Hello,

I have a group presentation today and we worked on the case attached. I would like to get some feedback and see if we are on the right track or we should work some more on it. Would someone here be able to go through it and help us?

Thank you.

Claire's expectations VS previous year's report - Maintain same selling price Increase sales volume (5%) + VC (3%) +FC (1%) Claire is aiming to improve the company's profit margin to prevent the bank to increase the borrowing rate. Due to the fact that the sales volume increased by 5 %, the sales would increase as well. Claire would like to maintain the selling price as it is. However, by increasing the variable and fixed costs, the contribution margin and the gross profit would decrease compared to last year's performance. If Claire's decides to maintain these expectations, the company's performance would be worst compared to the previous year. Claire's expectations are based on the previous year's performance. Last year's return on sales (profit margin), which calculates the amount of income earned with each sales dollars generated, was 5.78%. However by taking into consideration all of Claire's assumptions and by calculating a budget according to her expectations, we calculated a return on sales of 2.90%. The number of sales units and the amount of total sales would increase compared to the previous year. However, because of the fact that products' selling prices have remained the same and that the variable and fixed costs have increased, this results as a lower expected gross profit of $ 534,766. When comparing the variable cost per unit of last year and Claire's new expectations, we see that due to the fact of increasing the variable and fixed costs by 3% and 1%, Claire's new expected variable cost per unit increases to $69.03 compared to last year's $66.15 per unit. This means that it would cost more to produce the products and keeping the selling price constant, which explains the lower gross profit. The break-even amount in sales in dollar would also increase compared to last year. The breakeven point in sales in dollar for last years was $12,685,591. With Claire's numbers, the breakeven point in sales in dollar would increase to $15,353,970. This means that it the company would have to increase its sales and/or reduce its variable cost in order to break-even. Overall, with the numbers given by Claire, we can assume after our calculations that the company's performance would deteriorate even though the sales amount would increase. Because of the increased variable and fixed costs, the company's gross profit would be much lower than last year's. Claire's expectation VS. last's year performance: Dave McPhail, Sales Manager's recommendations: - Sales volume increased by 25% Selling price + VC + Fixed MOH costs remain the same as per Claire's expectations (Claire wanted to increase VC + FC) Selling expenses increased by $115000 for promotion/advertising The sales volume has increased by 25% by keeping the same selling price as the previous year and as per Claire's expectations, which would result in higher sales compared to the previous year's performance and also compared to Claire's expectations. This would also generate the highest amount of sales of $21,937,500 compared to the other two managers expectations as well. The variable OH costs have remained the same, but because of the increase in sales units, the total variable costs have increased to $ 17,363,438 compared to last year $ 13,890,750, and to Claire's expectations which is $ 15,221,280. The total variable OH costs is also the highest when comparing with the two other managers' expected total variable OH costs. The contribution margin would increase to $4,574,063 due to the fact that the sales units would increase to 262,500 units. The corporate fixed costs, which included the selling expenses, would increase by $115 000 because of promotion/advertising. This would cause the total fixed costs to be the highest, $ 2,760,000, compared to last year, Claire's expectations and the two other managers as well. Furthermore, the profit margin on sale would be higher, 8.27%, compare to last year and Claire's expectation. however the variable cost per unit would be the same as previous year, $ 66.15, which is lower than Claire's expectations. At the end, the gross profit would have increased to $ 1,814,063 compared to the previous year's and Claire's expectations. The break-even point of 41 726 units and $13,237,139 (sales $) are the highest compared to the two other managers. This means that according to this recommendation, the company would that to sell the highest number of units and generate the highest amount of sales in order to break-even. Nicole Phillips, Finance Manager's recommendations: - Selling price increase by 8% (Claire wants to keep same selling price) Sales volume decrease by 2% (Claire wanted to increase sales volume) VC reduced by 1% + FC reduced by 4% (Claire wants to increase VC + FC) May use lower quality raw materials + pay freeze for employee Nicole believes that by cutting the costs and increasing the selling prices, the company's performance would be more favorable. By increasing the selling price by 8% and reducing the sales volume by 2%, the sales would increase compared to the previous year's sales and Claire's expectations. However, the expected sales amount would be less than the expected sales that Dave McPhail is recommending. By decreasing the variable costs by 1%, the total variable costs would decrease to $13,417,807, also the variable cost per unit to $65.20 compared to last year's performance, sales' manager and Claire's expectations. The expected contribution margin would be higher, 27.76%, than last year's and Claire's expectations and it would also be the highest when comparing with the two other managers. By decreasing the fixed costs by 4%, the total fixed costs expected by Nicole would be the lowest, $ 2,539,200, when comparing with last year', Claire and the two other managers. At the end, because of the highest contribution margin and the lowest amount of total fixed, Nicole is expecting the highest gross profit which is $ 2,617,913 when compared to last year, Claire and the two other managers. When we calculated the key ratios, we see that this recommendation is the most favourable. The return on sales and the contribution margin are the highest compared to the two other managers and Claire's expectations. The variable cost ratio, variable cost per unit, and the break-even point in unit and sales in dollar are the lowest compared to Claire and the two other managers. Furthermore, Nicole is recommending using lower quality raw materials. Also, she is increasing the product price, while using lower quality materials for production. Using lower quality raw materials may reduce the total direct materials costs. However, this could result in lower quality products. Customers may be dissatisfied with the products and would not want to pay a higher price for lower quality products. In conclusion, it would be unrealistic to expect customers to pay a higher price for lower quality products. Thus, resulting a decrease of sales. In addition, the fact that the employees might get a pay freeze might lower the motivation level of the employees. This could also lead to lower production and the products might have defects/damages due to the fact that the materials are of lower quality, and that the employees might not be working to their maximum capacity. It could eventually lead to valuable employees wanting to quit the company due to compensation issues. Nicole has not respected any of Claire's expectations, however the gross profit expected by Nicole is the highest compared to Claire's and the two other manager's recommendations, but we are uncertain if Nicole's recommendation would be as profitable in the long run. Bob Robust, Marketing Manager's recommendations: - Introduce new product: Carbon X Paddle to replace the Aqua Lite Paddles All of Claire's expectations met except that the sales units would decrease 20000 Carbon X Paddles Bob is aware of the kayaking industry and has understood the growing demands for carbon paddles. He explains why customers prefer carbon paddles and how it improves the performance for customers. He recommends introducing a new product: Carbon X Paddle. Bob suggested to replace the Aqua Lite paddle by Carbon X Paddle. According to Bob, Claire will sell 20,000 Carbon x Paddles. The low number of sold Carbon X Paddle would result in a drastic drop in sales units, which would lead to a drastic drop in sales as well. This would be the lowest amount of sales when comparing with last year, Claire and the two other managers. All the variable costs would be reduced by 3%. Also, due to the fact that the sales units have decreased, the total variable OH costs would be the lowest, $6,148,317, in comparison with the others. Because of the low sales units and totals sales amount, the contribution margin expected by Bob would also be the lowest at $1,619,183, in comparison with the two other managers. The fixed costs would increase by 1% which is $ 2,671.450. As a result, the company would end up having a loss of $1,052,267. The key ratios are quite disappointing. The return on sales, -13.55%, variable cost ratio, 79.15%, and contribution margin, 20.85%, are the most unfavourable compared to the two other recommendations. The variable cost per unit is the lowest at $49.19 per unit, however, that is due to the fact that the number of sales have dropped drastically. Thus, leading the company to a loss. Even though Bob has respected all of Claire's expectations, except the sales units, his recommendations would lead the company to incur a loss. The sales volume would be much too low compared to last year and Claire's and the two other manager's recommendations. This is very unfavorable for the company on the short run. However, if the new product becomes more popular to the customers, on the long run, the sales might increase, thus eventually leading the company to earn profits. Budgeted income statements of all 3 managers: Green: Favorable Red: Unfavorable Purple: low amounts because of drastic drop in sales units Recommendations to Claire: After thoughtfully studying the three managers' recommendation and Claire's expectations, we came to conclusion that Claire would have the best outcome and profits if we combine the best options recommended by the three managers. After doing several calculations, we conclude that Claire should increase her sales units production of the Skirt and the Cockpit by 25% as recommended by the sales manager, Dave McPhail. Claire must also increase the sale of Carbon X Paddles to 65 000 units. This would lead to an increase in Claire's profits. We do not recommend Claire to replace an existing well selling product for a new product that clients are not familiar with yet as Bob Robust suggested. As you can see, this lead to a loss. We instead recommend Claire to keep the Aqua Paddle as it is and slowly introduce the Carbon X Paddle to the clients and once Claire will have a large clientele for the product, she can slowly decrease producing Aqua Paddle. We believe this will prevent Claire having any losses. Also, we suggest to Claire to spend $115,000 for promotion as recommended by Dave McPhail's. Not only this would increase Claire's sales, but it will also be a good opportunity for introducing and promoting the new Carbon X Paddle to her clientele. Furthermore, as Nicole Phillips, the finance manager, suggested, Claire should increase her selling price by 8%, because an increase in production will automatically lead to an increase in variable cost, direct material costs, and as well as direct labor costs, therefore she needs to increase her selling price to cover up her expenditure. In conclusion, we kept the best options from all three recommendations that Claire had. However, we could not keep all of Claire's expectations due the low profits it brings. Thus, Claire will have to increase the sales units, but not by 5% as she initially planned, but by 25% (skirt and cockpit) and around 31% increase for Carbon X Paddle so she can maintain stable profits. Claire can keep the 3% increase in variable cost, and 1% increase in fixed cost as she planned. This would be the best option we could recommend for Claire. Our final recommendation for Claire: Kayaking has been growing in popularity over the past five years, and Kuality Kayaks Ltd. has benefitted from the trend. The company produces accessories for kayaks: a cockpit cover to keep out rain when the kayak is stored outside, a lightweight paddle well-known by expert kayakers, and a skirt that is worn by enthusiasts who enjoy touring in rough waters. Claire Westbrook, the only shareholder of Kuality Kayaks Ltd., has been very conservative in managing the growth of the business. Claire expects the favourable trend for kayaking to continue and is considering options to grow the business. Claire had scheduled a meeting with her senior managers to discuss options for the business. She had also compiled some key historical financial data regarding volume, sales prices, and production costs of the three products (Exhibit 1). You were hired as a strategy consultant for the company and asked to prepare a budgeted segmented income statement for the three managers prior to the meeting incorporating Claire's assumptions. All three managers had received the information prior to the meeting and were asked to review it. In addition, Claire had provided them with her assumptions regarding business performance next year. Specifically, she expected product sales prices to remain unchanged, sales volumes for all products to increase by 5%, product variable costs to increase by 3%, and all fixed costs to be held to an increase of 1%. Claire had asked that the three managers come to the meeting prepared to present a strategic option for next year's operations. The managers had been told that the option they develop must focus on the kayaking industry. She also advised the managers that the banks are threatening to increase the company's borrowing rate if she was unable to demonstrate that next year's profit margins would improve. The following three options were presented at the strategy meeting. Dave McPhail, Sales Manager Dave believes greater profits can be taken from the existing product line. In his presentation, he suggested that more product promotion is required. To achieve this, he recommended an increase in promotional spending. Specifically, selling expense should be increased by $115,000. The result, Dave forecasted, will be a 25% increase in sales volume across all products. All other assumptions provided by Claire are unchanged in this strategic option (i.e., sales price, variable costs, and fixed costs other than selling). Nicole Phillips, Finance Manager Cutting costs and increasing selling prices was the theme of Nicole's presentation. In this scenario, prices for all products would be increased by 8%. As well profits would be increased by reducing variable costs by 1% and all fixed costs (manufacturing and corporate) by 4%. Nicole estimated that these changes would cause sales volumes to drop by 2% for all products. She warned in her presentation that this may require the use of lower quality raw materials and that all salaried staff would require a pay freeze for one year. Bob Robust, Marketing Manager Bob has been attending trade shows over the past year and has become aware of a growing demand for carbon paddles. Users find this paddle lighter and stiffer, leading to better performance. In his presentation, Bob recommend introducing a new carbon paddle, the \"Carbon X Paddle.\" No additional equipment is required. All of Claire's assumptions were maintained in Bob's scenario, except that last year's quantity of unit sales of the Aqua Lite Paddle would be displaced by the new paddle at a rate of 1 for every 5 Carbon X Paddles sold. Bob forecasted sales of 20,000 Carbon X Paddles at a price of $160 each with a total amount of direct material and direct labour being 2,420,000 (1,320,000 + 1,100,000). After the meeting Claire has asked you to prepare a report that compares the three budgeted segmented income statements and scenarios prepared by the managers and recommend a strategic option based on Claire's input and the managers' presentations. Exhibit 1 Manufacturing costs: Units sold Selling price Direct material Direct labour Variable overhead - percent of direct labour Cockpit Cover 75,000 $28.00 $9.25 $10.00 -- UNITS -Aqua Lite Paddle 110,000 $120.00 $56.00 $37.00 10% 10% Skirt 25,000 $90.00 $12.75 $51.50 10% Fixed annual costs for the company are as follows: Fixed manufacturing overhead* $615,000 Corporate fixed expenses: Research and development Selling and marketing General administrative 200,000 1,180,000 650,000 * Fixed manufacturing overhead is allocated to segments based on variable overhead amounts