenses. But first, lets examine another key
concept:

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Key Concept Variable and Fixed Costs
Companies use several different terms to describe their costs. The important
distinction is the difference between costs that vary as production increases
and costs that do not. Fixed Costs do not change with production volume.
They are the same whether you produce 10,000 tons of steel this month or
zero. Variable Costs do change with production volume. Examples include the
cost of raw materials and the production bonuses paid to workers. Fixed Costs
are sometimes called Indirect Costs or Overhead. Variable Costs are
sometimes called Direct Costs or Cost of Goods Sold. Each of these terms
have their own particular meaning, but for the purposes of this game,
consider these groups to be synonyms:

Fixed Costs = Overhead

Variable Costs = Cost of Goods Sold

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Your everyday expenses are divided into 3 categories:
1. Conversion Costs Variable / Cost of Goods Sold: These are the
costs directly connected with manufacturing steel. You pay them only
when you make something. They include the cost of scrap, alloys,
electrodes, energy and production bonuses earned by your production
workers.
o

Your divisions monthly revenues minus Cost of Goods Sold equal

your divisions Gross Profit or Marginal Contribution for the
month.

2. Conversion Costs Fixed: These include regular monthly expenses

connected to manufacturing. These are separated from Cost of Goods
Sold, because you have these expenses every month, whether you
produce anything or not. These include Depreciation, Machine
Overhead, and base labor wages for your production workers.
As a Nucor Steel Division, you expect that your mill will run full, or
nearly full this year. If the mill is not running, you will provide work to
your employees so that they can work on improvement projects,
housekeeping and other projects. Therefore, your base wages are
considered fixed costs.
o

Depreciation: After you purchase a piece of equipment, it

gradually becomes less and less valuable as time goes on. The
accounting name for this is depreciation. Companies recognize
this decline in value by taking a prorated depreciation charge on
their books every period.

You will need to depreciate your mills equipment by $5 million per month,
starting this month.
o

Machine Overhead: Equipment must be maintained and

repaired.
You pay $1 million to maintain and repair your equipment each
month, starting next month when production begins, for
equipment overhead.

3. Selling, General & Administrative: These are the expenses that

support the manufacturing operation.
These are mostly fixed expenses you pay them each month,
regardless of how much you produce.
o

Sales and Marketing: This expense may sometimes vary with

the size of your operation. The more capacity you have, the
more sales people and marketers you need to drum up business.

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Your Division will require two sales and marketing people to
support your divisions sales and will be able to handle additional
capacity should you decide to expand your business. This may
not be completely accurate in real life.
o

Advertising: This is a discretionary item; you set the level

every month, which makes it a variable cost. Every million
dollars you pay in advertising gives you a competitive
advantage over your competitors.

Administration: This expense covers office people, your

receptionist, accounting and human resources staff. It doesnt
vary. Pay $3 million a month. Should your business expand,
you can just work these people harder instead of hiring extra
staff.

Training: Since you have hired production workers, you will

need to train them. It will cost your division $3 million to train
your entire workforce. You will allocate this expense to
Administration Overhead.

Administrative Overhead: This represents the computers,

paper and office supplies needed to run the office. As you
expand, your administrative overhead tends to rise. Pay $1
million per month, plus an additional $1 million for every bid
submitted each month. Well discuss the bidding process next
month.

Risk: You will soon find that your mill is exposed to several
different types of risk. In order to reduce the risk in several key
areas such as safety, environmental, and quality, you will have
the option of spending money on programs and resources to
address these risk factors. Well discuss this later.

All of the above expenses fall under the category of Operating Expenses, the
expenses you must pay in the course of running your factory.

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Profits:
Youll notice on your income statement, that we refer to both Division
Contribution and Net Profit. These are two different measures of
profitability. These are not completely accurate in this game compared
to how Nucor really works.
Division Contribution is the profit without taxes and interest. Of
course, in this game, we do not pay taxes. However, you as a division
are responsible for loans, which mean that you have interest. As
mentioned, this does not happen in the real world of Nucor. The
Corporate office is responsible for financing the activities of the
company, and hence responsible for reporting the interest payments.
So, remember

Division Contribution is Profits before Interest and

Taxes.
Key Concept Retained Earnings
A companys Equity comes from two sources: Investment by the owners, and
the companys profits. The owners investment is called the companys
Capital Stock, or for the purposes of this game, we call it the Initial
Investment. Company profits (also known as earnings) are sometimes split:
Some funds are paid directly to shareholders; these are called Dividends.
Nucor has a longstanding history of paying quarterly dividends. This is one
way of providing a return to those who entrust us with their hard earned
money. The company keeps the rest to help fund its growth. This portion of
company profits that is not paid to shareholders is called Retained Earnings.
Since Nucor divisions do not pay dividends, you will not pay any dividends in
this game. Your retained earnings will be a running tally of your monthly
division contributions.

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Learning Point:
Because fixed costs create a sizeable hurdle to profitability, it is always in the
best interest to manage your divisions asset base, overheads, and SG&A.
If volume can have such a positive impact on cost per unit and overall
profitability, why dont Nucor divisions expand more quickly?
Have you experienced significant swings in volume at this division?
What items have we already discussed which could adversely affect your
division during times where the plant is not running full?
Companies with sizable Fixed Costs quickly discover that modest changes in
revenues can produce large swings in profit. Consider your own division, with
40,000 tons of capacity. Look how the change in volume affects profitability.
SHOW: Show PowerPoint slide of Breakeven Chart. There are five
successive charts that build each months expense figures and profitability.

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Month 5: First Sales

Now that your staff, raw materials inventory and equipment are all in place,
youre ready to begin production. Nucor Steel produces mostly on a made-toorder basis. In other words, you need to make a sale before you start making
steel. However, you have an excellent forecasting system which allows you
to anticipate the market. As the game progresses, youll have the option to
expand your business.
Within this game, you will not be allowed to build a backlog. You must have
the capacity to make whatever bids you accept in the current month. All
orders you receive must ship in the month you receive the order.
Fortunately, the market for your first month is very stable and predictable.
Demand is exactly what you forecast. And since all of your competitors are
starting up, industry capacity is low enough so that everyone will win exactly
one bid.
For this month alone, some market conditions are unique. For one thing, since
youre new to the market, youll bid the going market rate of $13 million per
10,000 tons of steel. You will submit only one bid this month. Your payment
terms will be 30 days after delivery. However, in the future, you may bid as
high as $16 million per 10,000 tons. This market has a price ceiling, which
you would not see in the real world.
You will always put the full order price on the bid sheet. Full order prices
should be in whole numbers and do not have to be divisible by the number of
tons. So, you could bid $52 million, $53, $47, $63, etc
In future months, market conditions will change in several ways, which we
will outline next month.
After your team wins an order
Youre finally ready to start producing, which means that youre also ready to
start collecting revenue. Remember, youll determine your delivery terms in
the marketplace. Unfortunately, all customers dont pay on time for a variety
of reasons. For each order you win, spin the Wheel of Risk. The number you
spin determines if your customer will pay on time.
Payables Wheel Spin (spin for every order received)
If #
is

1-15 On-time, no problems

16- Customer is low on cash. Will delay payment an additional 30
20
days

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Now that youre involved in a number of activities, including bidding,
producing and delivering, we have put together a monthly checklist that
should help take you through all the steps you need.

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General Managers, you are responsible for your team utilizing this
checklist each month. This checklist provides all the procedures
necessary to successfully manage your game board and financial
statement. Accuracy in this game is very important, just like in real
life. In real life, if you income statement and balance sheet are
incorrect, you go to jail. So, in this game, instead of incarcerating
any of you, we will fine your team $5 million if you move ahead of
the checklist and dont balance.

Month 5 Checklist
1.
2.
3.
4.
5.
6.

___
___
___
___
___
___
OH

Update receivables(these steps are not necessary this month)

Update liabilities
Allocate all fixed costs (labor, machine OH and all fixed SG&A)
Take depreciation
Review Supply and Demand
Prepare Bids/Move matching # of green chips from cash to admin
to pay for the bids

Go to Market: Do Not Move Forward until instructed

7. ___
8. ___
9. ___
10.___

Submit Bids
Move Purchase Price Chips into Accounts Receivable
Take Raw Materials to Production Area.
Pay Labor Bonus
Reminder: Pay bonus of $1 million per 10,000 tons produced
11.___ Move Product to COGS
12.___ Purchase Raw Materials
13.___ Complete Income Statement
14.___ Update Retained Earnings
15.___ Complete Balance Sheet
16.___ Once balance sheet balances, clear income statement circle of
green and purple chips

Taxes
Hopefully, your division will earn a profit by the end of the year. Actually,
youre not the only one who hopes your division earns a profit. Uncle Sam is
rooting for you, too, because the government gets a share of your profits in
the form of taxes.
Nucor pays taxes to a variety of local, state, and federal governments at
various times during the year. However, in Dollars and Tons, you will not be
paying taxes. You have worked out a favorable agreement with the
government to forego taxes in your first year of operation. Dont expect this
to be the case in the real world.

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Month 6: Free Market begins

Loans
By this point, no doubt youve noticed how quickly your cash can disappear.
To keep your division running, you might need to take out a bank loan.
Your bank will determine whether to lend you money and how much to lend
you based on its confidence in your ability to pay the loan back. Normally,
your bank would look at a number of measurements to determine your ability
to repay the loan. In this game, we will simplify the process and rely on one
measurement: Your debt-to-equity ratio. As long as your debt-to-equity ratio
is less than 1 (in other words, you have more equity than debt), you are
eligible for a loan.
The maximum loan you can take out is one-half of your net worth, which
equals your Shareholder Equity. Banks lend money in $10 million increments
($10 million, $20 million, $30 million, etc.)

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Interest
Lenders charge a premium for the use of their money, called Interest. In
many types of loans, including your home mortgage, interest is paid
throughout the payback period. Every month (or whatever period your lender
agrees to), you pay a portion of the loan amount, called the Principal, and a
portion of the interest you owe. In this game, we simplify the process a little.
The interest rate charge is 20% of the loan, to be paid when the loan is
approved. The term for all loans is 4 months. Pay off the loan as evenly as
possible over the four months. If the loan doesnt break into 4 equal
payments, pay a little more in the first and third months. So, for example, if
you take out a $10 million loan in Month 7, this would be your payback
schedule:
Month
7
8
9
10
11

Payment
$2 million (the interest payment)
$3 million
$2 million
$3 million
$2 million (loan is paid off)

To help you determine how much of a loan you are eligible for, you can use
the Loan Eligibility Form seen below. Refer to your current balance sheet to
fill in the eligibility form. You will have one of these forms at the end of each
monthly checklist:

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Market Projections
Your division has carefully studied demand in Kansas and surrounding states,
keeping in mind formidable Nucor Steel competitors in the region. The
department has put together the following demand forecast, based on its
research. Keep in mind that demand can fluctuate as developers accelerate,
slow or scrap building projects. Seasons and unpredictable weather also can
impact demand. Still, the schedule should be very helpful in your planning
and in future decisions.

Demand Forecast (6 team game)

Month
Projected Demand
(10,000 tons)
5
24
6
24
7
30
8
33
9
33
10
36
11
36
12
37
Total
253

Demand Forecast (4 team game)

Month
Projected Demand
(10,000 tons)
5
16
6
16
7
20
8
22
9
22
10
24
11
28
12
26
Total
174

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Raw Materials Purchases
You have flexibility on the terms in which you purchase your raw materials.
Of course, this will have an impact on how quickly you have to pay your
supplier. You may purchase materials on the following terms:

Pay cash and receive a 10% discount on your entire purchase, rounded
off to the nearest million dollars.
Pay list price, 30 days after purchase.
Pay 10% premium, 60 days after purchase, rounded off to the nearest
million dollars.

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Changes in the bidding

Starting this month, many of the market restrictions have been removed. You
can set any price up to a market ceiling of $16 million per 10,000 tons of
steel. You can also choose among the following payment terms:

Payment on Delivery: Your customer receives a 10% discount from

your bid price, rounded off to the nearest million.
Net 30 days: Your customer pays the bid price.
Net 60 days: Your customer pays a 10% premium on the bid price,
rounded off to the nearest million.

Safety, Quality, and Environmental Risk Exposure

Now that youve had a month of production under your belt, its time to
consider some other important aspects of running your business.
As with any division, you have risk exposure on several different fronts
including safety, environmental, and customer satisfaction due to quality.
While each of these risk factors is very important, you must determine
whether they require additional spending for structured programs to reduce
risk.
Your team has BESTmarked with other divisions to gather information and
statistics on what may be the best possible course of action. You have
determined that an appropriate program for each of these risk factors will
cost $1 million per month. Each month you will make new decisions about
how much to spend. You may choose any, all, or none of the risk reduction
programs in any given month.
To determine the level of risk your division is currently exposed to versus the
risk associated with an appropriate program, refer to the chart below. Actual
consequence to potential risk will be determined by the wheel of risk.

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Month 6 Checklist
1.
2.
3.
4.
5.
6.

___ Update receivables

___ Update liabilities
___ Allocate all fixed costs (labor, machine OH and all fixed SG&A)
___ Take depreciation
___ Review Supply and Demand
___ Prepare Bids/Move matching # of green chips from cash to admin
OH to pay for the bids
7. Determine investments in Safety, Quality and Environmental
8. Decide if you need a loan
Go to Market: Do Not Move Forward until instructed
9. ___
10.___
11.___
12.___

Submit Bids
Move Purchase Price Chips into Accounts Receivable
Take Raw Materials to Production Area.
Pay Labor Bonus
Reminder: Pay bonus of $1 million per 10,000 tons produced
13.___ Move Product to COGS
14.___ Purchase Raw Materials
15.___ Complete Income Statement
16.___ Update Retained Earnings
17.___ Complete Balance Sheet
18.___ Once balance sheet balances, clear income statement circle of
green and purple chips

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Tools:

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Month 7: Adjusted Price / Decision Making

Tools / Capital Projects
Adjusted Price: Marketing and Advertising
Although price is extremely important, customers in this market look at more
than just price when they award bids. This idea is summarized in a term
called Adjusted Price.
From this point on, when you submit bids, you will make an adjustment to
your bid price to determine who wins the bid. This adjustment does NOT
affect the price you will receive for your steel, but it will affect who wins the
bid. Starting this month, customers award bids based on lowest Adjusted
Price, then, as before, break ties on payment terms, then market reputation
measured by reliability of on-time delivery.
The adjustment is for Marketing and Advertising.
Marketing and advertising is designed to position your division as a preferred
supplier in the marketplace. It allows you to communicate the added value of
your products and services. Price is not your only weapon in the
marketplace. So, for every million dollars you spend on marketing and
advertising this month, lower by $1 million the Adjusted Price on every bid
this month. You can change your advertising spending every month which,
in turn, changes the impact on your Adjusted Price each month.

Capital Projects:
Now that you have your business up and running, you may consider
expanding capacity to meet increased demand in the marketplace. Your
forecasting system has determined that there will be more tons of demand in
the market in future months. Your division has done extensive research, has
BESTmarked with other divisions and is currently considering investment in
the following projects:

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Project 1:

Roll Mill Capacity Expansion Project

Cost:

$7 million / 10,000 tons

Impact:

Improve your mills capacity from 40,000 tons to 50, 60, 70, or
80,000 tons.

Details:
significant

Currently, your divisions melt shop and roll mill have a

capacity mismatch. Currently, your melt shop has the capacity
to produce 80,000 tons of liquid steel while the roll mill only has
capacity for 40,000 tons. You may undertake this project in $7
million increments which will subsequently increase rolling
capacity by 10,000 tons. The incremental $7 million
investment(s) will add to the value of your assets and will,
therefore, be depreciated by $1 million per month. You must
pay cash should you choose to expand your capacity.

Project 2:

Iron Unit Cost Reduction Project

Cost:

$12 million

Impact:

Reduces cost of iron units (scrap) from 4 $million per 10,000

tons to $3 million per 10,000 tons.

Details:

This project involves a joint investment into a new pig iron

producing facility which utilizes a leapfrog technology called the
Pig-in-an-iron-blanket process. This process produces top quality
pig iron at 75% of the cost of scrap. Your $12 million will be part
of the capital that goes into the project and will be depreciated
by $2 million per month. You will need to pay cash if you choose
to participate in this project.

Project 3:

Value Added Product Project:

Cost:

$12 million

Impact:

Your division will install equipment that will add additional value
to your steel products allowing you to receive a premium for the
product in the marketplace. Your customer(s) will be willing to
add an additional $1 million to the purchase price per 10,000
tons of steel that you provide. Your actual bid price will not
change. The premium is given on top of your actual bid price.

Details:

The market for your products has been demanding a level of

quality that others are unable to provide. Because you have
revolutionized this new process, you are able to charge a
premium for your products. You must pay cash for this
equipment and will depreciate it at $2 million per month.

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NOTE: If you invest in any of the above projects, you will not get any
of the benefits of the project until next month. You will also NOT
begin depreciating these assets until next month either.

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Month 7 Checklist
1.
2.
3.
4.
5.
6.

___ Update receivables

___ Update liabilities
___ Allocate all fixed costs (labor, machine OH and all fixed SG&A)
___ Take depreciation
___ Review Supply and Demand
___ Prepare Bids/Move matching # of green chips from cash to admin
OH to pay for the bids
7. Determine investments in Safety, Quality and Environmental
8. Decide if you need a loan
9. Decide if you want to invest in a project
a. ____ Project 1
b. ____ Project 2
c. ____ Project 3
i. ____ Allocate purple chips (Facilitator)
ii. ____ Allocate yellow chips for new depreciation schedule
Go to Market: Do Not Move Forward until instructed
10.___
11.___
12.___
13.___

Submit Bids
Move Purchase Price Chips into Accounts Receivable
Take Raw Materials to Production Area.
Pay Labor Bonus
Reminder: Pay bonus of $1 million per 10,000 tons produced
14.___ Move Product to COGS
15.___ Purchase Raw Materials
16.___ Complete Income Statement
17.___ Update Retained Earnings
18.___ Complete Balance Sheet
19.___ Once balance sheet balances, clear income statement circle of
green and purple chips
20.___ Take a picture of your game board
21.___ Fill out your Chip Layout Sheet
22.___ Take chips on board and place in small zip lock bag that has your
team number on it
23.Place rest of chips into large zip lock bag
24.Fold chip layout sheet and place into large bag. Seal bag

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Key Concept Cash Flow vs. Profit
Were all familiar with the term profit: Profit is simply a companys revenues
minus its expenses. For a company to remain healthy over the long-term, it
must earn a profit.
As the name suggests, Cash Flow measures the amount of cash that the
company has received over a period of time, minus the amount of cash the
company paid out over the same period. Think of a store with 2 cash
registers: one to receive payments from its customers, the other from which
it pays its suppliers.
Cash flow is related to profit, but with some important differences. Highly
profitable companies tend to have strongly positive cash flow but not
always. There are many activities that affect cash flow or profit, but not the
other. For example:

When a company pays for supplies, that reduces its cash flow, but has
no impact on its profits. On the companys books, the transaction is
accounted for as converting one type of asset (cash) into another type
of asset (inventory).

The company converts those supplies into a product. When it sells that
product, only then are its profits affected. The sale price becomes
revenue, and the money it spent on the supplies is added to expenses
under Cost Of Goods Sold.

When a customer buys a product on credit (for example, she agrees to

pay within 60 days of delivery), the company immediately counts the
sale as revenue. But it doesnt benefit cash flow until 60 days down
the road, when the customer actually pays the bill.

Companies recognize that aging equipment and buildings arent worth

as much as new by recording a Depreciation charge. If, for example,
the company paid $100,000 for a piece of equipment, and it expects
the equipment to last 10 years, it would take a depreciation charge of
$10,000 each year. (This is known as straight-line depreciation. There
are other ways to depreciate equipment, but this game will use only
straight-line depreciation.) At the end of 10 years, the companys
balance sheet would report that the equipment is worthless.
Depreciation reduces profits but has no impact on cash flow.

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Month 8: Business as Usual

1.
2.
3.
4.
5.
6.

___ Update receivables

___ Update liabilities
___ Allocate all fixed costs (labor, machine OH and all fixed SG&A)
___ Take depreciation
___ Review Supply and Demand
___ Prepare Bids/Move matching # of green chips from cash to admin
OH to pay for the bids
7. Determine investments in Safety, Quality and Environmental
8. Decide if you need a loan
9. Decide if you want to invest in a project
a. ____ Project 1
b. ____ Project 2
c. ____ Project 3
i. ____ Allocate purple chips (Facilitator)
ii. ____ Allocate yellow chips for new depreciation schedule
Go to Market: Do Not Move Forward until instructed
10.___
11.___
12.___
13.___

Submit Bids
Move Purchase Price Chips into Accounts Receivable
Take Raw Materials to Production Area.
Pay Labor Bonus
Reminder: Pay bonus of $1 million per 10,000 tons produced
14.___ Move Product to COGS
15.___ Purchase Raw Materials
16.___ Complete Income Statement
17.___ Update Retained Earnings
18.___ Complete Balance Sheet
19.___ Once balance sheet balances, clear income statement circle of
green and purple chips

Tools:

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Month 9: Run Your Division

1.
2.
3.
4.
5.
6.

___ Update receivables

___ Update liabilities
___ Allocate all fixed costs (labor, machine OH and all fixed SG&A)
___ Take depreciation
___ Review Supply and Demand
___ Prepare Bids/Move matching # of green chips from cash to admin
OH to pay for the bids
7. Determine investments in Safety, Quality and Environmental
8. Decide if you need a loan
9. Decide if you want to invest in a project
d. ____ Project 1
e. ____ Project 2
f. ____ Project 3
i. ____ Allocate purple chips (Facilitator)
ii. ____ Allocate yellow chips for new depreciation schedule
Go to Market: Do Not Move Forward until instructed
10.___
11.___
12.___
13.___

Submit Bids
Move Purchase Price Chips into Accounts Receivable
Take Raw Materials to Production Area.
Pay Labor Bonus
Reminder: Pay bonus of $1 million per 10,000 tons produced
14.___ Move Product to COGS
15.___ Purchase Raw Materials
16.___ Complete Income Statement
17.___ Update Retained Earnings
18.___ Complete Balance Sheet
19.___ Once balance sheet balances, clear income statement circle of
green and purple chips

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Tools:

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Month 10: Run Your Division

1.
2.
3.
4.
5.
6.

___ Update receivables Dan added more

___ Update liabilities Dan added more
___ Allocate all fixed costs (labor, machine OH and all fixed SG&A)
___ Take depreciation
___ Review Supply and Demand
___ Prepare Bids/Move matching # of green chips from cash to admin
OH to pay for the bids
7. Determine List your investments in Safety, Quality and
Environmental________________
8. Decide if you need a loan. A Facilitator must be involved in any loans
made. Show the total loan amount and the interest paid
Loan________________ Interest paid______________
9. Show Marketing & advertising
investments______________________________________
10.Decide if you want to invest in a project must use a Facilitator to
invest. Show amount for each project
g. _________
Project 1
h. _________
Project 2
i. _________
Project 3
i. ____ Allocate purple chips (Facilitator)
ii. ____ Allocate yellow chips for new depreciation schedule
Go to Market: Do Not Move Forward until instructed
11.___ Submit Bids For each successful bid, show adjusted price, terms,
and tonnage. Also show all fines
incurred_______________________________________________________________
________________________________________________________________________
___________
12.___ Move Purchase Price Chips into Accounts Receivable (Pay attention
to terms of sale e.g. 60 days)
13.___ Take Raw Materials to Production Area.
14.___ Pay Labor Bonus
Reminder: Pay bonus of $1 million per 10,000 tons produced
15.___ Move Product to COGS
16.___ Purchase Raw MaterialsList tons, terms, and adjusted cost
17.___ Complete Income Statement
18.___ Update Retained Earnings
19.___ Complete Balance Sheet
20.___ Once balance sheet balances, clear income statement circle of
green and purple chips
21.21Etc

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End of Game Review

Key Concept Performance Measures and Ratios
One company earns $20 million a year; another earns $30 million a year.
Which one is doing better? The answer is: It depends. Lets say the first
company had $150 million in assets and $100 million in equity, while the
second had $450 million in assets and $200 million in equity. The first
company is getting a much higher percentage return on its assets and equity
than the second company. What does this mean? Lets take a look.
Financial measurements are most insightful when they are compared with
each other, just as operational measurement are most useful when they are
expressed as a comparison, such as Cost per Ton. Often, financial
comparisons are expressed as ratios: one measurement divided by another.
Some of the most commonly used ratios include:

Return on Assets: Profits divided by a companys assets. This tells an

organization how well it is utilizing the equipment and resources that it
has employed to make products or provide services.

Return on Equity: Profits divided by shareholder equity. This tells an

organization how well it is generating profits based on the investment
that its owners have placed into the business.

Debt-to-Equity Ratio: A companys debt divided by its equity. This

indicates the companys relative level of borrowing. A company with a
high debt-to-equity ratio has the potential of earning high returns for
its shareholders, but it also operates at a higher risk of having debt
payments eat up its profits.

Cost of Capital: A percentage measurement that indicates the

percentage return people expect from their investment in your
company. For a company to be successful, the projects it chooses to
invest in must have a higher return than its cost of capital.

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Profit margin (ROS%): Earnings divided by sales. Companies in highly

competitive industries, where price is a big factor, tend to have lower
profit margins.

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Final Analysis
Once you have balanced your balance sheet for the final month, please
complete the final calculations. Rip this page out of your workbook and turn
it in the instructor.
Total Sales: Sum up the top line of each month of your income statement
$_________________
Net Income: This will be your final retained earnings figure from the last
month of your balance sheet
$_________________
Return on Sales: Divide your net income by your total sales
(Net Income / Total Sales)
$_________________
Total Assets: This is the final assets number on the last month of your
balance sheet
$_________________
Return on Assets: Divide your net income by your total assets
(Net Income / Total Assets)
$_________________
Debt to Equity Ratio: Divide your total liabilities on the last month of your
balance sheet by the total equity on the last month of your balance sheet
(Total Liabilities / Total Equity)
$_________________

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