For the past few years, Billy Hays, the president of Brew Corp., a regional coffee roaster, had noticed a decrease in profit margins that was troubling. The company’s revenues were consistently up, but margins kept shrinking. Hays knew that smaller profits meant less money in his pocket, and he didn’t like that. He wanted answers quickly. He pressed his longtime and trusted CFO, Sandy Dawson, to check it out. Then she had her best accountant, Luke Smith, analyze the problem.
Smith and Dawson met with Hays and gave him the news. Smith provided a very plausible explanation for the shrinking margins. It was simple; there had been a steady increase over the past several years in both repair costs and information technology (IT) expenses. Smith and Dawson explained to Hays that these increases were due to Brew Corp.’s outdated coffee-processing equipment and recent attempts to upgrade their old technology; they hadn’t invested in new plant equipment in many years. Also, their computer systems were dated and required more IT support than ever before.
Hays was embarrassed when he heard these explanations because he knew that Brew Corp.’s equipment was outdated. He had denied several requests to buy new plant and computer equipment in recent years. So, it seemed that Hays was the one causing the problem. He simply didn’t want to bite the bullet and spend the money to upgrade. He was nearing retirement, so the last thing he wanted to ...