Emily Carrigan was recently transferred to the Appliances Division of Delancy Corporation. Shortly after taking over her new position as divisional controller, Carrigan was asked to develop the divisions predetermined overhead rate for the upcoming year. The accuracy of the rate is important. Delancy Corporation uses direct labour-hours in all of its divisions as the allocation base for manufacturing overhead. To compute the predetermined overhead rate, Carrigan divided her estimate of the total manufacturing overhead for the coming year by the production managers estimate of the total direct labour-hours for the coming year. She took her computations to the divisions general manager for approval but was quite surprised when he suggested a modification in the base. Her conversation with the general manager of the Appliances Division, Harry Dafoe went like this? Carrigan: Here are my calculations for next years predetermined overhead rate. If you approve, we can enter the rate into the computer on January 1 and be up and running in the job-order costing system right away for this year. Dafoe: Thanks for coming up with the calculations so quickly. They look just fine. There is however, one slight modification Id like to see. Your estimate of the total direct labour-hours for the year is 110,000 hours. How about cutting that to about 105,000? Carrigan: I dont know if I can do that. The production manager says she will need about 1110,000 direct labour-hours to meet the sales projections for next year. Besides, there will be over 108,000 direct labour-hours during the current year, and sales are projected to be higher next year. Dafoe: Emily, I know all of that. I would still like to reduce the direct labour-hours in the base to something like 105,000 hours. You probably dont know that I had an agreement with your predecessor as divisional controller to shave 5% or so off the estimated direct labour-hours every year. That way, we kept a reserve that usually resulted in a big boost to operating income at the end of the fiscal year in December. We called it our Christmas bonus. Corporate headquarters always seemed as pleased as punch that we could pull off such a miracle at the end of the year. This system has worked well for many years, and I dont want to change it now. Required: As an independent consultant apprised of the situation - Prepare a brief report in the form of a memo, to Delancy owner Angela Su, providing the following: Explain to owner what is the main problem? ** What impact would shaving 5% off the estimated direct labour-hours in the base of the predetermined overhead rate have on financial statements? (consider MOH, WIP, FG, COGS, etc) a. During the year? b. At the end of the year? Include in your report a discussion about the following: Assuming the company stakeholders are investors, creditors, tax authority, employees, insurers - how are they impacted by PDOR manipulation? What is your recommendation to reduce yearend impact of cogs adjustment? Be ready to present an Elevator pitch or a quick summary of your analysis. The report should include the following: Cover page with student name, student number, date Memo to/from/date/detailed subject line. This acts like an executive summary. If the owner was only to read one page, this would summarize your report. Complete this last. Introduction what the reader can expect from the report? Provide the scope. Background/Situational Analysis and Assessment. Company context, business overview What is/are the major issue(s) Who are you writing be mindful of your audience. What are the alternatives available to the company? Analysis of alternatives (if applicable) Quantitative analysis (only using numbers provided dont make up numbers!) Qualitative analysis (non financial considerations) Other considerations Decision matrix not utilized for these small cases Recommendation/ ADVISE based on your analysis, what should the company do? Do you address the main issues (and any secondary issues) identified Action plan. What are the next steps.