Marshall School of Business
University of Southern California
VisuSon Inc.
Teaching Note
Purpose of Case
The VisuSon, 1nc. (VSI) case was written to illustrate a pure planning (forecasting) application
of budgetingthe pro forma use of the financial statement format. The case requires students to
prepare plans/budgets that are not linked to any form of incentives. They are asked to consider
Assignment Notes
I have used this case as a group project, assigned to groups of three or four students. I asked the
students to prepare a short in-class presentation of their findings and to submit a short report of
what they did. The case could also be used in a more traditional way, with preparation by
Suggested Assignment Questions
1. Under the current budget, what is VSIs breakeven revenue figure for 2009 and how does
this compare with projected 2008 revenue? Explain.
2. What magnitude of market decline relative to estimated 2008 sales would force VSI
management to take actions likely to impact the companys future growth prospects in a
significantly negative way? (Note: Assume that borrowing more money would be quite
difficult and/or prohibitively expensive.)
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3. What magnitude of market decline would threaten the companys survival?
Assignment suggestions/hints for students:
Before analyzing alternative scenarios, carefully review the existing 2009 budget model in the
Excel workbook provided. At minimum you should consider the following:
a. Why are salary and wage costs classified as they are? What impact has this classification
had on the budget model?
b. How has the ending balance in each of the asset and liabilities accounts been determined?
Are these assumptions consistent with historical patterns? How might they change in
response to changes in the rate of growth?
c. What debt ratio has historically been most important for VSI? What constraint will
maintaining or improving this debt ratio place on VSIs operations in 2009?
Begin your scenario analysis with an examination of two scenarios for which you have some
historical precedent. A zero-growth and a 15% decrease scenario would be good starting
choices. You may wish to start by assuming that expenditures are made according to the draft
2009 budget but production and ending asset and liability balances are allowed to adjust to
changes in volume.
Case Analysis
A partial solution to the case with suggestions and annotations is provided in VisuSon Exhibits-
Solution.xls.
Probably the best way to start the analysis is from the 2009 draft budget.
It is not specified in the assignment, but it is logical for students to compare the effects of
scenarios of zero sales growth and declines of 10%, 15%, 20%, 30%, and 50%.
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2. What should the company do? As revenues decline, what expenses can/should be cut?
Which are fixed vs. variable? Which are discretionary? In order to minimize the pain, in
what order should the cuts (e.g., sales, manufacturing and engineering personnel, capital
expenditures) be made? VSI has a long sales cycle, so if sales personnel are laid off, the
company could suffer for years to come. If engineering is cut, perhaps some current
3. Have the additional employees in the budget been hired already? If so, severance will have
to be paid. If not, the easiest cost saving is just not to hire the additional employees called
4. Will any bonuses be paid? Probably yes, as some objectives will be achieved. Plus, VSI
5. Can VSI borrow any money? The case says that VSI can borrow against the value of its
accounts receivable and inventories. But how much? Perhaps 80% is a good estimate.
6. How important are the operating policies, such as maintain 3040 days of forward sales in
finished goods inventory?
Diligent students will consider jointly the effects of sales decline scenarios and differences in
assumptions.
Most importantly, students will have to figure out what the most important dependent variable
is. Unquestionably, it is cash flow. At some point, VSI will run out of cash, with no ability to
Here are plausible answers to the assignment questions:
A. Question 1
The answer to this question is $58,795. Students should see that the breakeven revenue
B. Question 2
Revenues for 2006 were about 85% of 2008 revenues, so the historical financial statements
in the exhibits provide a basis for comparison to any 15% scenarios. With a 15% sales
C. Question 3
With a 30% sales decline, VSIs survival is threatened. The borrowing base will not be
sufficient to support the companys working capital needs (6 weeks of operating
Merchant & Van der Stede, Management Control Systems, 3rd edition, Instructors Manual
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expenditures). Perhaps VSI could borrow against the value of some of its fixed assets. But
Pedagogy
When I have used the case, I have asked students to present their findings orally in class with
formal PowerPoint presentations. All of the groups have had sufficient Excel skills to be able to
prepare sets of numbers based on credible downside scenarios.
At the conclusion of the class, I provide some brief comments, as follows:
1. This is scenario planning (also called stress testing).
a. It goes beyond flexible budgeting, which typically has simple fixed vs. variable
assumptions about expenses and assumed simple linear relationships.
2. Anyone who does this type of scenario planning must know how expenses are incurred.
This information is not obvious in the financial statements. Special analyses (or
assumptions) are needed.
a. Fixed vs. variable
b. Discretionary vs. necessary
3. What makes for a good analysis?
a. Done technically correctly.
b. Depth of insight as to what would happen in the company in various scenarios,
particularly a crisis (negative 15% growth, or worse).
i. What is most important?
1. Earnings?
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3. Financing possibilities?
ii. Strategic damage (risks and trade-offs, such as opportunities for future growth vs.
level of safety now)
2. Working capital management (e.g., supplier relations)
4. Investments (R&D and capital)
