Case 4 ElectroTools Ltd. (30 Minutes) You are Ranjit Sidhu, the CFO (chief financial officer) of Electro Tools Ltd., a Canadian public company that manufactures electronic appliances. Electro Tools sells its products to major retailers such as Future Shop and Best Buy. The company's CEO (chief executive officer), Robert Watt, visited your office in early 2017 and advised that at the recent board of directors' meeting he was told to look for ways to increase the company's revenues. He is considering making changes to the company's warranty and reward programs to achieve this goal. The company currently offers warranties separately from the products it sells. This means that a consumer purchases the product without a warranty. They are then offered (by the retailer on Electro's behalf) the opportunity to purchase a three-year warranty on the product. Approximately 70% of consumers currently purchase the warranty. Mr. Watt is considering changing this practice to bundling the two products such that the down-stream customer is automatically provided with a warranty when they purchase Electro's product. The new price of the bundled product would be the sum of the current sales prices of the appliance and warranty purchased separately. To encourage retailers to purchase the company's products, Electro Tools employs a reward program. Retailers that reach pre-specified levels of purchases in the current year are provided with a cash discount the following year. For example, if a retailer makes purchases of between $1 million and $2 million during the year, then it is entitled to a 2% discount on all purchases in the following year. Purchases in the range of $2 to $5 million entitle the retailer to a 4% concession, and purchases in excess of $5 million entitle the retailer to a 6% reduction. Mr. Watt is considering replacing the discount program by contracting with Reward Plus Inc., an independent company that offers a points-based rewards program to its clients. Electro Tools will award points to the retailers based on their level of purchases; the points can then be used to acquire a variety of communications products and services (e.g. iPhones and cell phone plans) from Rewards Plus. Electro will pay a fee to Rewards Plus for this service based on the number of points it awards. Mr. Watt intends to build the reward system such that the cost of the rewards provided under the new program will be equivalent to the discounts provided under the old program. Mr. Watt has asked you to analyze the effect of these potential changes. Specifically, he wants you to address the following issues: 1. Will there be changes to the way warranties and rewards are recorded? If so, how will the changes affect the financial statements? 2. Will the changes allow Electro Tools to report increased revenues? 3. What other issues should be considered? 4. What are the potential negative aspects of those changes? Required: Write a memo to Mr. Watt, addressing the issues raised