North Shore Cabinets Inc. (NSCI) is a manufacturer and installer of kitchen and bathroom cabinets. NSCI was founded 20 years ago by David Chan, who is the CEO and sole shareholder of NSCI. NSCI is committed to environmentally responsible manufacturing processes, including recycling the sawdust it produces and using eco- friendly finishing techniques that minimize emissions. NSCI manufactures its cabinets from start to finish in its facility in British Columbia. Centralizing all steps of the cabinet-making process in one facility allows NSCI to ensure it maintains the quality craftsmanship and excellent customer service for which the company is known. NSCI manufactures 11 different styles of cabinets, with the three most popular accounting for 60% of sales and the three least popular accounting for less than 5%. NSCI experienced steady growth up until 2019, when sales declined forthe first time, with NSCI dropping from full capacity to 80%. NSCI has two divisions a manufacturing division and a sales and installation (SI) division. Each division's manager reports directly to David. Luke is the head of the manufacturing division and Michelle is the head of the SI division. The divisions are treated as profit centres, with the managers evaluated and paid a bonus based on divisional profits. David is frustrated because the divisional managers are often in disagreement over decisions impacting the company. He is hoping your guidance will help address some of their issues. Today is February 3, 2020. You are a CPA hired by David as an external consultant to provide an independent point of view. General information on NSCI and the cabinet-manufacturing industry is provided in the Appendix. Appendix You have visited NSCI's plant and made the following notes on NSCI's operations and the cabinet-making industry. Cabinet industry Low interest rates and declining unemployment over the past five years have led to increased spending in the housing market. This demand is expected to continue to increase over the next five years. A shift toward cabinets with improved amenities such as charging ports for electronic devices and LED lighting will also drive growth. Competition in the industry has increased, in part due to an increase in cabinets being imported from overseas. Generally, imported cabinets are priced lower than those manufactured in Canada. Increasingly, customers are concerned about the environmental impact of their purchases and show a preference for manufacturers with environmentally friendly practices. The well-established distribution networks between existing manufacturers and their suppliers can deter new entrants. In order to be successful, cabinet manufacturers must secure a steady source of wood supply for an affordable price. This is especially important given that the price of wood has been increasing, a trend that is expected to continue. NSCI operations NSCI prides itself on being a great place to work. As a result of the caring atmosphere and generous incentives, most of NSCI's 500 employees have been with the company at least five years. NSCI is located in close proximity to two large sawmills, with which it has developed an excellent relationship over the years. NSCI has been able to purchase enough quality lumber from these two suppliers to meet all of its needs. The manufacturing division struggled to meet production deadlines in 2019 because cabinets took longer on average to manufacture. The cabinet assemblers have complained that they have to spend time searching for the right hardware and screws to use. Each cabinet type requires specific hardware, and the small pieces often get mixed up in the storage bins. Sometimes the hardware required is not in stock, especially for the less popular cabinets. The assemblers also noted that an increasing number of pieces are having to be sent back for rework. The problem was traced to a lack of maintenance on one of the older cutting machines that has problems with calibration. Appendix (continued) NSCI uses batch processing, which means that raw materials and work in progress are often sitting on the factory floor between stages. Employees have complained that they find it difficult to manoeuvre around the factory because of all of the clutter. They also noted that switching between the 11 different cabinet styles is time consuming because the machine must be reset and tested each time. Plant supervisors are responsible for initiating purchase orders for materials when they notice that stock is running low. Sometimes orders are initiated by more than one person, resulting in excess inventory that may sit around for weeks or months. Other times, orders are not placed soon enough and production is delayed while workers wait for the materials to arrive. Currently, the manufacturing division transfers all of its production to the SI division. Similarly, the SI division sources cabinets exclusively from the manufacturing division. The transfer price is set at variable costs plus 30%. Task #4 A condominium developer has offered NSCI a contract to supply cabinets for all of the units in a new condominium project. NSCI has capacity in the factory to fill the order without impacting production of other cabinets. Luke is in favour of accepting the contract and Michelle is opposed. The details of the offer are as follows: Direct labour hours 2.6 per unit Direct labour rate $38.50 per hour Direct materials $128 per unit Variable overhead $38 per unit Fixed overhead (allocated based on direct labour hours) $42 per unit Delivery (per cabinet) $10 per unit Installation labour hours 0.7 per unit Installation labour rate $35 per hour Selling price $340 per unit David would like your independent assessment of whether accepting the contract is in the best interests of NSCI as a whole. He also wants to understand why Luke is in favour of accepting the contract while Michelle is opposed, and if there is anything he can do to avoid these types of conflicts in the future and ensure that decisions are consistent with NSCI's best interests as a whole. North Shore Cabinets Inc. (NSCI) is a manufacturer and installer of kitchen and bathroom cabinets. NSCI was founded 20 years ago by David Chan, who is the CEO and sole shareholder of NSCI. NSCI is committed to environmentally responsible manufacturing processes, including recycling the sawdust it produces and using eco- friendly finishing techniques that minimize emissions. NSCI manufactures its cabinets from start to finish in its facility in British Columbia. Centralizing all steps of the cabinet-making process in one facility allows NSCI to ensure it maintains the quality craftsmanship and excellent customer service for which the company is known. NSCI manufactures 11 different styles of cabinets, with the three most popular accounting for 60% of sales and the three least popular accounting for less than 5%. NSCI experienced steady growth up until 2019, when sales declined forthe first time, with NSCI dropping from full capacity to 80%. NSCI has two divisions a manufacturing division and a sales and installation (SI) division. Each division's manager reports directly to David. Luke is the head of the manufacturing division and Michelle is the head of the SI division. The divisions are treated as profit centres, with the managers evaluated and paid a bonus based on divisional profits. David is frustrated because the divisional managers are often in disagreement over decisions impacting the company. He is hoping your guidance will help address some of their issues. Today is February 3, 2020. You are a CPA hired by David as an external consultant to provide an independent point of view. General information on NSCI and the cabinet-manufacturing industry is provided in the Appendix. Appendix You have visited NSCI's plant and made the following notes on NSCI's operations and the cabinet-making industry. Cabinet industry Low interest rates and declining unemployment over the past five years have led to increased spending in the housing market. This demand is expected to continue to increase over the next five years. A shift toward cabinets with improved amenities such as charging ports for electronic devices and LED lighting will also drive growth. Competition in the industry has increased, in part due to an increase in cabinets being imported from overseas. Generally, imported cabinets are priced lower than those manufactured in Canada. Increasingly, customers are concerned about the environmental impact of their purchases and show a preference for manufacturers with environmentally friendly practices. The well-established distribution networks between existing manufacturers and their suppliers can deter new entrants. In order to be successful, cabinet manufacturers must secure a steady source of wood supply for an affordable price. This is especially important given that the price of wood has been increasing, a trend that is expected to continue. NSCI operations NSCI prides itself on being a great place to work. As a result of the caring atmosphere and generous incentives, most of NSCI's 500 employees have been with the company at least five years. NSCI is located in close proximity to two large sawmills, with which it has developed an excellent relationship over the years. NSCI has been able to purchase enough quality lumber from these two suppliers to meet all of its needs. The manufacturing division struggled to meet production deadlines in 2019 because cabinets took longer on average to manufacture. The cabinet assemblers have complained that they have to spend time searching for the right hardware and screws to use. Each cabinet type requires specific hardware, and the small pieces often get mixed up in the storage bins. Sometimes the hardware required is not in stock, especially for the less popular cabinets. The assemblers also noted that an increasing number of pieces are having to be sent back for rework. The problem was traced to a lack of maintenance on one of the older cutting machines that has problems with calibration. Appendix (continued) NSCI uses batch processing, which means that raw materials and work in progress are often sitting on the factory floor between stages. Employees have complained that they find it difficult to manoeuvre around the factory because of all of the clutter. They also noted that switching between the 11 different cabinet styles is time consuming because the machine must be reset and tested each time. Plant supervisors are responsible for initiating purchase orders for materials when they notice that stock is running low. Sometimes orders are initiated by more than one person, resulting in excess inventory that may sit around for weeks or months. Other times, orders are not placed soon enough and production is delayed while workers wait for the materials to arrive. Currently, the manufacturing division transfers all of its production to the SI division. Similarly, the SI division sources cabinets exclusively from the manufacturing division. The transfer price is set at variable costs plus 30%. Task #4 A condominium developer has offered NSCI a contract to supply cabinets for all of the units in a new condominium project. NSCI has capacity in the factory to fill the order without impacting production of other cabinets. Luke is in favour of accepting the contract and Michelle is opposed. The details of the offer are as follows: Direct labour hours 2.6 per unit Direct labour rate $38.50 per hour Direct materials $128 per unit Variable overhead $38 per unit Fixed overhead (allocated based on direct labour hours) $42 per unit Delivery (per cabinet) $10 per unit Installation labour hours 0.7 per unit Installation labour rate $35 per hour Selling price $340 per unit David would like your independent assessment of whether accepting the contract is in the best interests of NSCI as a whole. He also wants to understand why Luke is in favour of accepting the contract while Michelle is opposed, and if there is anything he can do to avoid these types of conflicts in the future and ensure that decisions are consistent with NSCI's best interests as a whole