oduction It was the May Day weekend in 2020. Mr. Richard Simpson, Chairman of Raya Designer Clothing was in his office and the look on his face was one of confusion. Richard and his daughter, Ayka spent the May Day evening discussing ways of improving company operations. Richard and Ayka had the following discussion: Richard: I think it's high time that we should think of how to improve our performance. Our market share is small. Do you have any ideas? Ayka: Dad, I think the best strategy would be to expand our current product line. We should try to increase our market share. Richard: I was thinking that the best strategy would be to become aggressive on price. Last month at the CMA workshop I heard a lot on becoming aggressive on price. Ayka: How aggressive? Richard: If we drop the price by 15% and maintain the current advertising campaign, I think we will generate more sales. Ayka: Dad, if you reduce the price too much, our customers will think our products are of lower quality. We are a small company and I do not think that we can compete with big companies by reducing the price. I think we should ask our management accountant about the best strategy we should follow to expand our operations, Richard: That sounds good. I will talk to him on Tuesday. By the way, do you think you can join the company this year? 1 / 4 100% + Joc company na Ayka: Of course, Dad, I am counting days to joining the company in October. The Company Raya Designer Clothing was established in 1978 for the purpose of manufacturing and importing garments. From its inception the company has been running as a small-sized family business and now it is in the hands of second generation. The company's headquarters and factory are situated in Palo Alto near California. Mervin Simpson, the current chairman's father, founded the company. Mervin had been in the tobacco Industry for over 10 years and had wanted to join the apparel Industry as textiles and apparels generated more profits at that time. He started his business with a small bank loan and his personal savings. Over the years, the company expanded rapidly front a small tailor shop that produced ladies' clothing for the local community to an import-oriented business. The company specializes in the production of ladies' jackets and began importing apparels in 1982. At the end of 1992, Mervin Simpson retired from his chairman position due to an accident that left him paralyzed. His younger son, Richard assumed duties as the chairman, Richard started working as the director of operations with the company right after graduating with an Engineering Degree from a California State University in 1988. As Richard was a very df 2 / 41 100% + devoted and hard-working manager, both Mervin and his elder son Sahil agreed that Richard would be ideal for the company's chairmanship. Sahil was the company's director of marketing until 1996. At the end of 1995, Sahil sold his shares to Richard and left the company as he wanted to start a tech company. Soon after assuming duties as the company's chairman, Richard undertook several managerial initiatives to enhance company operations. He recruited a qualified management accountant, replaced the costing system with an activity-based costing system and initiated an employee training program. Richard also established a long-term advertising campaign with a marketing company. In recent months, he has been very keen in finding ways to improve the company's operations. Richard's elder daughter, Ayka, is studying for an accounting degree and plans to become a CPA. Richard wants Ayka to join the company as soon as she graduates as he thinks Ayka should be trained to accept the company's leadership. Richard's twin daughters are still in elementary school. Richard wants to continue his business as a family business and Ayka is very eager to join the company as she knows she is going to lead the company in the future. Richard has been thinking of increasing the company's export market share in order to improve company performance. He knows that a large number or very successful local and foreign garment manufacturers and exporters are already competing with his company and he should plan and implement any changes with great care. With this in mind, Richard attended several CMA workshops. The workshops had been designed to enhance managers' knowledge in various aspects of business management. Richard learned that decreasing the price of a product can enhance the sales volume of the product, and with this idea in mind, he discussed his concerns with Ayka. Ayka, however, had differing views of enhancing company operations and Richard decided to meet with the management accountant, Mr. Andrew Barringer Cost Accounting at Raya Designer Clothing 2 Cost Accounting at Raya Designer Clothing For many years, the company had been using a market-based pricing strategy for setting its product prices. When Richard became the chairman of the company, he recruited Andrew Kimm as the company's management accountant in 1993. Soon after joining the company, Andrew recommended to Richard that the company's cost management system based on a single plant-wide rate be refined. Richard gave his approval for this and Andrew established an activity-based costing system in the company in 1994. Since then, managers found that the company could save a lot of money as a result of eliminating unnecessary business activities. The pricing strategy also showed improved results, Andrew gained a reputation as a leading business manager in the company. When Ayka suggested that Andrew could advise the best action the company should take to improve Its operations, Richard agreed. Richard thought that Andrew would come up with a sound solution. On Tuesday, Richard met Andrew and revealed the conversation he had with Ayka. Andrew also did not agree with the idea of decreasing product price. "We should not reduce out selling price as our prices are not higher than the prices of similar products out there in the market. And another thing-we set our price considering the actual product cost based on activity-based cost Information. If we reduce our price, we will be selling our product at a loss," said Andrew. "Well, Andrew." Richard said, "do you think that we should expand our plant capacity as Ayka had suggested?" "Well," said Andrew, "I don't think expanding our capacity would be a problem. However, I will find more information soon. We should consult the marketing and operations managers to get more information about the market situation and our production capacity before making a decision" "Andrew, I rely on your expertise," said Richard. "Thanks, Richard, I will try my best." replied Andrew. Richard felt better after meeting with Andrew. He was pleased with Andrew's response to his suggestion and proud of Ayka as it was her suggestion to expand plant capacity, Richard thought Ayka would grow to be a sound financial manager one day, To get a quick picture of the company operations and its market situation, Andrew reviewed the company records and found that expanding capacity would be ideal. Later that evening, he met with the operations manager, Ruby, and marketing manager, Samantha, to discuss the proposal to expand plant capacity. They had a discussion which lasted about two hours. After the meeting. Andrew felt relaxed, and he determined to develop a plan for plant reviewed the company records and found that expanding capacity would be ideal. Later that evening, he met with the operations manager, Ruby, and marketing manager, Samantha, to discuss the proposal to expand plant capacity. They had a discussion which lasted about two hours. After the meeting, Andrew felt relaxed, and he determined to develop a plan for plant expansion. He felt confident that he would find a way to meet the high expectations Richard had for expanding Company operations and for Andrew's work as the management accountant. Andrew observed that the company was operating at full capacity and sold 80,000 units at a price of $58.50 during 2019. In planning for his upcoming meeting with Richard, Andrew prepared an Income statement and a schedule of fixed and variable costs (See Exhibits 1 and 2). (Note: All monetary amounts ate expressed in U.S. dollars). As Andrew has expected, Richard visited him in his office the following evening. Andrew provided him with the two schedules he had prepared, and Richard was happy to know that Andrew had already developed a plan. Andrew explained that his plant expansion program would permit an increase of $877,500 in annual sales. The expansion would increase fixed costs by $100,620 however, would not affect the relationship between sales and variable costs. Andrew also promised to prepare a detailed analysis of the proposal using the CVP analysis. Richard returned to his office with the documents Andrew had given to him. He remembered a discussion on CVP analysis at one of the CMA workshops, He wanted to know more about the CVP analysis and spent several hours reading a textbook on management accounting and found some Interesting topics on cost-volume-profit analysis-also known as the break-even analysis. He tried to calculate the estimated profit for different sales volumes following an example given in the textbook using the schedules given by Andrew but found it complex and time consuming. He was anxious and did not want to wait until he next met with Andrew for more details about the proposed expansion program. Assume that Richard is your uncle, your father's brother. Richard emailed you and requested your assistance in conducting the CVP analysis. Following are the questions Richard wants you to answer: 1. Calculate the total fixed costs and the total variable costs for 2019, 2. Calculate (a) the unit variable cost (b) the unit contribution margin and (c) the contribution margin ratio for 2019, 3. Using the contribution margin, compute the break-even sales (units) for 2019. 4. Compute the break-even sales (units) under the proposed expansion plan. 5. Determine the volume of sales (units) required under the proposed expansion program to realize the $1,313,325 of Income from operations that was earned In 2019 6. Calculate the maximum income from operations possible with the expanded plant capacity. 7. If the proposal is accepted and the sales remain at the 2019 level, what would be the income/loss from operations in 2020. 8. Based on the given data, would you recommend accepting the expansion proposal? Please explain why or why not. 9. Besides the analysis in 1-8, make a list of other financial and qualitative factors that Andrew and Raya's executive team should consider when deciding whether to expand. 6. Calculate the maximum income from operations possible with the expanded plant capacity 7. If the proposal is accepted and the sales remain at the 2019 level, what would be the income/loss from operations in 2020. 8. Based on the given data, would you recommend accepting the expansion proposal? Please explain why or why not. 9. Besides the analysis in 1-8, make a list of other financial and qualitative factors that Andrew and Raya's executive team should consider when deciding whether to expand. Exhibit 1: Raya Designer Clothing Condensed Income Statement for 2019 Sales $4,680,000 Cost of Goods Sold (2,610,000) Gross Margin 2,070,000 Operating Expenses: Selling Expenses 536,675 Administrative Expenses 220,000 Total Operating Expenses (756,675) $1,313,325 Operating Profit Exhibit 2: Division of Costs Cost of Goods Sold Selling Expenses Administrative Expenses Fixed 30% $133,675 5096 Variable 7096 $403,000 50%