Case study.

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Work Gear Case Irina has just been hired as CEO of a small manufacturing firm, Work Gear, located in Kamloops, BC. Work Gear has gone through some major problems the last few years, so the plant was sold, and the new owner, Marla, is putting together an experienced management team. Prior to accepting Marla's offer, Irina requested assurance that she would have a say in the selection of the CFO and was granted it. She has since asked Marla to hold off on interviewing CFO candidates until she gets to read a detailed report from you, a talented group of MBA students. Irina first wants help with some questions Marla has asked her. Marla paid $4.5M for the plant (including lan orth an estimated $1M) and business- she wants to know if it was a good investment. Marla is specifically wondering how long it might take to recover the cash she paid out, assuming a best case scenario. She is currently paying interest of 5.25% on the full amount of the purchase and plans to pay it off over time. Prior to regulatory issues, the plant was producing about quality leather toolbelts and work-vests six days a week (about seventy-five of each daily). On average, the belts sold for $20 apiece, while the vests retailed for $25. The business has been shut down for the past two months, but expenses used to be as follows: . o . Average cost of leather per toolbelt: $3 Average cost of leather per vest: $4 Average daily salary of assembly line workers (typically 6 employed each workday): $200 Average daily salary of sales and administrative staff (typically 3 employed each workday): $150 Additionally, minor supplies total $3,000 per month, maintenance and repair expenses total $4,500 a month, utilities costs are $1,000 a month, marketing expenses total $3,500 a month, and executive salaries total $16,000 a month. The income tax rate is 15%. Marla estimates that each product takes an equal time to make, even though the vests contain more leather. From looking at sales data, she has determined that demand for the vests is highest during the spring and seasons, while the toolbelts tend to be sold evenly through the year. Overall, the annual demand for the products is roughly the same, which matches production. Marla is wondering if the current level-production model is efficient or if there might be a better way to produce the goods. A large machine has been deemed to be a fire hazard by regulators. Fixing it would cost $20,000 and keep the machine working for an estimated three additional years. However, the machine could also be scrapped for a cash refund of $2,000. The business can then purchase a new $180,000 machine which would cut current maintenance and repairs expenses by 10%. The new machine would have an expected useful life of twelve years, with a scrap value of $2,000. Irina needs advice on the accounting treatment of an asset like this. In addition to the machine repair/replacement, Marla estimates that the plant needs an additional $500,000 of repairs. While she can borrow additional funds on her current loan, she wonders if it is a better idea to sell equity in the company. A friend, Janine, has offered her $650,000 for a 25% stake in the business. Under that arrangement, the land would remain fully owned by Marla. Marla is wondering what the pros and cons are of accepting Janine's offer. Irina is wondering if she should recommend increasing the marketing budget. She senses that by hiring an additional staff member at the current expense rate and investing an additional $2,000 into advertising each month, Work Gear can boost sales numbers by 10%. She suspects that these higher sales numbers can be maintained indefinitely with the continued higher marketing expense level. Prepare a business report for Irina. Discuss all relevant issues, including pros and cons of each course of action. Outline any questions/inquiries which should be directed to Irina or Marla and why the information is important to certain decisions