Lawrence Poppin, the CEO of PremiumInternetCable, has expressed great admiration for your work and has invited you to engage in another consultation session during this consultation, Mr. Poppin presented detailed financial data from the past 12 months of the gold cable business, which led to a comprehensive discussion encompassing several critical aspects.

In this conversation, Lawrence Poppin articulated, "Having recently reviewed our financial results over the previous 12 months, it is evident that we experienced profitable periods alongside months marked by losses. Our cable sets are priced at $280 per unit, incurring a variable cost of $165 per unit, while our fixed costs, inclusive of all administrative and selling expenses, amount to $90 per unit. Notably, even if we were to sell only one cable set each month, we would still yield a profit, with the potential for increased total profit as additional units are sold. Our fixed cost remained consistent at $62,000 per month. You looked at Lawrence and asked, "How did you come up with a $90 fixed cost per unit?

Lawrence replied, "I arrived at the $90 fixed cost per unit estimate based on our sales from the previous year, and I believe it is reasonable way to consider it on a per-unit basis. Nevertheless, I'm unsure if this approach presents any potential challenges. My main goal is to avoid incurring losses. Is there a way to determine the minimum monthly sales volume required to cover our expenses?

He continued, "I'd also like to discuss what it will take to make a decent profit. At our company, we often have high-budgeted sales, but I want to play around a little bit with the area that we can be flexible with sales, just in case we have competition, or the economy goes down. With the recent outlook of the Canadian economy, I am afraid the sale target might not be met. Can you give me some advice on this area?"

As both of you were talking, the General Manager (GM) waved her hand at you and walked toward you to engage in your conversation.

"It is great to see both of you, I just had a meeting with my production team, and it looks like we should be looking at purchasing a coating machine. We currently hire a third party to manually coat our cable sets, and even though it does have a nice human touch which is great for our marketing, it is too much work and increases labour costs."

She continued, "Suppose we switch to an automatic coating machine. In that case we can grow production without customers noticing- and I think we can even sell more! We can just keep the same marketing message of "human touch" as we have been doing before. I'm sure not many would notice the difference. Also, the small space in our building where we are storing the finished products shipped back from the third party along with other products- we can use that space to operate the machine and store the same products. I am sure the safety committees will be fine with this.

The GM then showed both you and Lawrence a cost summary. "These are our current rough annual numbers but here, take a look."

The cost to the third party for this project amounts to $815,000. Meanwhile, for equivalent units produced with the machine, direct material expenses total $150,000, and the labour required to operate the machinery is $160,000. Manufacturing overhead costs related to this project come to $100,000. The machine would cost $125,000. Production supervisors' account for $140,000 of the budget, and there is an expenditure of $90,000 for quality control related to third-party production. It costs $290,000 for building rent.

Lawrence considers the numbers in front of him. "125,000... Hmmm. That machine is not cheap. Do you have any idea how long we will use the machine and if we can get anything for it when we dispose of it?"

The GM responds that, at the current levels of usage, the machine would last three years, but there would be no salvage value. She then checks her watch and rushes off to an important meeting.

Lawrence turns to you and says, "I would like some more insight on buying this machine and how we would treat the asset from an accounting perspective through the three years- is the $125,000 cost expensed right away? If not, what do we do?"

"Also, that marketing advice the GM just gave us is a bit concerning to me. I think that our sales would dip 15% if we no longer advertise the cable pieces as hand-coated, so we should just keep marketing as is. What would be the impact of a 15% drop in sales on our bottom line?

The CEO, Lawrence added, "There's more thing I'd like to discuss, and it's about our current approach to handling defective products. When an issue arises on the production line, our practice has been to simply acknowledge it and pass it on to our Quality Control team to handle. I believe this is the most effective approach, but my production manager has expressed disagreement. We've followed this procedure for years. What are your thoughts on this?"

As you and the CEO were enroute to your office, you crossed paths with the production manager. He expressed, I'm genuinely committed to this company, but there's been significant pressure to reduce production costs within the vinyl department by using resin. The challenge I'm facing is the high conversion cost, and we can't alter material expenses. So, my plan is to boost our production to 50% over the next three months, which will help reduce the overall overhead cost per unit and, consequently, lower the unit cost. I'm aware that we have amply production capacity." The production manager looked at the CEO, awaiting response.

The CEO replied, "I appreciate your concerns, and your proposal sounds intriguing. We'll certainly explore it further. I'm open to increasing our output as long as it proves effective and financially sound." Then, he turned to you as asked, "could you also investigate this proposal? I'm intrigued by the idea but uncertain about how to proceed a this moment."

Lawrence's phone rings and he turns away to tend to the call. You return to your office to work on the task at hand.

Prepare a detailed business memo providing feedback on this issues raised.