ArMob Inc.

Three months ago, Sage Van Wiki $($Sage$)$ invented the next coolest mobile device. As a young

science student, he was completely tired of dragging around all his electronics $($laptop$,$ phone,

calculator, mpp$3$ player, etc.$)$ and thought there must a better way. So$,$ he invented the Arm

Mobile. The Arm Mobile $($ArMob for short$)$ is a voice activated $10$ cm square screen that self

adheres to your forearm. Thin as a piece of paper and light as a hiccup it is powered by your

body heat and operates as computer, phone, mp$3,$ electronic wallet, calculator, web browser

everything. All communications flow through vibrations and images at your eye level and linked

to Smart Glasses. The device is controlled as you wiggle your fingers. After three minutes of

play the device worked seamlessly for almost anyone under the age of $27.$

Sage may be a technical genius but business seems a bit boring and simple to him. Three

months ago, he and two buddies $($Jacob and Fran$)$ founded a new company $($ArMob Inc.$)$ and

built $300$ devices with Direct Materials $$70$ per unit, Direct Labour $$50$ per unit and

Manufacturing Overhead indirect materials and labour per unit $$30$ per unit and a selling price of

$$375$ each. Their sales strategy was simple $-$ pay fellow students $$20$ for every device they

sold. And OMG the students sold them all. A single tiny issue was that $3$ devices $(1\%)$ reacted

mildly to the purchasers' forearm so they were returned for full refunds $($some reaction to the

adhesive $-$ nobody was hurt $-$ nothing to see here$).$

During the three$-$month startup phase the three friends kept costs pretty low as follows;

Facility $($Jacob$\text{'}$s garage$)$ $ $2,000\mathrm{.}00$

Insurance $ $-$

Administration staff $ $4,500\mathrm{.}00$

Vehicle expenses $ $3,500\mathrm{.}00$

Office expenses $ $2,500\mathrm{.}00$

One of the founders $($Jacob$)$ borrowed $$100,000$ from his father $($Tim$)$ to buy the manufacturing

equipment, and they were able to pay the interest costs of $1\%$ per month leaving still almost

$$15,000$ each.

The business opportunities seemed excellent and they are looking for money to expand. A

reformed corporate pirate wants to lend ArMob Inc. $$500,000$ so they could pay the original

investor $($Tim$)$ back and purchase a number of new $3$D printers. The $"3-$founders" are excited

because the terms seem reasonable at $2\%$ per month, $45\%$ ownership, a seat on the Board of

Directors and potential stock options for the future.

The three founders are extremely confident that with an additional $$400,000$ investment

$($$$500,000$ less the $$100,000$ payback$)$ they could sell at least $2,500$ units a year.

With increased production, Direct Materials would drop to $$50$ per unit, Direct Labour $$45$ per

unit and Manufacturing Overhead indirect materials and labour per unit $$25$ per unit with an

additional Fixed Manufacturing Overhead for facility operations of $$20,000$ for the year. They

are confident that they could keep the selling price the same. Their sales strategy is to expand

at the school level by paying $$25$ per unit as a sales incentive to help increase sales volumes.

The new cost estimates are as follows;

Facility $-2000$ sq$.$ foot bay $ $60,000\mathrm{.}00$

Insurance $ $50,000\mathrm{.}00$

Administration staff $ $27,000\mathrm{.}00$

Vehicle expenses $ $21,000\mathrm{.}00$

Office expenses $ $15,000\mathrm{.}00$

Production and sales manager $ $75,000\mathrm{.}00$

Sage wants to hire a production manager for $$45,000$ per year to be in charge of operations and

a Sales manager to organize the student sales force for $$30,000$ per year. Sage believes that

he is best suited to be the CEO in charge of new product development. The plan is to set up a

Board of Directors made up of the three original founders plus the new investor with Sage as

Chairman.

The new investor is extremely excited about the product and is strongly pushing to expand into

the business market. While she likes the student educational, entertainment and gaming

market she thinks the real opportunity is in the business market. With the surge of business

opportunities after COVID and the existing market gaps she is confident that the ArMob is

perfectly positioned to jump a big piece of the business market.

You are a recent accounting graduate of MRU and are working at a large consulting firm $($KPWCDELY$)$ in

downtown Calgary. Your boss Tim $($a partner with the firm$)$ is Jacob's father.

Your boss $($Tim$)$ has asked you to prepare an internal report for the other KPWCDELY partners about the

prospect of working with ArMob Inc. as it secures the new financing for the planned expansion. Your

boss has expressed a little concern that the "founders" may not have really looked at every issue and may

have even missed paying their income taxes $(20\%)$ altogether.

He says the taxes etc. are no problem as ArMob Inc. is paying the firm $$30,000$ for the report and a

promise of $5\%$ ownership if the financing goes ahead.

Case Question:

Prepare the internal report requested by your boss $($Tim$)$ for the other KPWCDELY partners with

respect to the plans of ArMob Inc. and the potential of the firm working with the ArMob Inc.