From the below case Study for Accounting:

• List the Problems/Issues
• Using the Apendix, Quantitavely and Qualitatively analyze the problem or the issue
• Provide Recommendation
• Write an Executive Summary
• Discuss the ethical consideration

InnovAppliance's most recent set of financial statements is included in Appendix A.

Expansion:

the Chairman of the Board, Lars Ericsson, has voiced some concerns about expanding into Israel due to the financing required, cultural differences, quality concerns and regulatory considerations. The CEO would like an analysis and recommendations on whether the company should move forward with the expansion, with consideration towards both financial and non-financial factors. The companys controller has prepared a detailed breakdown of the incremental start-up costs, and a 5-year projection of revenue and operational costs associated with the expansion in Appendix B.

Model X:

InnovAppliance has recently invested in new artificial intelligence (AI) technology to produce a new refrigerator model called Model X. The new technology would automatically determine when to order new groceries based on customer eating habits. This technology aims to The CEO has asked the Operations Director, Olu Manuel, to put together a quarterly sales, production, and direct materials budget for the first year of sales of this product line. Olu has provided the financial information in Appendix C, however has requested your assistance in building these budgets. He wants to understand why the company is spending so much time budgeting, and how these budgets can be used to make decisions and monitor the performance of the new product line going forward. Hes also looking for some guidance on whether the projected gross profit margins for the Model X look healthy in year 1 (2024), and some ideas on how the team can reduce their projected direct mate

The CEO would like you to compare the two financing options and provide guidance on which one would be best for the company to pursue.

Option 1: InnovAppliance has approached an Israeli bank to secure a loan for the expansion to Israel, or for use in further technological investment. The bank has offered a term loan of $2 million with an interest rate of 8% per annum. This bank is known for offering strict debt covenants and requires the company to maintain a current ratio of 2.2:1 at each financial reporting date. The loan has a repayment period of five years, and InnovAppliance would need to make equal monthly payments, including principal and interest. The loan requires collateral in the form of the company manufacturing equipment, with a market value of $1.8 million.

Option 2: InnovAppliance has engaged with venture capitalists interested in investing in the company's expansion. They have proposed an equity financing deal where they will invest $2 million in exchange for a 20% ownership stake in InnovAppliance. The venture capitalists have a track record of supporting successful technology companies and can bring valuable industry expertise and networks to help accelerate InnovAppliance's growth.

Ethical Dilemma:

InnovAppliance's commitment to sustainability has been a core value since its inception. As the company considers expansion into Israel, it faces an ethical dilemma regarding the sourcing of raw materials.

As CFO, you must decide whether to compromise on sustainability principles and work with these suppliers to keep costs low or seek alternative suppliers who adhere to sustainable practices, potentially incurring substantially higher costs.

APPENDIX A: InnovAppliance Financial Statements

InnovAppliance

BALANCE SHEET

December 31, 2022

	2022	2021
ASSETS
Current Assets
Cash	$600,000	$500,000
Accounts Receivable	$400,000	$300,000
Inventory	$900,000	$700,000
Total Current Assets	$1,900,000	$1,500,000
Land & Buildings	$2,000,000	$2,000,000
Equipment	$1,800,000	$1,500,000
Intangible Assets	$200,000	$200,000
TOTAL ASSETS	$5,900,000	$5,200,000
LIABILITIES
Current Liabilities
Accounts Payable	$500,000	$400,000
Accrued Expenses	$150,000	$100,000
Unearned Revenue	$200,000	$200,000
Total Current Liabilities	$850,000	$700,000
Long-Term Debt	$700,000	$800,000
TOTAL LIABILITIES	$1,550,000	$1,500,000
SHAREHOLDERS EQUITY
Common Stock	$500,000	$500,000
Retained Earnings	$3,100,000	$2,700,000
Additional Paid-inCapital	$750,000	$500,000
Shareholders Equity	$4,350,000	$3,700,000

InnovAppliance

INCOME STATEMENT

For the period ending December 31, 2022

	2022	2021
Revenue
Sales Revenue	$4,800,000	$3,700,000
Service Revenue	$200,000	$300,000
Total Revenue	$5,000,000	$4,000,000
Cost of GoodsSold	$2,800,000	$2,200,000
Gross Profit	$2,200,000	$1,800,000
Operating Expenses
Salaries &Wages	$700,000	$600,000
Rent & Utilities	$250,000	$200,000
Marketing Expenses	$400,000	$300,000
Other Operating Expenses	$150,000	$100,000
Total Operating Expenses	$1,500,000	$1,200,000
Operating Income	$700,000	$600,000
Interest Expense	$50,000	$60,000
Income Before Tax	$650,000	$540,000
Tax Expense	$195,000	$162,000
Net Income	$455,000	$378,000

APPENDIX B: Expansion - Financial Details

The controller has put together some projections associated with the expansion into Israel. The breakdown of the expected start-up costs for this project include:

• Equipment: The company plans to rent their manufacturing space, but would need to incur

$1,000,000 for the purchase of new equipment.

• Marketing and Advertising Expenses: InnovAppliance plans to allocate $500,000 for marketing and advertising campaigns targeted at the Israeli market. This includes promotional activities, market research, and advertising campaigns to create brand awareness and attract customers.
• Research and Development Costs: Over the last 2 years the company has spent $185,000 on travel and research & development-related costs. To adapt the products for the Israeli market and meet local regulatory requirements, InnovAppliance anticipates incurring another$300,000 in research and development costs. This includes product modifications, certifications, and testing.
• Distribution and Logistics Expenses: Establishing distribution channels and ensuring efficient logistics in a new market involve additional costs.InnovAppliance estimates that it will need to allocate $200,000 for distribution network setup, transportation, warehousing, and order fulfillment in Israel.
• Legal and Regulatory Fees: Expanding into a new country requires legal and regulatory compliance. InnovAppliance expects to spend $100,000 on legal and regulatory fees for market entry, permits, licensing, and compliance with Israeli regulations.
• Administrative Costs: Additional administrative costs are anticipated for managing operations in Israel. These costs include setting up a local office, hiring local staff, and complying with local administrative requirements. InnovAppliance estimates that it will need to allocate $150,000 for administrative expenses associated with the expansion.
• Financing costs: Depending on the financing option the company decides to pursue, there could be additional interest expense that the company will need to incur.

The revenue projections for the expansion into Israel in the first 5 years are as follows:

• Year 1: InnovAppliance expects to generate $3 million in revenues from the Israeli market.
• Year 2: The company anticipates a growth rate of 20% in the Israeli market.
• Year 3: The company projects further growth of 15% in the Israeli market.
• Year 4 & 5: The company expects 10% growth per year.

Going forward if the company uses the new cheaper Israeli suppliers, they expect the gross profit % to increase by 8% in comparison to the 2022 operations in Canada. Annual labor costs are 10% higher in Israel, however the remaining operating expenses are expected to fall in line with the same % of sales as Canadian operations. The Israeli tax rate is expected to be 50% of the Canadian tax rate.

APPENDIX C: Model X Budget Information

The Operations Director has provided the following financial details to assist in the preparation of the requested budgets for the first year (2024).

• Expected Q1 sales volume:1,000 units with a 15% increase each quarter in 2024. Q1 sales for 2025 are expected to be the same as Q4 sales in 2024.
• Selling price per unit:$1,000 in 2024, and $800 in 2025
• Raw materials cost per pound: $10
• Volume of raw materials per unit: 50 pounds
• Direct labor cost per unit: $200
• Variable manufacturing overhead cost per unit: $100
• Fixed manufacturing overhead cost per year: $300,000
• Selling and administrative expenses per year: $200,000
• Desired ending raw materials inventory: 20% of next quarters expected production requirements. The desired ending raw materials inventory at the end of Q4 2024 is 16,202 pounds.
• Desired ending finished goods inventory: 30% of next quarters expected sales units