labor needed to produce one backpack. Suzie will also need to know if any specialized equipment will need to be procured. Suzie indicated that she would begin exploring ways to allocate indirect costs into the product. She will also handle the general accounting areas of the budget. Each founder has now settled into their roles and begin work. It didnt take Andrea long to come up with a design. She did a lot of research on backpack designs and had extensive discussions with Tony on where he believed the designs needed improvement. What they needed was a prototype so they could cost it out and determine feasibility. Tony loved the design, but had a few suggestions that Andrea incorporated. Then she got to work on the prototype. Using the equipment, she had available and measuring production time herself she came up with the following specifications: Product Standards Standard Quantity or Hours Standard Price or Rate Standard Cost Direct Materials Fabric 2.5 yards 2.50$ 6.25$ Metal Gromets 12 0.50$ 6.00$ Plastic Buckles 14 1.50$ 21.00$ Velcro 1 yard 0.75$ 0.75$ Total Standard Cost Per Unit Of Material 34.00$ Direct Labor 4.5 hours 18.00$ 81.00$ Variable Manufacturing Overhead 4.5 hours 2.50$ 11.25 Total Unit Product Costs 126.25$

The variable Manufacturing Overhead came from Suzies calculations, but she warned theyre just preliminary. Well have to do a more thorough allocation later. Tony was excited about the proto-type budget. He said at first glance he thought we could work with that and create a competitive price point. He shared the preliminary designs with some friends at local outdoor equipment stores and they loved it. Tony thinks theyre on to something. Tony spent the next week crunching the numbers, looking at market demographics and where he believed their catchment area would be and determine that he could sell the pack at 1.50 percent above product costs. He put together a three-month sales forecast for 2021 as follows: Budgeted Sales in Units October 1000 November 1500 December 1500 Tony also indicated he expects that sales will grow at a modest 5% through 2022 Andrea looked at the sales figures and started getting a bit nervous. There was a lot of work to do! Its worse than that said Tony. In order for us to maintain a steady flow of sales we need some inventory on hand to meet our lead times. Tony advised Andrea that we would need 10 percent of the following months sales in ending inventory to ensure they did not have a stock out. Tony knew that delays in order would have a detrimental effect on the new companys reputation as being unreliable. I see said Suzie; in that case we better build an ending inventory into our raw material budgets as well. We would need a 20% ending inventory based on the next months cost of goods sold.

While Andrea and Tony were busy on the design production and marketing side of the new business, Suzie was busy with the finance side. In speaking with Andrea, Suzie was informed that to meet production requirements, the company would need the following equipment: Equipment List: 3 Heavy Duty Sewing Machine $2,500 per machine 2 Cutting Machines $1,500 per machine 1 Gromet Fastening Machine $ 1,200 per machine 1 Crimping Machine $ 800 per machine The machines have a four-year life and no salvage value General and Administrative Budget: Ending 12-31-2021 Officers Salaries 18,750.00$ Office Salaries 3,000.00$ Payroll Tax 8,700.00$ Indirect Labor 37,500.00$ Rent 6,250.00$ Utilities 1,375.00$ Depreciation ? Selling & Aministrative $3 per unit Selling & Administrive Fixed 7,000.00$ Interest Expense ? Insurance 9,000.00$ Office Supplies 1,250.00$ All general and Administrative Expenses would be paid in the month Andrea was able to find materials supplies she felt would offer quality products and be reliable. She was even able to negotiate credit terms. The suppliers were willing to allow payment in 30 days following the month of purchase.

Tony discussed the sales with the group. In discussions with potential customers, he realized they were cash strapped themselves. They would gladly take the goods on consignment, but if Great Adventures required a sale, they would need at least 30 days pas the month of sale to pay. Tony didnt want to get into a consignment arrangement, so he agreed to the terms. Things were coming together. The actual products cost data for three months ending 12-31-2021 was as follows: Actual Sales in Units October 800 November 1200 December 2500 Product Standards Standard Quantity or Hours Standard Price or Rate Standard Cost Direct Materials Fabric 2.75 yards 3.50$ 6.25$ Metal Gromets 12 0.50$ 6.00$ Plastic Buckles 13 0.75$ 21.00$ Velcro 1.5 yard 0.85$ 0.75$ Total Standard Cost Per Unit Of Material 34.00$ Direct Labor 5.5 hours 17.50$ 81.00$ Variable Manufacturing Overhead 4.5 hours 3.50$ 11.25 Total Unit Product Costs 126.25$ Actual General & Administrative Costs were as follows:

General and Administrative Budget: Ending 12-31-2021 Officers Salaries 15,250.00$ Office Salaries 1,850.00$ Payroll Tax 6,840.00$ Indirect Labor 32,500.00$ Rent 6,250.00$ Utilities 1,875.00$ Depreciation ? Selling & Aministrative $3 per unit Selling & Administrive Fixed 8,500.00$ Interest Expense ? Insurance 9,250.00$ Office Supplies 1,850.00$ Three months of actual operations went by fast! The group now had time to evaluate operations and make some decisions. Things were pretty rocky for the first three months of their business, and they decided to fund any production needs from their savings during their growth phase of the business. However, they knew this could not continue and were intending on presenting their business plan to First National with the line of credit to be available at the first of the year. Covering their first full year of business. Suzie met with Mrs. Cheryl Biggs Business Lending Manager at First National Bank and had a very nice conversation: Mrs. Biggs: How are you financed currently? Suzie: Well, each of the founders put in $10,000 of their own funds. We also borrowed an additional $10,000 in unsecured loans from our parents. Any additional shortfalls come out of our collective savings. The loans are at 6% and are due in five years. Mrs Biggs: What do you think your financing needs will be from us? Suzie: Were looking for $100,000 dollars as a working capital loan. We would intend to access principle as needed.

Mrs. Biggs: Well, weve done this type of loan for similar businesses, so we believe we can help. However, were going to need some information. Based on your first three months of business 1.) Budgets as follows: (See Chapter 8) a. Sales Budget b. Production Budget c. Direct Materials Budget d. Direct Labor Budget e. General and Administrative Expense Budget f. Cash Budget 2.) Variable Cost Income Statement 3.) Flexible Budget 4.) Breakeven level in units and dollars see chapter 2/3 5.) Margin of Safety See chapter 2/3 6.) Degree of Operating Leverage See Chapter 2/3 7.) For any new equipment purchases we would issue a separate loan but would need a net present value analysis and a payback analysis. (See Chapter 7) 8.) Terms of the line of credit would be at 12% with interest paid monthly on outstanding balances. Draws would need to be made in increments of $1,000. Once the loan is approved, we of course will have some covenants needed to be adhered to related to variances between your actual activity and budgeted activity. Suzie considered this information and indicated she will get back to Mrs. Biggs with the Information Requested. She knew she had a lot of work to do. When Suzie got back to her home office, she dug right in making phone calls and researching the business environment. She put together what she believed would be a reasonable general and administrative budget.

Andrea indicated she would like to invest in a new cutting/sewing automated system. The piece of equipment would reduce manufacturing direct labor by 50%. It would also reduce material costs by 15% saving on waste. Tony loved the idea saying that he could increase sales by 10% because the total price point would be lowered by the savings. The machine would cost $150000. It would require the use of working capital of $25000 to start but this would be returned at the end of the useful life. The machines useful life would be 6 years. In order to make this investment, the bank would require: 1.) A positive NPV using the loan rate of 12% 2.) A payback not to exceed the useful life of the machine (See Chapter 7) Tony is still struggling with the price point. He understands that Manufacturing Overhead will be assigned to the product on the basis of direct labor hours. He wants to consider a more meaningful allocation method. Doing a little research on his own, he discovered that an activity-based allocation method might be a better allocation method, particularly given that the new machine will reduce labor cost and may no longer be an accurate driver. Currently Great Adventures uses a plantwide overhead. Manufacturing Overhead Consists of Variable Costs Estimated to be $150,000 per year variable manufacturing costs allocated on the basis of direct labor hours. And $48,500 of fixed manufacturing overhead See Chapter 4 Tony would like to switch to the following activity base drivers

Customer Orders Product Design Order Costs Set Up Tony estimated the pools would consist of the following: ACTIVITY BASE Customer Orders 375,000$ Number of orders 1,500 Product Design 22,500$ Number of Designs 50 Machine Set Ups 675,000$ Number of Set-Ups 2,500 Order Size 427,500$ Machine Hours 75,000 1,500,000$ See Chapter 5 Suzie had another suggestion. There is a Filipino company that had contacted he regarding opportunity to offshore the manufacturing operations. The company offered to produce the backpack design and sell the unit back to the Great Adventures at: $125 a unit See chapter 6 The actual sales for the first quarter of 2022 were as follows: Actual Sales in Units First Quarter 2022 January 2600

February 2200 March 2300 Requirements: Based on the information provided in the case: 1.) Provide the information requested by First National Bank for Quarter ending 12/31/2021 2.) Determine the financial Advantage/Disadvantage of Offshoring production 3.) Determine whether there is a positive Net Present Value on the purchase of the machine. 4.) Determine if the payback meets the criteria 5.) Provide an income statement for Quarter ending 03-31-2022 including Actual Activity as well as Flexible Budget and Standard Budget utilizing your decisions in 2 and three above 6.) Compute Variance for each budget line 7.) Compute the material price and volume variance 8.) Compute the labor price and efficiency variance. Provide a comment on the viability of Great Adventures based on the information above. Make any recommendations for price or cost adjustments