Colonial Tap Company (CTC) is a manufacturer of taps and fittings for the plumbing trade, located in Brisbane. The company was established by Ken Hall in 1951, with a workforce of 10, to meet the needs ofthe postwar housing boom. Its product range was fairly limited but the company had an excellent reputation for quality.

Nowadays, CTC manufactures an extensive range of high quality brass and chrome taps. The company is managed by Ken's son, Michael, and employs 20 people. It has annual sales averaging approximately $1 million. Although it has been consistently profitable, CTC has experienced increasing pressure from competitors since the early 2000s. The company uses a cost-plus approach to pricing but is having to reduce its markup constantly in order to maintain market share.

Both Ken and Michael qualified as engineers. The business is small and has never been able to employ an accountant. Instead, a bookkeeper calculates monthly profit as sales revenue minus expenses. Prices are based on rough estimates of cost of direct material and direct labour inputs plus a 50 per cent markup. With the decline in profit and constant pressure on prices, Michael began to feel uneasy about the way costs and profits were calculated. The results for the month just ended were:

Sales Less Expenses: Materials purchased Factory wagesproduction line Production supervisor's salary Rent Council rates Sales staff Advertising Equipment depreciation Electricity Manager's salary Truck lease Total expenses Net profit $300000 250000 35000 80000 5000 110000 18000 25000 12000 80000 10000 $980 000 925 000 $ 55000