ANGLER AND KELPAY Angler and Kelpay (AK) is a large producer of whiteware appliances (washing machines, clothes dryers, dishwashers etc) located in Dunedin. The large appliances are produced in separate product divisions. The managers of each division are paid attractive salaries with a bonus paid on percentage of annual divisional profit. Whilst enjoying reasonable profitability, AK does have some spare capacity and is what we might term a "prospector firm; that is, it is always looking for new opportunities, particularly in products aligned to its core business or similar markets. AK's Research and Development (R&D) division is keen to expand into the small household appliance market. Recently the R&D division designed and developed a new hand-held mixer, named the "Mixalot". The Mixalot can be used to mix milkshakes and light batter. With the mincer attachment, it can mince up to a cup of vegetables or fruits. Even with these diverse capability features, the Mixalot is reasonably similar to other mixer models available in the market. However AK has stronger brand reputation than the other producers. It is planned to start production and sales of the Mixalot in 2019. In 2019, the aim is for AK to capture 2.5% of the market for mixers. In the first year the Mixalot would be produced within the Dishwasher division, but when production exceeds 140,000 per annum it would be produced within its own division. The R&D division spent $250,000 on the design and development of the Mixalot. Another $50,000 was spent on consumer focus groups, in which prototypes of the Mixalot were kitchen tested by consumers. It was in those groups, that a safety problem surfaced when one of the testers sliced his hand. This safety issue necessitated adding a plastic guard around the blade, which increased the original budgeted prime costs. The trainee cost accountant, Miles Cameron is concerned that this extra cost would make the Mixalot unprofitable. In addition a special machine would need to be purchased at the beginning of 2019 for moulding and attaching the guard. The machine would cost $65,000 and would have a life of five years with no salvage value. MacBook Air Another $50,000 was spent on consumer focus groups, in which prototypes of the Mixalot were kitchen tested by consumers. It was in those groups, that a safety problem surfaced when one of the testers sliced his hand. This safety issue necessitated adding a plastic guard around the blade, which increased the original budgeted prime costs. The trainee cost accountant, Miles Cameron is concerned that this extra cost would make the Mixalot unprofitable. In addition a special machine would need to be purchased at the beginning of 2019 for moulding and attaching the guard. The machine would cost $65,000 and would have a life of five years with no salvage value. AK utilises just-in-time production. The Mixalot mixers are to be made in batches. Based on prior experience it is assumed that in the first year a 70% cumulative average time learning curve will operate. AK's operations' engineer predicted that the average time taken to make a batch would be stable by the end of 2019 and show no further improvement. AK's projected sales and costs for the Mixalot for year 1 TURN OVER MacBook Air presented Exhi Exhibit 1 Projected Sales and Cost Information for Mixalot in 2019 Size of market for mixers for 2019 (mixers) Selling price/mixer Total direct materials cost Batch size (mixers) Time taken to produce first batch of mixers Labour cost/hour Total setup costs Total rework costs Total other manufacturing overhead costs Total marketing, selling and administration (MS&A) costs - warranties Total MS&A costs - selling commission Total MS&A costs - advertising 1,000,000 $15 $59,000 5,000 503.61 hours $60 $5,000 $12,500 $50,000 $6,250 5% of revenue $250,000 Exhibit 2 Projected Sales and Cost Information for Mixalot for 2020-2023 Year 2020 (Year 2) 2021 (Year 3) 2022 (Year 4) 150,000 400.000 400,000 $20 $20 $18 Sales volume (mixers) Selling mixer 2023 (Year 5) 135,000 $15 Total MS&A costs - advertising $250,000 Exhibit 2 Projected Sales and Cost Information for Mixalot for 2020-2023 Year 2020 (Year 2) 2021 (Year 3) 2022 (Year 4) 2023 (Year 5) Sales volume (mixers) 150,000 400,000 400,000 135,000 Selling price/mixer $20 $20 $18 $15 Direct materials | $1.41 $1.36 $1.31 $1.06 cost/mixer Setup costs $24,000 $80,000 $80,000 $21,500 Rework costs $45,000 $60,000 $60,000 $6,750 Extra divisional direct manufacturing costs other than prime costs $15,000 $40,000 $35,000 Other manufacturing overhead $300,000 $800,000 $800,000 $270,000 MS&A costs warranties $7,500 $10,000 $10,000 $3,375 MS&A costs - selling -5% of 5% of 5% of 5% of commission revenue revenue revenue revenue MS&A costs - advertising $150,000 $100,000 $100,000 $25,000 After the first year, Miles is aware that labour cost/unit would increase 5 cents every year because of increasing wage rates mandated by the Government's policy on increasing the minimum wage. However he believes that with increasing production, the purchasing manager could get some better deals on material costs. The R&D division believes that the Mixalot could have a presence in the market for 5 years. Miles' projections for the following 4 years (2020-2023) are displayed in Exhibit 2. Required: (a) Calculate the cost of goods sold per unit for the Mixalot in 2019. (10 marks) (b) "Are Miles' concerns that the Mixalot will be unprofitable in 2019 unfounded or not? Support your decision with calculations. (6 marks) (0) Calculate operating profit for each of the following four years (2020-2023). (18 marks) (d) Roughly sketch a product life cycle for Mixalot identifying the revenues and operating profits over time. Is the Mixalot profitable or not over its entire lifecycle? Explain. (Ignore the time value of money). (7 marks) (e) How might the manager of the Dishwasher division react to having responsibility for Mixalot production? Explain. (6 marks) () Discuss the pricing strategy of AK for the Mixalot. (8 marks) (8) What recommendations do you have for AK in relation to the Mixalot proposal? Explain. (5 marks) ANGLER AND KELPAY Angler and Kelpay (AK) is a large producer of whiteware appliances (washing machines, clothes dryers, dishwashers etc) located in Dunedin. The large appliances are produced in separate product divisions. The managers of each division are paid attractive salaries with a bonus paid on percentage of annual divisional profit. Whilst enjoying reasonable profitability, AK does have some spare capacity and is what we might term a "prospector firm; that is, it is always looking for new opportunities, particularly in products aligned to its core business or similar markets. AK's Research and Development (R&D) division is keen to expand into the small household appliance market. Recently the R&D division designed and developed a new hand-held mixer, named the "Mixalot". The Mixalot can be used to mix milkshakes and light batter. With the mincer attachment, it can mince up to a cup of vegetables or fruits. Even with these diverse capability features, the Mixalot is reasonably similar to other mixer models available in the market. However AK has stronger brand reputation than the other producers. It is planned to start production and sales of the Mixalot in 2019. In 2019, the aim is for AK to capture 2.5% of the market for mixers. In the first year the Mixalot would be produced within the Dishwasher division, but when production exceeds 140,000 per annum it would be produced within its own division. The R&D division spent $250,000 on the design and development of the Mixalot. Another $50,000 was spent on consumer focus groups, in which prototypes of the Mixalot were kitchen tested by consumers. It was in those groups, that a safety problem surfaced when one of the testers sliced his hand. This safety issue necessitated adding a plastic guard around the blade, which increased the original budgeted prime costs. The trainee cost accountant, Miles Cameron is concerned that this extra cost would make the Mixalot unprofitable. In addition a special machine would need to be purchased at the beginning of 2019 for moulding and attaching the guard. The machine would cost $65,000 and would have a life of five years with no salvage value. MacBook Air Another $50,000 was spent on consumer focus groups, in which prototypes of the Mixalot were kitchen tested by consumers. It was in those groups, that a safety problem surfaced when one of the testers sliced his hand. This safety issue necessitated adding a plastic guard around the blade, which increased the original budgeted prime costs. The trainee cost accountant, Miles Cameron is concerned that this extra cost would make the Mixalot unprofitable. In addition a special machine would need to be purchased at the beginning of 2019 for moulding and attaching the guard. The machine would cost $65,000 and would have a life of five years with no salvage value. AK utilises just-in-time production. The Mixalot mixers are to be made in batches. Based on prior experience it is assumed that in the first year a 70% cumulative average time learning curve will operate. AK's operations' engineer predicted that the average time taken to make a batch would be stable by the end of 2019 and show no further improvement. AK's projected sales and costs for the Mixalot for year 1 TURN OVER MacBook Air presented Exhi Exhibit 1 Projected Sales and Cost Information for Mixalot in 2019 Size of market for mixers for 2019 (mixers) Selling price/mixer Total direct materials cost Batch size (mixers) Time taken to produce first batch of mixers Labour cost/hour Total setup costs Total rework costs Total other manufacturing overhead costs Total marketing, selling and administration (MS&A) costs - warranties Total MS&A costs - selling commission Total MS&A costs - advertising 1,000,000 $15 $59,000 5,000 503.61 hours $60 $5,000 $12,500 $50,000 $6,250 5% of revenue $250,000 Exhibit 2 Projected Sales and Cost Information for Mixalot for 2020-2023 Year 2020 (Year 2) 2021 (Year 3) 2022 (Year 4) 150,000 400.000 400,000 $20 $20 $18 Sales volume (mixers) Selling mixer 2023 (Year 5) 135,000 $15 Total MS&A costs - advertising $250,000 Exhibit 2 Projected Sales and Cost Information for Mixalot for 2020-2023 Year 2020 (Year 2) 2021 (Year 3) 2022 (Year 4) 2023 (Year 5) Sales volume (mixers) 150,000 400,000 400,000 135,000 Selling price/mixer $20 $20 $18 $15 Direct materials | $1.41 $1.36 $1.31 $1.06 cost/mixer Setup costs $24,000 $80,000 $80,000 $21,500 Rework costs $45,000 $60,000 $60,000 $6,750 Extra divisional direct manufacturing costs other than prime costs $15,000 $40,000 $35,000 Other manufacturing overhead $300,000 $800,000 $800,000 $270,000 MS&A costs warranties $7,500 $10,000 $10,000 $3,375 MS&A costs - selling -5% of 5% of 5% of 5% of commission revenue revenue revenue revenue MS&A costs - advertising $150,000 $100,000 $100,000 $25,000 After the first year, Miles is aware that labour cost/unit would increase 5 cents every year because of increasing wage rates mandated by the Government's policy on increasing the minimum wage. However he believes that with increasing production, the purchasing manager could get some better deals on material costs. The R&D division believes that the Mixalot could have a presence in the market for 5 years. Miles' projections for the following 4 years (2020-2023) are displayed in Exhibit 2. Required: (a) Calculate the cost of goods sold per unit for the Mixalot in 2019. (10 marks) (b) "Are Miles' concerns that the Mixalot will be unprofitable in 2019 unfounded or not? Support your decision with calculations. (6 marks) (0) Calculate operating profit for each of the following four years (2020-2023). (18 marks) (d) Roughly sketch a product life cycle for Mixalot identifying the revenues and operating profits over time. Is the Mixalot profitable or not over its entire lifecycle? Explain. (Ignore the time value of money). (7 marks) (e) How might the manager of the Dishwasher division react to having responsibility for Mixalot production? Explain. (6 marks) () Discuss the pricing strategy of AK for the Mixalot. (8 marks) (8) What recommendations do you have for AK in relation to the Mixalot proposal? Explain