BELOW:

1) introduction, writing a brief description of the business context and overview of contents

2) Product cost anaylsis

3) Appendix for any additional easy to follow calculations of best case and worst case scenarios and supporting tables

Impcorp Foods

Hoang Nguyen Aulcorp Food Marketers and Distributors Inc.

INTRODUCTION

You were recently hired as the finance manager of Impcorp. Your position was created because the management accounting work was overwhelming Sergio Villani, the chief executive officer (CEO), and the other staff members. Sergio needed someone other than himself to oversee that area. He further believed that improvements were needed in the management accounting and inventory areas, but he was unclear where to begin and what to do to prepare for the continuing growth of suppliers, products, and retailers. Specifically, as profitability of suppliers, products, and retailers are currently difficult if not impossible to calculate, he asked for your suggestions for pursuing profitable growth. He also said Impcorp might need to replace its accounting software system with one with more functionality. You are to identify changes needed in the management accounting area to improve the profitability of Impcorp.

BACKGROUND

Impcorp Foods was established in Canada as a private, family-owned firm seven years ago. At that time, Sergio leveraged his more than 20 years of progressive food sales experience with a leading retailer into his own business. Sergio, his wife Lise, and one other employee, Maria Randle, were the first three employees. He was responsible for sourcing products and generating sales while Maria and Lise

Gary Spraakman York University

handled office administration work, including accounting and logistics. Internal control and operating procedures were retained in the minds of these three employees, which was not uncommon with start-up firms.

The business started with importing Italian cakes, followed by expansion into sauces, rice products, and various other product categories. The demand to which Impcorp was responding came from customers of major North American retailers, who wanted authentic, premium quality Mediterranean food at reasonable prices. The suppliers came from various regions in Italy, many of whom manufactured products for the Italian market but had no presence in the North American market. Impcorp gave them access to the North American market through ordering products in large volumes in return for price discounts. In the first year, Impcorp had two major Canadian retail chains as customers and three products from suppliers, for total sales of $600,000. Now, after seven years, the sales have exceeded $10 million.

A crucial component of the business is the logistic linkage between suppliers in Italy and retail chains in North America. The products are shipped from Italy directly to North American retailers or, if shipments to the retailers need to wait, to public warehouses. Impcorp pays the suppliers and receives payment from the retailers. Presently, there are seven Italian suppliers and six major retail customers. The latter are evenly split between major Canadian and American retail chains.

Impcorps sales growth comes mainly from newly developed products through joint efforts with Italian suppliers for customers of retail chains in Canada and the United States. Prices are kept competitive by maintaining close supplier relationships and by volume sales to retail chains. Costs are further minimized with appropriate IT investments. As high product quality is demanded by the retail chains, Impcorp ensures meeting this criterion by working with only tier 1 suppliers.

DUTIES OF THE NEW FINANCE MANAGER

Your first task is to familiarize yourself with the companys organizational structure, accounting system, and logistics. In recent years, Impcorp added three Italian suppliers and two retailers. You have also noticed that Impcorp successfully developed many new products with Italian suppliers and will be adding another American retail chain next year. The number of products increased from 35 to 84 over the past two years. You quickly understand why staff had become overwhelmed. This and all other finan[1]cial statements are prepared in Canadian dollars at the firms office in Canada..

Revenue $10,635,119

Cost of goods sold (penalties from retailers $15,000) 7,872,775

Gross margin $2,762,344

Expenses:

Employee administrative salaries $673,475

Employee benefits 30,162

Information technology, computer repairs 33,860

Telecommunications 23,874

Unsaleable product, damaged, expired, shortage 53,170

Facilities, rent, amortization 31,609

Automobile including amortization 62,500

Foreign exchange (gains) losses, realized and unrealized 88,445

Customer discounts/rebates and commissions 160,658

Transportation of inventory 801,523

Insurance for inventory 15,184

Storage costs for inventory 45,700

Interest and bank charges 15,910

Consulting fees 22,511

Advertising, entertainment 62,520

Total $2,121,101

Net income $641,243

FURTHER ASSESSMENT

Through further questioning of the two consultants, you realize that the existing system has a basic server, which implies that there is no backup. If the system crashes, all information would be lost and Impcorp would be in serious trouble. In contrast, the new system has a redundant server to reduce the risk of information loss and to speed up processing. The existing system slows tremendously when going from three to four users. This does not happen with the proposed new system because of its higher capacity server.

There are other advantages. The locking feature of the existing system is a disadvantage, as it requires that all users log off before any changes can be made. The proposed system does not have that shortcoming.

The existing system is out-of-the-box software without industry-specific features. In contrast, the proposed system is specifically tailored to the packaged food wholesale operations where Impcorp competes. The consultant or supplier for the

COSTS AND BENEFITS

The consultant has quoted the cost of the new software at $100,000. There would also be a hardware upgrade required for $12,000, an annual licensing/operating cost of $13,000, which is $11,000 more than the existing system. You estimate that training in terms of outside help, replacement staff, and staff time to cost $17,000 of which $10,000 is for initial training and $7,000 for additional post-implementation training.

It is estimated that a one-year time frame is required for staff to become sufficiently familiar with the system to do their jobs. Training is to start one month after the software set-up and continue for two months after implementation. There are 100 hours allocated for training over the first year. In conjunction with the independent consultant, Sergio estimates that inventory which is at a steady level during the year will be reduced by 10% due to the better information. (Impcorp has an inventory turn of 20 times.) With the improved

information, reduction in penalties from retailers due to late shipments and cost of expired items are estimated to represent an annual saving of 10%. There is also an estimated 10% saving in employee administration salaries from a reduction in manual entries, duplication, and quicker transaction processing. Cash flow should also improve, particularly because of the reduction in inventory as noted, which would decrease the interest and bank charges cost by 15%.

REQUIRED:

You have completed the assessment of your responsibilities as the new finance manager at Impcorp. Report to Sergio on what Impcorp needs to do to improve its management accounting practices, and how to proceed with those improvements. Be sure to calculate the costs and benefits of your recommendations.