In each independent situation below, identify and describe at least three risks. For each risk, suggest two internal controls to address it.
a. (CMA adapted, June 1992) Midwest Electronics Corp. manufactures computers. Recently, its products have met stiff competition from lower-priced imports, and the firm is seeking ways to improve its workers’ productivity in order to maintain its market share. Over lunch in the company cafeteria, Alice Kumar (manager of the Accounting Department) and Greg Mossman (manager of the Sales Department) recently discussed a presentation made to the management of Midwest by a consultant on employee motivation. In the course of the conversation, Kumar recalled what happened at Spokane Computer Associates, her former employer. A national labor union had sought repeatedly to unionize the workers at the plant but had never succeeded. There was very little turnover among the workers, and the plant was considered a safe and pleasant place to work. Salaries were relatively high, and workers earned not only a base salary but incentive bonuses based on their individual output and company profits.
b. (CMA adapted, June 1992) Alaire Corporation manufactures several different types of
printed circuit boards; however, two of the boards account for the majority of the company’s
sales. The first of these boards, a television circuit board, has been a standard in the industry
for several years. The market for this type of board is competitive and, therefore, price sensitive. Alaire plans to sell 65,000 television circuit boards next year at a price of $150 each. The second high-volume product, a personal computer circuit board, is a recent addition to the company’s product line. Because it incorporates the latest technology, it can be sold at a premium price; next year’s budget calls for the sale of 40,000 personal computer boards at a price of $300 each.
c. (CMA adapted, December 1991) Microtronics Inc. is a private company involved in genetic engineering. The company was started several years ago by Joseph Graham, a scientist, and is financed by a group of venture capitalists. Microtronics has had some successful research, and one of its products recently received approval from the Federal Drug Administration (FDA). Two other products have been submitted to the FDA and are awaiting approval. Because of these successes, the investors believe the time is right for preparing the company for a public stock offering.
d. (CMA adapted, December 1991) Princess Corporation grows, processes, packages, and sells three apple products: sliced apples used in frozen pies, applesauce, and apple juice. The
outside skin of the apple, which is removed in the Cutting Department and processed as animal feed, is treated as a by-product. In the company’s conversion process, the Cutting Department washes the apples and removes the outside skin. The apples are then cored and trimmed for slicing; the three main products and the by-product are recognizable after processing in the Cutting Department. Each product is then transferred to a separate depart-ment for final processing. The trimmed apples are forwarded to the Slicing Department, where they are sliced and frozen. Any juice generated during the slicing operation is frozen with the slices. The pieces of apple trimmed from the fruit are processed into applesauce in the Crushing Department. Again, the juice generated during this operation is used in the applesauce. The core and any surplus apple generated from the Cutting Department are pulverized into a liquid in the Juicing Department. The outside skin is chopped into animal feed and packaged in the Feed Department.
e. (CMA adapted, June 1994) Damian Information Inc. is a four-year-old information processing and software development company serving a number of small clients in the midwestern United States. As its customer base has grown, DII has increased its staff to 30 employees. The company has been considering an arrangement whereby they would lease employees. Currently, there are in excess of 400 employee leasing companies in the United States representing nearly one million workers. The major users of this service are companies that need fewer than 100 workers. If DII were to enter into an employee-leasing arrangement, all of DII’s current employees would become employees of the leasing company and then leased back to DII.
f. (CMA adapted, June 1994) Richmond Inc. operates a chain of department stores located in the northwest. The first store began operations in 1965 and the company has steadily grown to its present size of 44 stores. Two years ago, the board of directors of Richmond approved a large-scale remodeling of its stores to attract a more upscale clientele. Before finalizing these plans, two stores were remodeled as a test. Linda Perlman, assistant controller, was asked to oversee the financial reporting for these test stores, and she and other management personnel were offered bonuses based on the sales growth and profitability of these stores. Based on the apparent success of the test (sales growth for the two stores was reported at 11 percent and profitability showed a 14 percent increase), the board is now considering two alternatives for financing the balance of the remodeling effort. Alternative one involves pure debt financing. The company would make a public offering of bonds with a face value of $30 million and a stated interest rate of 11 percent. Alternative two is a combination alterna-tive. It would involve $12 million in 9 percent bonds, common stock of $14.5 million, and retained earnings of $4.5 million. The current market value of Richmond’s common stock is $30 per share; the dividends per share have held steady at $3.00 per share for the last year, but investors are expecting growth of 6 percent in the dividend.