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:

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.