CMRNA is a small-scale contract producer and seller of drugs and vaccines for clinical trials. The master budget will detail each quarter's activity and the activity for the year in total. CMRNA will base the 2021 budget on the following information:

1. Expected sales, in units, for the four quarters of 2021 and the first two quarters of 2022 are as follows:

2021 Q1

2,800

2021 Q2

15,000

2021 Q3

26,000

2021 Q4

35,000

2022 Q1

40,000

2022 Q2

43,000

The selling price for 2021 has been set at $40.00 per unit. CMRNA's fiscal year ends on December 31. All sales are on account. 80% of sales on account are collected in the quarter of sale; 20% of sales on account are collected in the following quarter. Assume that all the balance in accounts receivable (as of 31^stDecember, 2020) will be collected in the first quarter of 2021. Assume no bad debts are incurred.

1. Each component requires the following direct inputs:

• 4 micrograms (mcg) of direct material available at a price of $1.00 per mcg.
• 0.002 hours of direct labour at a rate of $40.00 per hour.

CMRNA has a policy of maintaining direct material ending inventory equal to 10% of direct materials needed forthe next quarter's production requirements. All raw materials are purchased on account. 50% of a quarter's purchases are paid for in the quarter of purchase; the remaining in the following quarter. CMRNA has a policy of keeping ending finished goods inventory equal to 10% ofnext quarter's forecasted sales. There is no beginning or ending work-in-process inventory. Direct labourers are paid at the end of each month.

1. Total budgeted variable overhead costs for the 2021 year(at a level of sales estimated in Item 1 above)follow:

Indirect materials

$26,986

Indirect labour

55,520

Employee benefits

83,280

Inspections

31,500

Utilities

41,640

Total

$238,926

Variable overhead is applied to components using a predetermined overhead rate based on annual direct labour hours. All variable overhead items are paid for in the quarter incurred.

1. The annual budget for fixed manufacturing overhead items follows:

Supervisory salaries

$186,200

Property taxes

26,000

Insurance

28,800

Maintenance

46,000

Utilities

33,400

Engineering Time

41,850

Depreciation

96,000

Total

$458,250

All fixed overheads are paid evenly each quarter except for property taxes which are paid for in the third quarter of the year. Fixed overhead is applied to production using a predetermined overhead rate based on the estimated annual number of units produced.

1. Variable selling and administration expenses include commissions and other administrative expenses. Commissions are budgeted at 5% of sales dollars for the quarter. 80% of these commissions are paid in the quarter they incurred, while 20% are paid in the following quarter. Other variable administration costs are $2.00 per unit. These costs are paid for in the quarter they incurred.

Annual fixed selling and administration expenses are as follows:

Sales salaries

$152,000

Administration salaries

100,000

Travel

24,000

Insurance

3,400

Utilities

2,800

Depreciation

12,000

Other

2800

Total

$297,000

Fixed selling and administration expenses are paid evenly over the four quarters of the year.

1. CMRNA makes quarterly income tax installments based on the projected taxable income for the year. The company is subject to a 30% tax rate. For the master budget, CMRNA assumes tax expenses incurring for the year 2021 are paid in cash evenly over the four quarters of the year 2021.
2. CMRNA plans the following financing and investing activities for the coming year:

• The company is planning to buy a piece of land, costing $70,000, in the last quarter of 2021. This piece of land will be held for future plant expansion. The company will pay cash for the land and will finance any resulting cash shortfall by drawing on its operating line of credit.
• The company has an operating line of credit established with its bank. This allows the company to borrow in multiples of $5,000 to cover any cash shortfalls. All borrowing is assumed to occur atthe beginning of the quarterin which the funds are required and all repayment is assumed to be made atthe end of the quarterin which funds are available for repayment. Simple interest at the rate of 10% per annum is paid on a quarterly basis on all outstanding short-term loans. All repayments are in multiples of $1,000.
• The company currently has $240,000 in an outstanding long-term loan with an annual interest rate of 9% and makes quarterly interest only payments at the end of each quarter. The loan is due in 2033.
• The company outsources some of the manufacturing for $500,000. The company pays the outsourcing fee in cash at the end of the first quarter of year 2021.

1. The company's simplified balance sheet as of December 31, 2020 is as follows:

Cash

$31,000

Accounts Payable (1)

$30

Accounts Receivable

800

Commissions Payable

500

Raw Material Inventory

0

Long-term Debt

240,000

Finished Goods Inventory

0

Capital Stock

1,849,270

Buildings and Equipment

2,020,000

Retained Earnings

(350,000)

Accumulated Depreciation

(312,000)

Total Assets

$1,739,800

Total Liabilities and Shareholder's Equity

$1,739,800

These balance sheet figures must be taken as given. Negative balances are in the parentheses.

The current price of $40.00 per unit is set during the last year's pre-trial stage production. CMRNAplans to scale up the production to meet thegrowing demand. The resulting economies of scale allow the company to consider strategic pricingand compensation. The strategic price should satisfy the following criteria:The price should be less than $40.00 per unit to beat other small-scale producersin price competition.The company must achieveprofit margins (= Operating income/Sales) between 5% and 10%The company also needs to increaseemployee benefitsand compensationby $90,000 to retain skilled manufacturing workers and production engineers.

Provide support for your strategic pricing and compensation based on the following discussion: Describe a business, industry, and regulatory environment that provide competitive advantages to firms maximizing profits. Describe the business environments that reward firms maximizing employee benefits and compensation. Discuss potential trade-offs (benefits and risks) in the strategic pricing and compensation in an industry or a business of your choice (e.g., services, media, luxury goods, retail, software engineering, manufacturing, real estate development and investment, bio-tech, fin-tech, advertisement, higher education, mining, oil and gas, agriculture, social work, professional services, etc.)