Choose machine F and create tables for Sales Budget, Production Budget, Direct Materials Budget, Overhead Budget, SGA Budget, Income Statement, Cash Budget, and Balance Sheet For the six months ended June 30, 2016. Make a table like this one below for all of them.

Sales Budget

For the six months ended June 30, 20X6

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"In preparing for battle, I have always found that Part 2: The Simulation Game Each machine setup has a five year useful life. You will need to hire a maintenance technician at an annual salary of $50,000 for machinery with low quality control. The more sophisticated high quality control machines will require a more highly trained technician at an annual cost of $90,000 plans are useless, but planning is indispensable." Background Dwight D. Eisenhower Machinery may only be purchased in cash. You may use the $1.6 million in cash you start with, plus any additional cash you intend to secure in Phase 2 (below). You are the management team of a startup company entering the fast-paced, cutthroat world of ceramic coffee mug manufacturing. You have land, buildings, cash, and an assembled workforce of managers, salespersons, administrative personnel, and most indirect labor. You do not have any manufacturing equipment, raw materials, direct laborers, or liabilities. Your balance sheet is as follows: Your only raw material is clay, sold in 100 pound blocks from one of two suppliers. Shay's Clays sells a low quality clay for $51.00 per 100 povod block. Grey's Clays sells a high quality clay for $61.00 per 200 povod block. Clay is available in unlimited supply at those prices. Each supplier offers a 296 cash payment discount, or credit terms with payment due in the quarter after purchase. Each supplier has also notified you that it anticipates a price increase of $1.50-$2.50 per block to take effect in the second quarter of 20X6. Project 2 - Budgeting This is a team project, and teams have been assigned by your instructor. This project will consist of three main steps: 1. Master Budget: Prepare a master budget, including a sales budget, production budget, raw materials budget, direct labor budget, overhead budget, budgeted income statement, cash budget, and budgeted balance sheet. 2. Simulation: Make investment, hiring, purchasing, financing, production, and pricing decisions in a two calendar quarter simulation game where you are competing against the other teams in the class in the same market to earn the highest profits. 3. Budgetary Control: Prepare a static budget report and a flexible budget report on the income statement. Prepare a responsibility report for the entire company, treating it as an investment center. Assess your company's performance in the simulation compared to the budget. ???? Company Balance sheet as of December 31, 20X5 Cash $1,400,000 Property, plant, and equipment, net 725.000 Total assets $2,125.000 Your finished good is cases of coffee mugs (12 to a case) to be sold to retailers. Each unit of finished foods requires 15 pounds of clay (regardless of which clay you use). If you put high quality clay into a high quality control machine, you get a high quality finished product. If you put low quality clay into a low quality control machine, you get a low quality finished product. If you mix high and low quality, you get a medium quality finished product. The quality of your finished product may affect how much it can be sold for in the marketplace. Your production per quarter may never exceed your machine capacity. Common stock $2.125.000 Total liabilities and stockholders' equity $2.125.000 Property, plant, and equipment consists of a parcel of land (at $200,000 cost), on which two buildings sit. One is the factory building ($400,000 cost), and the other is the office/sales building ($125,000 cost). Both buildings have a 20 year useful life. Part 1: The Master Budget Instructions: You will choose a high skill or low skill direct labor workforce. The skill of the workforce does not affect the quality of the finished product, only the cost and efficiency of the labor. Low skilled labor costs $20.00 per hour, averages one unit of finished goods every 24 minutes (0.4 hours), and is available in unlimited supply at that price. High skilled labor costs $24.00 per hour, and averages one unit of finished goods every 18 minutes (0.3 hours). High skilled labor is also unionized, and covered by a collective bargaining agreement. Under that agreement, any hours direct laborers work above what the direct labor budget calls for is paid at time-and-a-half ($36.00 per hour), and they must be paid for 90% of the hours in the budget (even if they work less). 1. Download the "Mug Master Budget.xlsx" file from Canvas. 2. Read 'Part 2: The Simulation Game of this project. The master budget cannot be completed without the information it contains. 3. Read Chapter 21 - Pricing (learning objectives 1 and 2) from the text. In this budgeting assignment, the selling price will not be given; you will choose it. 4. Complete your master budget with the templates provided in the Excel file. Any numbers that have already been filled in may be assumed to be actual numbers, and need not (and should not) be changed. Note that the selling and administrative expenses budget is complete, and does not need to be edited. For simplicity, assume no income taxes. Any numbers not filled in are up to you. There is not a "right" answer. You will make decisions over a series of phases as detailed below. The other teams in the class are making these same decisions, buying from the same suppliers, selling to the same customers, etc. The goal of the simulation game is to make the most profit, not to have the most accurate budget. Whon presented with a choice between making more money or sticking to the budget, always choose to make Copy more money. The game will be executed remotely via Canvas in the following steps. EXAMPLE: If you budget 12,000 hours of highly skilled direct labor to make 40,000 units of finished goods, but then your plans change, and you only produce 30,000 units of finished goods, using 9,000 hours of direct labor, you still pay $259,200 for 10,800 hours (90% of your original budget). Phase 1: Startup EXAMPLE: If you budget 12,000 hours of highly skilled direct labor to make 40,000 units of finished foods, but then your plans change, and you produce 50,000 units of finished goods, using 15,000 hours of direct labor, you pay for 12,000 hours at $24.00 per hour, and the additional 3,000 hours at $36.00 per hour, for a total of $396,000 Grading: A total of 50 points will be available in the budget portion of the assignment. 35 points will be for the budget itself. (Are all budgets completed? Are all necessary items included? Are numbers consistent with facts of the case?) 15 points are for effective use of Excel. (Are formulas and cell references used instead of keyed-in values? Is number formatting correct? Is the layout easy to read?) Every team will choose production machinery to purchase, a raw material supplier to use, and a direct labor workforce. Each team's machinery, supplier, and labor choices will be revealed publicly to all teams. Every team will also choose a company name. [You don't want to be called Team B the whole time, do you?] The following choices for production machinery are available. Each team must choose one and only one. The machinery choices are not unique; more than one group may choose the same machinery. Machine configuration ATBTCTDT ETF Cost (paid in cash) $1,550,000 $1,700,000 $1,920,000 $820,000 $900,000 $1,000,000 Capacity (FG units/qtr.) 40,000 44,000 50,000 42,000 46,500 52,000 Quality control level High High High Low Low Low Your machinery, material, and direct labor choices are fixed for the duration of the game. When received, all teams' startup choices will be made public. In most cases, your budget, for the purpose of Part 2, will stand as is. In rare cases (for instance, if the budget reflects some critical misunderstanding of the case that would make success in Part 2 impossible), the instructor may return suggested revisions to your budget before Part 2 starts. HINT: Don't spend too much time agonizing over these decisions. There is profit to be made with any combination of choices, and no combination is necessarily better than any other. Here is a quick cheat sheet outlining the tradeoffs: Phase 4:01 Demand Discount Wonderland ranks these bids as follows: Machine capacity Low Lower cost, total and per unit, at lower production levels Lower cost. The following five retail chains will be looking to buy coffee mugs in 01. Machine quality control High Higher up front cost. Lower cost per unit if production is high. Higher cost. Customers may pay more for higher quality product. Higher cost. Customers may pay more for higher quality product. Lower cost when actual hours are near budgeted hours. Material quality Lower cost. Retail price Team per mug per case D (High) $6.00 $72.00 A Med.) | $5.75 $69.00 B (Low) $5.25 $63.00 E (Low) | $5.25 | 563.00 C (High) 56.00 $72.00 Bid $27.60 $27.95 $26.00 $30.00 5 61.99 Retail price per mug (by mur quality) Customer Name | Demand (total cases) Low Medium High Save 'n' Go 60.000-75,000 $3.00 $4.50 $6.00 All-Mart 55,000-70,000 $5.00 $5.00 $5.00 Discount Wonderland 1 90,000-115,000 $5.25T $5.75T $6.00 Dave Saves U Money 40,000-50,000 $4.75 $4.85 $4.95 Bath and Kitchen World 35,000-40,000 $4.00 $5.00 $6.00 During this phase of the game, demand will be revealed. The exact number of cases each retailer wants and the order in which they will purchase will be determined (by random number generation), and given to all teams. GP/case GP% $44.40 61.7% $41.05 59.596 $37.00 58.7% $33.00 T 52.4% $10.01 13.9% Action Buy all 40,000 offered. Buy all 40.000 offered Buy 14,000; demand is filled. Do not buy. Do not (and would never) buy Direct labor skill Higher cost per unit of finished goods. Greater flexibility Phase 2: 01 Financing At the beginning of quarter 1 of 20X6, you have one chance to borrow money at an interest rate of 596 per year (1.25% per quarter). If, at any time over the rest of the simulation, you run out of money, you will have to cover the shortfall by borrowing at 12% annual interest (3% per quarter). Although bids are never revealed, sales are. After each customer buys, the details of each transaction (price and quantity) are revealed to all teams. All sales are for credit. Each of the five customers will buy in turn, with new bids solicited for each customer. Teams may change the terms of their bids from one customer to the next. HINTS Last National Bank (your commercial banker) will loan you up to a total of $1 million at 5% annual interest in two installments. One loan at January 1, 20x6 (the beginning of Q1), and one at April 1, 20X6 (the beginning of Q2). You choose the amount of these loans. Last National Bank requires a cash budget as part of the business plan in any commercial loan application, so these borrowings must be in NOTE for the stat-heads): Demand amounts will be in even increments of 1,000 units, and the random number function will use a uniform probability distribution. Specifically, it is not a normal distribution where the actual demand is most likely closer to the middle. All-Mart is as likely to buy 55,000 units as ir is to buy 70,000 units as it is anywhere in between Setting prices will be the single most important factor that determines your company's success. To make a profit, you must consider the full cost per unit (not just product costs in a Chapter 14/15 sense). Even though selling and administrative costs do not go into the product, they are still paid with real money, and you must price your product high enough to cover those costs. More specifically, by the mathematics of this game, it is impossible to sell any product priced above $57.60, and impossible to make a profit selling any product priced below $18.93 This game has been set up so that total market demand approximates supply. You may be able to extract higher prices later in the buying sequence as your competition runs out of goods to Phase 5:01 Production Each team chooses the number of units of finished goods it is going to produce. The number is unbounded at the lower end. You are allowed (though not advised) to produce no units at all. At the upper end, the number is bounded by machine capacity (which you may never exceed) and raw materials (you must have 15 pounds of clay on hand for every unit you produce). Your production decisions are never revealed to the other teams. The Q2 borrowing is a contractual commitment made at the beginning of Q1. If your circumstances change such that, by the beginning of Q2, you no longer want or need the loan, a one-time $400 contract modification fee must be paid to the bank. Your financing transactions are never revealed to the other teams. Sell Phase 3:01 Purchasing Phase 7:01 Settlement and Reporting Each team collects 70% of its Q1 sales in cash, then spends cash to pay all of the following. Choose the number of pounds of raw material to be purchased from your supplier. All purchases must be in even multiples of 100 pounds (as they are sold in 100 pound blocks). You may take advantage of the 2% cash payment discount if you have available cash, or buy on credit, with the full amount due in the purchasing phase of 02. Again, the gross price is $51.00 per 100 pounds of low quality clay or $61.00 per 100 pounds of high quality clay. HINT: 2% is more than 1.25%. You should always plan to take advantage of the 2% cash discount offered by your supplier, even if it means borrowing the money to pay cash for your purchases. Phase 6:01 Sales Copy In the order and amounts given in the Demand phase, customers will come to market to buy merchandise. Each team will write a bid of the price and number of units they will offer. The bids are not revealed to the other teams. The customers will accept one or more bids until their entire order is filled. The customers do not care about the quality of the mugs, and will always choose the bids that get them the highest gross profit percentage. A customer will never accept a bid that would result in a gross profit of less than 20% at retail, even if it means they do not buy all the mugs they want. EXAMPLE: Discount Wonderland buys first, and wants 94,000 cases. 1. 91 direct labor costs: Will depend on the skill of your direct labor workforce and your actual production. 2. Q1 overhead costs: All pre-filled numbers in the overhead budget will be the actual numbers. Indirect labor (not pre-filled) is paid as well. 3. Q1 selling and administrative costs: All pre-filled numbers in the SG&A budget will be the actual numbers, with the possible exception of "Other". Your facilities have the capacity to store up to 30,000 pounds of clay, and up to 3,000 units of finished goods. If you exceed these amounts, you will have to rent off-site storage at a cost of $0.03 per pound of clay and $0.50 per unit of finished goods that you cannot store. These costs will be paid in cash, and included in the "Other" line. Your purchasing decisions are never revealed to the other teams. Both suppliers are willing to enter into a purchase agreement in Q1 where you can contract to buy any amount of clay in the Q2 Purchasing phase at Q1 prices. You are not required to enter such an agreement, but it is binding: you must purchase any units of raw material you agree to purchase. After all teams' budgets (with Q1 financing and purchasing decisions) are in, demand (see next Phase) will be revealed. Team A makes all 40,000 units of its medium-quality product available at $27.95 each Team B makes 25,000 of its 45,000 units of low-quality product available for $26.00 each. Team makes all 42,000 units of its high-quality product available for $61.99 each Team D makes all 40,000 units of its high-quality product available for $27.60 each. Team E makes all 50,000 units of its low-quality product available for $30.00 each. If you have a cash shortfall, you must borrow the difference on a line of credit that accrues interest at 12% per year (3% per quarter). Q1 interest will be charged for the entire amount borrowed, and since you have no cash) rolled into the loan balance. Clipboard Font Aligne D24 x for F G D ???? Company ------------- Sales Budget For the six months ended June 30, 20X6 Q1 Q2 Total 6 7 8 Expected unit sales Unit selling price Total sales . BIU- - Merge a copy Format Painter Clipboard Font Alignment X & fr E F D ???? Company Production Budget For the six months ended June 30, 20X6 Q1 Q2 Total Expected unit sales Add: desired ending finished goods inventory Total required units Less: beginning finished goods units Required production units AwN- E AN -NM B C D ???? Company Direct Materials Budget For the six months ended June 30, 20X6 5 Q1 Q2 Total FS 15 15 6 Units to be produced 7 Direct materials per unit (pounds) 8 Total pounds needed for production 9 Add: desired ending direct materials (pounds) 10 Total materials required 11 Less: beginning direct materials (pounds) 12 Direct materials purchases 13 Cost per pound 14 Total cost of direct material purchases 15 16 HUIC = Cut Be Copy Format Painter Calibri - 11 BI U. 2. AA .A Paste Clipboard Alignn Font D6 ???? Company Direct Labor Budget For the six months ended June 30, 20X6 AWN Q1 Q2 Total 6 Units to be produced 7 Direct labor time (hours) per unit 8 Total required direct labor hours 9 Direct labor cost per hour 10 Total direct labor cost 11 A B C D E FT ???? Company Manufacturing Overhead Budget For the six months ended June 30, 20X6 not un Q1 Q2 Total 6 Indirect labor * 7 Depreciation ** 8 Property taxes 6,000.00 6,000.00 12,000.00 9 Insurance 7,000.00 7,000.00 14,000.00 10 Utilities 3,000.00 3,000.00 6,000.00 11 Other 1,000.00 1,000.00 2,000.00 12 Total manufacturing overhead 13 Direct labor hours 14 Manufacturing overhead rate per DLH *** 16 - In addition to the cost of the maintenance worker depending on the machine you purchased, indirect labor consists of the following: Annual Position salary Factory supervisor 80000 Storehouse manager 40000 Janitor 40000 - Depreciation should include the factory building and whatever machinery configuration you chose to buy. Use straight line, no salvage value. 27 CDE ???? Company Selling, General, and Administrative Expense Budget For the six months ended June 30, 20X6 WN Q1 6 Salary and benefit expense 7 Depreciation 8 Property taxes 9 Insurance 10 Utilities 11 Other 12 Total manufacturing overhead Q2 Total $ 93,000.00 $ 93,000.00 $ 186,000.00 1,562.50 1,562.50 3,125.00 2,000.00 2,000.00 4,000.00 500.00 500.00 1,000.00 300.00 300.00 600.00 2,000.00 2,000.00 4,000.00 $ 99,362.50 $ 99,362.50 $ 198,725.00 14 NOTE: This budget should not need to be changed, and all actual amounts 15 will equal these budgeted amounts, with the possible exception of 16 "Other', which is where any off-site storage costs for excess inventory 17 will go. Since that is an unnecessary, and non-value-added cost, you 18 should be planning for storage costs to be so. That is, don't budget in 19 storage costs, budget your inventory levels low enough that you don't 20 have to pay them. 21 Paste BI U - 1 Format Painter Clipboard Font A16 : X for on AWNE BCD ???? Company Budgeted Income Statement For the six months ended June 30, 20X6 5 Sales 6 Cost of goods sold 7 Gross profit 8 Selling and administrative expenses 9 Income from operations 10 Interest expense 11 Net income SWN ???? Company Cash Budget For the six months ended June 30, 20X6 Q1 02 $ 1,600,000.00 6 Beginning cash balance 7 Add: receipts 8 Collections from customers 9 Total available cash 10 wo 11 Less: disbursements Direct materials Direct labor Manufacturing overhead 15 SG&A expenses Purchase of equipment 17 Total disbursements 18 19 Excess (deficiency) of available cash 20 over cash disbursements 22 Financing 23 Add: borrowings 24 Less: repayments incl. interest 25 Ending cash balance ???? Company Budgeted Balance Sheet As of June 30, 20X6 ou Awn 5 Cash 6 Accounts receivable 7. Inventory: 8 Raw materials Finished goods Total inventory 11 Property, plant and equipment At cost Less accumulated depreciation PP&E, net 15 Total assets 16 17 Accounts payable 18 Interest payable 19 Notes payable 20 Common stock 21 Retained earnings 22 Total liabilities and stockholders' equi 24. NOTF The following choices for production machinery are available. Each team must choose one and only one. The machinery choices are not unique; more than one group may choose the same machinery. Machine configuration A B C D E F Cost (paid in cash) $1,550,000 $1,700,000 $1.920,000 $820,000 $900.000 51.000.000 Capacity (FG units/qtr.) 40,000 44,000 50,000 42,000 46,500 $2,000 Quality control level High High High Low Low Low Each machine setup has a five year useful life. You will need to hire a maintenance technician at an annual salary of $50,000 for machinery with low quality control. The more sophisticated high quality control machines will require a more highly trained technician at an annual cost of $90,000. Machinery may only be purchased in cash. You may use the $1.6 million in cash you start with, plus any additional cash you intend to secure in Phase 2 (below). Your only raw material is clay, sold in 100 pound blocks from one of two suppliers. Shay's Clays sells a low quality clay for $51.00 per 100 pound block. Grey's Clays sells a high quality clay for $61.00 per 100 pound block. Clay is available in unlimited supply at those prices. Each supplier offers a 2% cash payment discount, or credit terms with payment due in the quarter after purchase. Each supplier has also notified you that it anticipates a price increase of $1.50-$2.50 per block to take effect in the second quarter of 20X6. Your finished good is cases of coffee mugs (12 to a case) to be sold to retailers. Each unit of finished goods requires 15 pounds of clay (regardless of which clay you use). If you put high quality clay into a high quality control machine, you get a high quality finished product. If you put low quality clay into a low quality control machine, you get a low quality finished product. If you mix high and low quality, you get a medium quality finished product. The quality of your finished product may affect how much it can be sold for in the marketplace. Your production per quarter may never exceed your machine capacity. You will choose a high skill or low skill direct labor workforce. The skill of the workforce does not affect the quality of the finished product, only the cost and efficiency of the labor. Low skilled labor costs $20.00 per hour, averages one unit of finished goods every 24 minutes (0.4 hours), and is available in unlimited supply at that price. High skilled labor costs $24.00 per hour, and averages one unit of finished goods every 18 minutes (0.3 hours). High skilled labor is also unionized, and covered by a collective bargaining agreement Inder that armat any the duration of the game. When received, all teams' startup choices will be made public. HINT: Don't spend too much time agonizing over these decisions. There is profit to be made with any combination of choices, and no combination is necessarily better than any other. Here is a quick cheat sheet outlining the tradeoffs: Machine capacity Machine quality control Material quality Low Higher up front cost. Lower cost Lower cost, total and per unit, at per unit if production is high lower production levels Higher cost. Customers may pay Lower cost. more for higher quality product. Higher cost. Customers may pay Lower cost. more for higher quality product. Lower cost when actual hours are Higher cost per unit of finished near budgeted hours. goods. Greater flexibility Direct labor skill Phase 2: Q1 Financing At the beginning of quarter 1 of 20X6, you have one chance to borrow money at an interest rate of 5% per year (1.25% per quarter). If, at any time over the rest of the simulation, you run out of money, you will have to cover the shortfall by borrowing at 12% annual interest (3% per quarter). Last National Bank (your commercial banker) will loan you up to a total of $1 million at 5% annual interest in two installments. One loan at January 1, 20x6 (the beginning of Q1), and one at April 1, 20X6 (the beginning of Q2). You choose the amount of these loans. Last National Bank requires a cash budget as part of the business plan in any commercial loan application, so these borrowings must be in it. The Q2 borrowing is a contractual commitment made at the beginning of Q1. If your circumstances change such that, by the beginning of Q2, you no longer want or need the loan, a one- time $400 contract modification fee must be paid to the bank. Your financing transactions are never revealed to the other teams. Phase 3: Q1 Purchasing Choose the number of pounds of raw material to be purchased from your supplier. All purchases must be in even multiples of 100 pounds (as they are sold in 100 pound blocks). You may take advantage of the 2% cash payment discount if you have available cash, or buy on credit, with the full amount due in the purchasing phase of Q2. Again, the gross price is $51.00 per 100 pounds of low quality clay or $61.00 per 100 pounds of high quality clay. HINT: 2% is more than 1.25%. You should always plan to take advantage of the 2% cash discount offered by your supplier, even if it means borrowing the money to pay cash for your purchases. Your purchasing decisions are never revealed to the other teams. Both suppliers are willing to enter into a purchase agreement in Q1 where you can contract to buy any amount of clay in the Q2 Purchasing phase at Q1 prices. You are not required to enter such an agreement, but it is binding; you must purchase any units of raw material you agree to purchase. After all teams' budgets (with Q1 financing and purchasing decisions) are in, demand (see next Phase) will be revealed. Phase 4: Q1 Demand The following five retail chains will be looking to buy coffee mugs in Q1. Retail price per mug (by mug quality) Customer Name Demand (total cases) Low Medium Save 'n' Go 60,000-75,000 $3.00 $4.50 $6.00 All-Mart 55,000-70,000 $5.00 $5.00 $5.00 Discount Wonderland 90,000-115,000 $5.25 $5.75 $6.00 Dave Saves U Money 40,000-50,000 $4.75 $4.85 $4.95 Bath and Kitchen World 35,000-40,000 $4.00 $5.00 $6.00 During this phase of the game, demand will be revealed. The exact number of cases each retailer wants and the order in which they will purchase will be determined (by random number generation), and given to all teams. NOTE (for the stat-heads): Demand amounts will be in even increments of 1,000 units, and the random number function will use a uniform probability distribution. Specifically, it is not a normal distribution, where the actual demand is most likely closer to the middle. All-Mart is as likely to buy 55,000 units as it is to buy 70,000 units as it is anywhere in between. Phase 5: Q1 Production Each team chooses the number of units of finished goods it is going to produce. The number is unbounded at the lower end. You are allowed (though not advised) to produce no units at all. At the upper end, the number is bounded by machine capacity (which you may never exceed) and raw materials (you must have 15 pounds of clay on hand for every unit you produce). Your production decisions are never revealed to the other teams. Phase 6: Q1 Sales In the order and amounts given in the Demand phase, customers will come to market to buy merchandise. Each team will write a bid of the price and number of units they will offer. The bids are not revealed to the other teams. The customers will accept one or more bids until their entire order is filled. The customers do not care about the quality of the mugs, and will always choose the bids that get them the highest gross profit percentage. A customer will never accept a bid that would result in a gross profit of less than 20% at retail, even if it means they do not buy all the mugs they want. EXAMPLE: Discount Wonderland buys first, and wants 94,000 cases. Team A makes all 40,000 units of its medium-quality product available at $27.95 each. Team B makes 25,000 of its 45,000 units of low-quality product available for $26.00 each. Team C makes all 42,000 units of its high-quality product available for $61.99 each. Team D makes all 40,000 units of its high-quality product available for $27.60 each. Team E makes all 50,000 units of its low-quality product available for $30.00 each. Discount Wonderland ranks these bids as follows: Retail price Team per mug per case Bid GP/case GP% Action D (High) $6.00 $72.00 $27.60 $44.40 61.7% Buy all 40,000 offered. A(Med.) $5.75 $69.00 $27.95 $41.05 59.5% Buy all 40,000 offered. B (Low) $5.25 $63.00 $26.00 $37.00 58.7% Buy 14.000 demand is filled. E (Low) $5.25 S63.00 $30.00 $33.00 52.4% Do not buy. C (High) $6.00 $72.00 $61.99 S10.01 13.9% Do not and would never) buy. Although bids are never revealed, sales are. After each customer buys, the details of each transaction (price and quantity) are revealed to all teams. All sales are for credit. Each of the five customers will buy in turn, with new bids solicited for each customer. Teams may change the terms of their bids from one customer to the next. HINTS Setting prices will be the single most important factor that determines your company's success. To make a profit, you must consider the full cost per unit (not just product costs Setting prices will be the single most important factor that determines your company's success. To make a profit, you must consider the full cost per unit (not just product costs in a Chapter 14/15 sense). Even though selling and administrative costs do not go into the product, they are still paid with real money, and you must price your product high enough to cover those costs. More specifically, by the mathematics of this game, it is impossible to sell any product priced above $57.60, and impossible to make a profit selling any product priced below $18.93. This game has been set up so that total market demand approximates supply. You may be able to extract higher prices later in the buying sequence as your competition runs out of goods to sell. Phase 7: Q1 Settlement and Reporting Each team collects 70% of its Q1 sales in cash, then spends cash to pay all of the following. 1. Q1 direct labor costs: Will depend on the skill of your direct labor workforce and your actual production. 2. Q1 overhead costs: All pre-filled numbers in the overhead budget will be the actual numbers. Indirect labor (not pre- filled) is paid as well. 3. O1 selling and administrative costs: All pre-filled numbers in the SG&A budget will be the actual numbers, with the possible exception of "Other". Your facilities have the capacity to store up to 30,000 pounds of clay, and up to 3,000 units of finished goods. If you exceed these amounts, you will have to rent off-site storage at a cost of $0.03 per pound of clay and $0.50 per unit of finished goods that you cannot store. These costs will be paid in cash, and included in the "Other" line. If you have a cash shortfall, you must borrow the difference on a line of credit that accrues interest at 12% per year (3% per quarter). Q1 interest will be charged for the entire amount borrowed, and since you have no cash) rolled into the loan balance. Your instructor will provide you with a GAAP-basis balance sheet as of March 31, 20X6 and income statement for the quarter, as well as an updated count of the raw materials and finished goods you have on hand. Phase 8: Q2 Financing If you have cash, you may repay all or part of what you "In preparing for battle, I have always found that Part 2: The Simulation Game Each machine setup has a five year useful life. You will need to hire a maintenance technician at an annual salary of $50,000 for machinery with low quality control. The more sophisticated high quality control machines will require a more highly trained technician at an annual cost of $90,000 plans are useless, but planning is indispensable." Background Dwight D. Eisenhower Machinery may only be purchased in cash. You may use the $1.6 million in cash you start with, plus any additional cash you intend to secure in Phase 2 (below). You are the management team of a startup company entering the fast-paced, cutthroat world of ceramic coffee mug manufacturing. You have land, buildings, cash, and an assembled workforce of managers, salespersons, administrative personnel, and most indirect labor. You do not have any manufacturing equipment, raw materials, direct laborers, or liabilities. Your balance sheet is as follows: Your only raw material is clay, sold in 100 pound blocks from one of two suppliers. Shay's Clays sells a low quality clay for $51.00 per 100 povod block. Grey's Clays sells a high quality clay for $61.00 per 200 povod block. Clay is available in unlimited supply at those prices. Each supplier offers a 296 cash payment discount, or credit terms with payment due in the quarter after purchase. Each supplier has also notified you that it anticipates a price increase of $1.50-$2.50 per block to take effect in the second quarter of 20X6. Project 2 - Budgeting This is a team project, and teams have been assigned by your instructor. This project will consist of three main steps: 1. Master Budget: Prepare a master budget, including a sales budget, production budget, raw materials budget, direct labor budget, overhead budget, budgeted income statement, cash budget, and budgeted balance sheet. 2. Simulation: Make investment, hiring, purchasing, financing, production, and pricing decisions in a two calendar quarter simulation game where you are competing against the other teams in the class in the same market to earn the highest profits. 3. Budgetary Control: Prepare a static budget report and a flexible budget report on the income statement. Prepare a responsibility report for the entire company, treating it as an investment center. Assess your company's performance in the simulation compared to the budget. ???? Company Balance sheet as of December 31, 20X5 Cash $1,400,000 Property, plant, and equipment, net 725.000 Total assets $2,125.000 Your finished good is cases of coffee mugs (12 to a case) to be sold to retailers. Each unit of finished foods requires 15 pounds of clay (regardless of which clay you use). If you put high quality clay into a high quality control machine, you get a high quality finished product. If you put low quality clay into a low quality control machine, you get a low quality finished product. If you mix high and low quality, you get a medium quality finished product. The quality of your finished product may affect how much it can be sold for in the marketplace. Your production per quarter may never exceed your machine capacity. Common stock $2.125.000 Total liabilities and stockholders' equity $2.125.000 Property, plant, and equipment consists of a parcel of land (at $200,000 cost), on which two buildings sit. One is the factory building ($400,000 cost), and the other is the office/sales building ($125,000 cost). Both buildings have a 20 year useful life. Part 1: The Master Budget Instructions: You will choose a high skill or low skill direct labor workforce. The skill of the workforce does not affect the quality of the finished product, only the cost and efficiency of the labor. Low skilled labor costs $20.00 per hour, averages one unit of finished goods every 24 minutes (0.4 hours), and is available in unlimited supply at that price. High skilled labor costs $24.00 per hour, and averages one unit of finished goods every 18 minutes (0.3 hours). High skilled labor is also unionized, and covered by a collective bargaining agreement. Under that agreement, any hours direct laborers work above what the direct labor budget calls for is paid at time-and-a-half ($36.00 per hour), and they must be paid for 90% of the hours in the budget (even if they work less). 1. Download the "Mug Master Budget.xlsx" file from Canvas. 2. Read 'Part 2: The Simulation Game of this project. The master budget cannot be completed without the information it contains. 3. Read Chapter 21 - Pricing (learning objectives 1 and 2) from the text. In this budgeting assignment, the selling price will not be given; you will choose it. 4. Complete your master budget with the templates provided in the Excel file. Any numbers that have already been filled in may be assumed to be actual numbers, and need not (and should not) be changed. Note that the selling and administrative expenses budget is complete, and does not need to be edited. For simplicity, assume no income taxes. Any numbers not filled in are up to you. There is not a "right" answer. You will make decisions over a series of phases as detailed below. The other teams in the class are making these same decisions, buying from the same suppliers, selling to the same customers, etc. The goal of the simulation game is to make the most profit, not to have the most accurate budget. Whon presented with a choice between making more money or sticking to the budget, always choose to make Copy more money. The game will be executed remotely via Canvas in the following steps. EXAMPLE: If you budget 12,000 hours of highly skilled direct labor to make 40,000 units of finished goods, but then your plans change, and you only produce 30,000 units of finished goods, using 9,000 hours of direct labor, you still pay $259,200 for 10,800 hours (90% of your original budget). Phase 1: Startup EXAMPLE: If you budget 12,000 hours of highly skilled direct labor to make 40,000 units of finished foods, but then your plans change, and you produce 50,000 units of finished goods, using 15,000 hours of direct labor, you pay for 12,000 hours at $24.00 per hour, and the additional 3,000 hours at $36.00 per hour, for a total of $396,000 Grading: A total of 50 points will be available in the budget portion of the assignment. 35 points will be for the budget itself. (Are all budgets completed? Are all necessary items included? Are numbers consistent with facts of the case?) 15 points are for effective use of Excel. (Are formulas and cell references used instead of keyed-in values? Is number formatting correct? Is the layout easy to read?) Every team will choose production machinery to purchase, a raw material supplier to use, and a direct labor workforce. Each team's machinery, supplier, and labor choices will be revealed publicly to all teams. Every team will also choose a company name. [You don't want to be called Team B the whole time, do you?] The following choices for production machinery are available. Each team must choose one and only one. The machinery choices are not unique; more than one group may choose the same machinery. Machine configuration ATBTCTDT ETF Cost (paid in cash) $1,550,000 $1,700,000 $1,920,000 $820,000 $900,000 $1,000,000 Capacity (FG units/qtr.) 40,000 44,000 50,000 42,000 46,500 52,000 Quality control level High High High Low Low Low Your machinery, material, and direct labor choices are fixed for the duration of the game. When received, all teams' startup choices will be made public. In most cases, your budget, for the purpose of Part 2, will stand as is. In rare cases (for instance, if the budget reflects some critical misunderstanding of the case that would make success in Part 2 impossible), the instructor may return suggested revisions to your budget before Part 2 starts. HINT: Don't spend too much time agonizing over these decisions. There is profit to be made with any combination of choices, and no combination is necessarily better than any other. Here is a quick cheat sheet outlining the tradeoffs: Phase 4:01 Demand Discount Wonderland ranks these bids as follows: Machine capacity Low Lower cost, total and per unit, at lower production levels Lower cost. The following five retail chains will be looking to buy coffee mugs in 01. Machine quality control High Higher up front cost. Lower cost per unit if production is high. Higher cost. Customers may pay more for higher quality product. Higher cost. Customers may pay more for higher quality product. Lower cost when actual hours are near budgeted hours. Material quality Lower cost. Retail price Team per mug per case D (High) $6.00 $72.00 A Med.) | $5.75 $69.00 B (Low) $5.25 $63.00 E (Low) | $5.25 | 563.00 C (High) 56.00 $72.00 Bid $27.60 $27.95 $26.00 $30.00 5 61.99 Retail price per mug (by mur quality) Customer Name | Demand (total cases) Low Medium High Save 'n' Go 60.000-75,000 $3.00 $4.50 $6.00 All-Mart 55,000-70,000 $5.00 $5.00 $5.00 Discount Wonderland 1 90,000-115,000 $5.25T $5.75T $6.00 Dave Saves U Money 40,000-50,000 $4.75 $4.85 $4.95 Bath and Kitchen World 35,000-40,000 $4.00 $5.00 $6.00 During this phase of the game, demand will be revealed. The exact number of cases each retailer wants and the order in which they will purchase will be determined (by random number generation), and given to all teams. GP/case GP% $44.40 61.7% $41.05 59.596 $37.00 58.7% $33.00 T 52.4% $10.01 13.9% Action Buy all 40,000 offered. Buy all 40.000 offered Buy 14,000; demand is filled. Do not buy. Do not (and would never) buy Direct labor skill Higher cost per unit of finished goods. Greater flexibility Phase 2: 01 Financing At the beginning of quarter 1 of 20X6, you have one chance to borrow money at an interest rate of 596 per year (1.25% per quarter). If, at any time over the rest of the simulation, you run out of money, you will have to cover the shortfall by borrowing at 12% annual interest (3% per quarter). Although bids are never revealed, sales are. After each customer buys, the details of each transaction (price and quantity) are revealed to all teams. All sales are for credit. Each of the five customers will buy in turn, with new bids solicited for each customer. Teams may change the terms of their bids from one customer to the next. HINTS Last National Bank (your commercial banker) will loan you up to a total of $1 million at 5% annual interest in two installments. One loan at January 1, 20x6 (the beginning of Q1), and one at April 1, 20X6 (the beginning of Q2). You choose the amount of these loans. Last National Bank requires a cash budget as part of the business plan in any commercial loan application, so these borrowings must be in NOTE for the stat-heads): Demand amounts will be in even increments of 1,000 units, and the random number function will use a uniform probability distribution. Specifically, it is not a normal distribution where the actual demand is most likely closer to the middle. All-Mart is as likely to buy 55,000 units as ir is to buy 70,000 units as it is anywhere in between Setting prices will be the single most important factor that determines your company's success. To make a profit, you must consider the full cost per unit (not just product costs in a Chapter 14/15 sense). Even though selling and administrative costs do not go into the product, they are still paid with real money, and you must price your product high enough to cover those costs. More specifically, by the mathematics of this game, it is impossible to sell any product priced above $57.60, and impossible to make a profit selling any product priced below $18.93 This game has been set up so that total market demand approximates supply. You may be able to extract higher prices later in the buying sequence as your competition runs out of goods to Phase 5:01 Production Each team chooses the number of units of finished goods it is going to produce. The number is unbounded at the lower end. You are allowed (though not advised) to produce no units at all. At the upper end, the number is bounded by machine capacity (which you may never exceed) and raw materials (you must have 15 pounds of clay on hand for every unit you produce). Your production decisions are never revealed to the other teams. The Q2 borrowing is a contractual commitment made at the beginning of Q1. If your circumstances change such that, by the beginning of Q2, you no longer want or need the loan, a one-time $400 contract modification fee must be paid to the bank. Your financing transactions are never revealed to the other teams. Sell Phase 3:01 Purchasing Phase 7:01 Settlement and Reporting Each team collects 70% of its Q1 sales in cash, then spends cash to pay all of the following. Choose the number of pounds of raw material to be purchased from your supplier. All purchases must be in even multiples of 100 pounds (as they are sold in 100 pound blocks). You may take advantage of the 2% cash payment discount if you have available cash, or buy on credit, with the full amount due in the purchasing phase of 02. Again, the gross price is $51.00 per 100 pounds of low quality clay or $61.00 per 100 pounds of high quality clay. HINT: 2% is more than 1.25%. You should always plan to take advantage of the 2% cash discount offered by your supplier, even if it means borrowing the money to pay cash for your purchases. Phase 6:01 Sales Copy In the order and amounts given in the Demand phase, customers will come to market to buy merchandise. Each team will write a bid of the price and number of units they will offer. The bids are not revealed to the other teams. The customers will accept one or more bids until their entire order is filled. The customers do not care about the quality of the mugs, and will always choose the bids that get them the highest gross profit percentage. A customer will never accept a bid that would result in a gross profit of less than 20% at retail, even if it means they do not buy all the mugs they want. EXAMPLE: Discount Wonderland buys first, and wants 94,000 cases. 1. 91 direct labor costs: Will depend on the skill of your direct labor workforce and your actual production. 2. Q1 overhead costs: All pre-filled numbers in the overhead budget will be the actual numbers. Indirect labor (not pre-filled) is paid as well. 3. Q1 selling and administrative costs: All pre-filled numbers in the SG&A budget will be the actual numbers, with the possible exception of "Other". Your facilities have the capacity to store up to 30,000 pounds of clay, and up to 3,000 units of finished goods. If you exceed these amounts, you will have to rent off-site storage at a cost of $0.03 per pound of clay and $0.50 per unit of finished goods that you cannot store. These costs will be paid in cash, and included in the "Other" line. Your purchasing decisions are never revealed to the other teams. Both suppliers are willing to enter into a purchase agreement in Q1 where you can contract to buy any amount of clay in the Q2 Purchasing phase at Q1 prices. You are not required to enter such an agreement, but it is binding: you must purchase any units of raw material you agree to purchase. After all teams' budgets (with Q1 financing and purchasing decisions) are in, demand (see next Phase) will be revealed. Team A makes all 40,000 units of its medium-quality product available at $27.95 each Team B makes 25,000 of its 45,000 units of low-quality product available for $26.00 each. Team makes all 42,000 units of its high-quality product available for $61.99 each Team D makes all 40,000 units of its high-quality product available for $27.60 each. Team E makes all 50,000 units of its low-quality product available for $30.00 each. If you have a cash shortfall, you must borrow the difference on a line of credit that accrues interest at 12% per year (3% per quarter). Q1 interest will be charged for the entire amount borrowed, and since you have no cash) rolled into the loan balance. Clipboard Font Aligne D24 x for F G D ???? Company ------------- Sales Budget For the six months ended June 30, 20X6 Q1 Q2 Total 6 7 8 Expected unit sales Unit selling price Total sales . BIU- - Merge a copy Format Painter Clipboard Font Alignment X & fr E F D ???? Company Production Budget For the six months ended June 30, 20X6 Q1 Q2 Total Expected unit sales Add: desired ending finished goods inventory Total required units Less: beginning finished goods units Required production units AwN- E AN -NM B C D ???? Company Direct Materials Budget For the six months ended June 30, 20X6 5 Q1 Q2 Total FS 15 15 6 Units to be produced 7 Direct materials per unit (pounds) 8 Total pounds needed for production 9 Add: desired ending direct materials (pounds) 10 Total materials required 11 Less: beginning direct materials (pounds) 12 Direct materials purchases 13 Cost per pound 14 Total cost of direct material purchases 15 16 HUIC = Cut Be Copy Format Painter Calibri - 11 BI U. 2. AA .A Paste Clipboard Alignn Font D6 ???? Company Direct Labor Budget For the six months ended June 30, 20X6 AWN Q1 Q2 Total 6 Units to be produced 7 Direct labor time (hours) per unit 8 Total required direct labor hours 9 Direct labor cost per hour 10 Total direct labor cost 11 A B C D E FT ???? Company Manufacturing Overhead Budget For the six months ended June 30, 20X6 not un Q1 Q2 Total 6 Indirect labor * 7 Depreciation ** 8 Property taxes 6,000.00 6,000.00 12,000.00 9 Insurance 7,000.00 7,000.00 14,000.00 10 Utilities 3,000.00 3,000.00 6,000.00 11 Other 1,000.00 1,000.00 2,000.00 12 Total manufacturing overhead 13 Direct labor hours 14 Manufacturing overhead rate per DLH *** 16 - In addition to the cost of the maintenance worker depending on the machine you purchased, indirect labor consists of the following: Annual Position salary Factory supervisor 80000 Storehouse manager 40000 Janitor 40000 - Depreciation should include the factory building and whatever machinery configuration you chose to buy. Use straight line, no salvage value. 27 CDE ???? Company Selling, General, and Administrative Expense Budget For the six months ended June 30, 20X6 WN Q1 6 Salary and benefit expense 7 Depreciation 8 Property taxes 9 Insurance 10 Utilities 11 Other 12 Total manufacturing overhead Q2 Total $ 93,000.00 $ 93,000.00 $ 186,000.00 1,562.50 1,562.50 3,125.00 2,000.00 2,000.00 4,000.00 500.00 500.00 1,000.00 300.00 300.00 600.00 2,000.00 2,000.00 4,000.00 $ 99,362.50 $ 99,362.50 $ 198,725.00 14 NOTE: This budget should not need to be changed, and all actual amounts 15 will equal these budgeted amounts, with the possible exception of 16 "Other', which is where any off-site storage costs for excess inventory 17 will go. Since that is an unnecessary, and non-value-added cost, you 18 should be planning for storage costs to be so. That is, don't budget in 19 storage costs, budget your inventory levels low enough that you don't 20 have to pay them. 21 Paste BI U - 1 Format Painter Clipboard Font A16 : X for on AWNE BCD ???? Company Budgeted Income Statement For the six months ended June 30, 20X6 5 Sales 6 Cost of goods sold 7 Gross profit 8 Selling and administrative expenses 9 Income from operations 10 Interest expense 11 Net income SWN ???? Company Cash Budget For the six months ended June 30, 20X6 Q1 02 $ 1,600,000.00 6 Beginning cash balance 7 Add: receipts 8 Collections from customers 9 Total available cash 10 wo 11 Less: disbursements Direct materials Direct labor Manufacturing overhead 15 SG&A expenses Purchase of equipment 17 Total disbursements 18 19 Excess (deficiency) of available cash 20 over cash disbursements 22 Financing 23 Add: borrowings 24 Less: repayments incl. interest 25 Ending cash balance ???? Company Budgeted Balance Sheet As of June 30, 20X6 ou Awn 5 Cash 6 Accounts receivable 7. Inventory: 8 Raw materials Finished goods Total inventory 11 Property, plant and equipment At cost Less accumulated depreciation PP&E, net 15 Total assets 16 17 Accounts payable 18 Interest payable 19 Notes payable 20 Common stock 21 Retained earnings 22 Total liabilities and stockholders' equi 24. NOTF The following choices for production machinery are available. Each team must choose one and only one. The machinery choices are not unique; more than one group may choose the same machinery. Machine configuration A B C D E F Cost (paid in cash) $1,550,000 $1,700,000 $1.920,000 $820,000 $900.000 51.000.000 Capacity (FG units/qtr.) 40,000 44,000 50,000 42,000 46,500 $2,000 Quality control level High High High Low Low Low Each machine setup has a five year useful life. You will need to hire a maintenance technician at an annual salary of $50,000 for machinery with low quality control. The more sophisticated high quality control machines will require a more highly trained technician at an annual cost of $90,000. Machinery may only be purchased in cash. You may use the $1.6 million in cash you start with, plus any additional cash you intend to secure in Phase 2 (below). Your only raw material is clay, sold in 100 pound blocks from one of two suppliers. Shay's Clays sells a low quality clay for $51.00 per 100 pound block. Grey's Clays sells a high quality clay for $61.00 per 100 pound block. Clay is available in unlimited supply at those prices. Each supplier offers a 2% cash payment discount, or credit terms with payment due in the quarter after purchase. Each supplier has also notified you that it anticipates a price increase of $1.50-$2.50 per block to take effect in the second quarter of 20X6. Your finished good is cases of coffee mugs (12 to a case) to be sold to retailers. Each unit of finished goods requires 15 pounds of clay (regardless of which clay you use). If you put high quality clay into a high quality control machine, you get a high quality finished product. If you put low quality clay into a low quality control machine, you get a low quality finished product. If you mix high and low quality, you get a medium quality finished product. The quality of your finished product may affect how much it can be sold for in the marketplace. Your production per quarter may never exceed your machine capacity. You will choose a high skill or low skill direct labor workforce. The skill of the workforce does not affect the quality of the finished product, only the cost and efficiency of the labor. Low skilled labor costs $20.00 per hour, averages one unit of finished goods every 24 minutes (0.4 hours), and is available in unlimited supply at that price. High skilled labor costs $24.00 per hour, and averages one unit of finished goods every 18 minutes (0.3 hours). High skilled labor is also unionized, and covered by a collective bargaining agreement Inder that armat any the duration of the game. When received, all teams' startup choices will be made public. HINT: Don't spend too much time agonizing over these decisions. There is profit to be made with any combination of choices, and no combination is necessarily better than any other. Here is a quick cheat sheet outlining the tradeoffs: Machine capacity Machine quality control Material quality Low Higher up front cost. Lower cost Lower cost, total and per unit, at per unit if production is high lower production levels Higher cost. Customers may pay Lower cost. more for higher quality product. Higher cost. Customers may pay Lower cost. more for higher quality product. Lower cost when actual hours are Higher cost per unit of finished near budgeted hours. goods. Greater flexibility Direct labor skill Phase 2: Q1 Financing At the beginning of quarter 1 of 20X6, you have one chance to borrow money at an interest rate of 5% per year (1.25% per quarter). If, at any time over the rest of the simulation, you run out of money, you will have to cover the shortfall by borrowing at 12% annual interest (3% per quarter). Last National Bank (your commercial banker) will loan you up to a total of $1 million at 5% annual interest in two installments. One loan at January 1, 20x6 (the beginning of Q1), and one at April 1, 20X6 (the beginning of Q2). You choose the amount of these loans. Last National Bank requires a cash budget as part of the business plan in any commercial loan application, so these borrowings must be in it. The Q2 borrowing is a contractual commitment made at the beginning of Q1. If your circumstances change such that, by the beginning of Q2, you no longer want or need the loan, a one- time $400 contract modification fee must be paid to the bank. Your financing transactions are never revealed to the other teams. Phase 3: Q1 Purchasing Choose the number of pounds of raw material to be purchased from your supplier. All purchases must be in even multiples of 100 pounds (as they are sold in 100 pound blocks). You may take advantage of the 2% cash payment discount if you have available cash, or buy on credit, with the full amount due in the purchasing phase of Q2. Again, the gross price is $51.00 per 100 pounds of low quality clay or $61.00 per 100 pounds of high quality clay. HINT: 2% is more than 1.25%. You should always plan to take advantage of the 2% cash discount offered by your supplier, even if it means borrowing the money to pay cash for your purchases. Your purchasing decisions are never revealed to the other teams. Both suppliers are willing to enter into a purchase agreement in Q1 where you can contract to buy any amount of clay in the Q2 Purchasing phase at Q1 prices. You are not required to enter such an agreement, but it is binding; you must purchase any units of raw material you agree to purchase. After all teams' budgets (with Q1 financing and purchasing decisions) are in, demand (see next Phase) will be revealed. Phase 4: Q1 Demand The following five retail chains will be looking to buy coffee mugs in Q1. Retail price per mug (by mug quality) Customer Name Demand (total cases) Low Medium Save 'n' Go 60,000-75,000 $3.00 $4.50 $6.00 All-Mart 55,000-70,000 $5.00 $5.00 $5.00 Discount Wonderland 90,000-115,000 $5.25 $5.75 $6.00 Dave Saves U Money 40,000-50,000 $4.75 $4.85 $4.95 Bath and Kitchen World 35,000-40,000 $4.00 $5.00 $6.00 During this phase of the game, demand will be revealed. The exact number of cases each retailer wants and the order in which they will purchase will be determined (by random number generation), and given to all teams. NOTE (for the stat-heads): Demand amounts will be in even increments of 1,000 units, and the random number function will use a uniform probability distribution. Specifically, it is not a normal distribution, where the actual demand is most likely closer to the middle. All-Mart is as likely to buy 55,000 units as it is to buy 70,000 units as it is anywhere in between. Phase 5: Q1 Production Each team chooses the number of units of finished goods it is going to produce. The number is unbounded at the lower end. You are allowed (though not advised) to produce no units at all. At the upper end, the number is bounded by machine capacity (which you may never exceed) and raw materials (you must have 15 pounds of clay on hand for every unit you produce). Your production decisions are never revealed to the other teams. Phase 6: Q1 Sales In the order and amounts given in the Demand phase, customers will come to market to buy merchandise. Each team will write a bid of the price and number of units they will offer. The bids are not revealed to the other teams. The customers will accept one or more bids until their entire order is filled. The customers do not care about the quality of the mugs, and will always choose the bids that get them the highest gross profit percentage. A customer will never accept a bid that would result in a gross profit of less than 20% at retail, even if it means they do not buy all the mugs they want. EXAMPLE: Discount Wonderland buys first, and wants 94,000 cases. Team A makes all 40,000 units of its medium-quality product available at $27.95 each. Team B makes 25,000 of its 45,000 units of low-quality product available for $26.00 each. Team C makes all 42,000 units of its high-quality product available for $61.99 each. Team D makes all 40,000 units of its high-quality product available for $27.60 each. Team E makes all 50,000 units of its low-quality product available for $30.00 each. Discount Wonderland ranks these bids as follows: Retail price Team per mug per case Bid GP/case GP% Action D (High) $6.00 $72.00 $27.60 $44.40 61.7% Buy all 40,000 offered. A(Med.) $5.75 $69.00 $27.95 $41.05 59.5% Buy all 40,000 offered. B (Low) $5.25 $63.00 $26.00 $37.00 58.7% Buy 14.000 demand is filled. E (Low) $5.25 S63.00 $30.00 $33.00 52.4% Do not buy. C (High) $6.00 $72.00 $61.99 S10.01 13.9% Do not and would never) buy. Although bids are never revealed, sales are. After each customer buys, the details of each transaction (price and quantity) are revealed to all teams. All sales are for credit. Each of the five customers will buy in turn, with new bids solicited for each customer. Teams may change the terms of their bids from one customer to the next. HINTS Setting prices will be the single most important factor that determines your company's success. To make a profit, you must consider the full cost per unit (not just product costs Setting prices will be the single most important factor that determines your company's success. To make a profit, you must consider the full cost per unit (not just product costs in a Chapter 14/15 sense). Even though selling and administrative costs do not go into the product, they are still paid with real money, and you must price your product high enough to cover those costs. More specifically, by the mathematics of this game, it is impossible to sell any product priced above $57.60, and impossible to make a profit selling any product priced below $18.93. This game has been set up so that total market demand approximates supply. You may be able to extract higher prices later in the buying sequence as your competition runs out of goods to sell. Phase 7: Q1 Settlement and Reporting Each team collects 70% of its Q1 sales in cash, then spends cash to pay all of the following. 1. Q1 direct labor costs: Will depend on the skill of your direct labor workforce and your actual production. 2. Q1 overh