Mohammed's Carpet Factory

Mohammed is exploring the possibility of establishing a new carpet plant in the Lower Mainland. One of his primary goals is to run an ethical business. He is forming a partnership with his friend Seema, a Chartered Professional Accountant. Mohammed wishes to have a better understanding of some ethical ideas and how they might be applied to his business. For instance, he may have heard of corporate governance but is unsure how it pertains to his firm or how to execute it. He considers whether there are any further ethical notions that might apply to him or Seema.

Mohammed has done some predictions and has a good understanding of fixed and variable costs, but he's stumped on period and product expenses. He has no idea what they are or why they matter to small business owners. Mohammed estimates that each Carpet will cost $1 in materials. He intends to pay assembly line workers $20 per hour, with each worker able to produce ten Carpets per hour on average. Other manufacturing costs totaling $0.50 each Carpet manufactured will also be incurred.

Mohammed will pay his two bosses $60,000 per year, and his janitor will be paid $40,000 per year.

The annual salary is $45,000. Monthly equipment and manufacturing rental costs will be $8,000, while office and administrative costs will be $5,000.

Mohammed is considering opening a new Carpet factory in the China. One of his biggest priorities is running an ethical business. He is partnering with his friend, Seema, who is a Chartered Professional Accountant. Mohammed wants to learn more about some ethical principles and how his business can follow them. For example, he has heard of corporate governance but doesn't really know how it applies to his business, nor any means of implementing it. He wonders if there are other ethical concepts which may apply to him or Seema.

Mohammed intends to sell each Carpet at a cost of $8. He is unsure of the monthly sales volume and revenue he needs earn to avoid losing money. He has set aside $50,000 as a "loss fund" and is curious as to how long it will last if he falls 10% short of the monthly break-even goal. Mohammed is unsure about the annual sales volume required to make a $80,000 profit/salary.

Mohammed's uncle, Imran, has indicated that he may require 1,000 Carpets in the future, possibly three years from now. Imran is prepared to pay $6 per Carpet if Mohammed accepts the order. Mohammed believes the facility would be fairly busy by then and is doubtful if he will have sufficient capacity. He is still unsure of the criteria that go into accepting or rejecting such a huge order and whether it is possible to give a recommendation right now

Mohammed has heard a rumour that a local tire factory owner wants to retire and is willing to bear the expenses of converting the factory, should a buyer agree to the purchase. The seller wants either $400,000 today or ten annual payments of $50,000. Mohammed can borrow money from the bank at 3.5% and is wondering about which option is cheaper, should he decide to go in that direction.

Finally, Seema has given Mohammed a quick crash course on budgeting, but she is too busy to teach him about budgetary analysis. Mohammed is confused about why some variances are favourable and unfavourable. He is also unsure about the differences between a static and flexible budget. He wants an explanation of how budgets are used to evaluate actual results and the terminology involved in the process.

Analyze Mohammed's business and advise him on the matters raised in the case. Make sure your recommendations are well supported by quantitative and qualitative analysis which ties to the case facts.