Organization's Background through December tends to be a higher volume period this increased in demand results During the pandemic, Max and Red saw the opportunity to start a business producing in Forest Enterprises getting roughly 60% of its business during that time period. hand sanitizer and called it Forest Enterprises. They applied for a bank loan to procure Because of the rush, the plant runs overtime, and weekend shifts as needed to get the a 51,000 square-foot plant to produce the product. Skincare Body Shop asked them to product to its suppliers. Max and Red believe the labeling process significantly slows produce some hand sanitizer for them. During their first year of operation, they earned down production time. $5, 185,000 in sales revenue and is on track to do $7,905,000 this year. Labor Analysis Their product line consisted mainly: [ Unscented Hand Sanitizer, their generic brand without scent and the containers are Forest Enterprises managers rely heavily on a Production Hour Report to manage its unlabeled. work force. The report lists eight salaried workers and approximately 50 hourly employees, expected number of work days for the month hours per day (typically 8) and total projected hours for the month. The hours are multiplied by the employee pay rate [ Scented Hand Sanitizer, which are to distributors for retail applications (from $8.50-$12.50 per hour) to get expected monthly gross pay amount for each hourly employee based on a 40-hour workweek. The sum of all expected hourly employee [ Scented Hand Sanitizer in a special flip-top lid, with custom labels. They are available gross monthly pay amounts are added to the salaried production workers gross monthly as a variety pack, a duo-pack (with different scents) pay and the projected total payroll added costs (Employer taxes, Social Security, etc.) to get "total labor dollars" cost for the month. The total labor dollars are divided by Max and Red often receive requests from retailers for custom orders and must decide projected sales revenues to get a "projected labor percentage." Management watches which ones to accept and which ones to pass on this number closely and tries to keep it around 20% of sales. In the past, it was assumed that labor costs for the company did not change with sales volume, and some Hand Sanitizer Production months were profitable, and some were not. Currently, Forest Enterprises' managers adjust labor hours up or down depending on the demand for sanitizer and try to keep Hand sanitizers go through a general four-step process: formulae mixing, batch stirring the projected labor near 20% of sales. settling and packaging. Forest Enterprises makes mixes isopropyl alcohol and glycerin in large batches, and scent additives are produced in smaller batches depending on the Related Costs Issues production schedule. Next, another vat with spicket is filled with mixed formulae and placed on holding shelf for settling (15 to 25 at a time depending on the batch size). Forest Enterprises wants the labor and the overhead of each product line, reviewed. After they've cooled for an hour, the formulae are stirred one more time and bottles are Currently, Forest Enterprises allocates the same amount of overhead costs to every filled from the spicket, replace the cap, packaged and labeled and placed on pallets until output unit. While total labor averages 20%, they believe that labor and overhead costs shipped. It takes about a week to complete a batch order and the plant uses just-in-time vary greatly by product. And, since the company does not currently track labor hours by production methods. The goal is to produce a hand sanitizer every five seconds. Since product, Max and Red have no idea of labor cost or profitability by product line. A digital alcohol contamination would lead to a visit by the Health and Sanitation Department biometric time clock keeps track of hours for the employees, but management is open to (and possibly shutting down the factory), there are at least three sanitation workers on asking shift workers to track their hours by job or batch. Max and Red's primary concern duty at all times. Generally, there are 3-4 warehouse workers on duty to handle the is making sure there is a good reason to change the method and that there's a simple shipping, receiving and storage of raw materials and finished product. The plant and low-cost way to track it. The company has a small but growing administrative staff typically runs two shifts per day with two production supervisors assigned to each shift that can do some basic record keeping while the accountant manages financial For each of the three product lines, the process is virtually the same regardless of reporting, taxes and decision analysis. The accountant has asked for help determining a scents. But the processes between the product lines can be very different (e.g., product costing system Forest Enterprises can use for pricing decisions, product line packaging for variety packs takes much longer than for generic hand sanitizer because profitability analysis, financial planning and helping managers understand the business. workers need to pull different scented bottles and place them on the same tray). Not to But costs are only one component. The company currently bases pricing decisions on mention the packaging varies - some go in boxes while others go in plastic containers, the "Three C's": cost, consumer and competition. As a bare minimum, the company and some package tops and labels take longer to place than others. Forest Enterprises wants to achieve a target 17% gross profit margin (or higher) on cost, but Max and Red seldom places its own labels and logo on any of their products. Label designs generally consider what a consumer is willing to pay the most important factor in pricing. They come from the customer, so they vary based on each order. The plant currently has want to be sure to keep Forest Enterprises is competitive with other companies. Table 1 capacity to do $850,000 in sales per month, but with additional investments in vat provides selected actual cost and revenue data for July 2021. Additional information mixers and workstations (for about $425,000) it could increase to $1,275,000. October about costs can be found in the Notes to Selected Financial Data below.+ m Supplies: Includes supplies relating to production, packaging, sanitation and Below are the selected financial cost and revenue data for July 2021 . warehouse (think: adhesive, funnel, stir paddles, scrapers, gloves and so on). Freight & Shipping-In: The costs of shipping raw ingredients and other materials to the Sales $651,667 factory from suppliers. Freight & Shipping-Out: The costs of shipping finished products to customer locations Expenses: and distribution centers. Raw Material $278.744 Utilities Electricity: Approximately 10% for administrative office and the remainder for Mixing Labor 134.952 the factory. The factory portion varies somewhat with production volume. Administrative Salary 35, 162 Utilities Gas (vat): Approximately 5% for administrative office and the remainder for the Supplies 3,258 factory. The factory portion varies somewhat with production volume. Freight-in 4, 171 Water: All for the factory and varies proportionately with production volume. Freight-out 55.001 Repairs & Maintenance: All for the factory. Utilities-Power 8.341 Rent expense: The factory uses about 85% of the total square footage of the building Utilities-Water 782 and the remainder is for the administrative office. Utilities-Gas 2.607 Internet & VOIP: All for the administrative office. Repairs & Maintenance 3.649 Co-owners' salary: Max and Red. Rent Expense 16.292 Brokers' commissions: Generally, 4% of sales. Internet/VOIP 1.955 Income Tax: Average total tax rate is 32%. Owners Salaries 21,505 Broker's Commissions 26.067 Your Tasks - Phase One Total Expenses $592,486 Max and Red were asking several firms to provide a proposal recommending what type Operating Income $59, 181 of costing approach will help them determine more accurate cost information for Forest Enterprises pricing and product decisions. You have been invited to provide an Net Operating Income $40,243 executive summary and a proposal addressing the following questions (charts and tables with numerical values and calculations are expected in this project). Additional Information: Unit Volume 54,825 Requirement: Average Operating Assets $4.675,000 1. What cost system should Forest Enterprises adopt? Justify your recommendation Minimum Rate of Return 8.00% and explain why this cost system will be more beneficial to the company? 2. Referring to the selected financial cost and revenue data in page 3, prepare a table Notes to Financial cost and revenue data with the following columns: (a) cost category - enter the cost items in this column. Raw Materials: Includes main ingredients and scent additives. Main ingredients are (b) variable or fixed cost - identify each cost item as fixed (F) or variable (V). relatively higher cost items such as alcohol, aloe Vera oil, and glycerin that appear on (c) product cost - in each cost items listed in column (a) enter the product cost $ the package label. Scent additives are relatively low-dollar cost items and a small part of amount when applicable or enter zero in column (d). If the cost item is the hand sanitizer such as dyes, salt, and certain oils that don't always appear on the allocable, allocate the $ amount applicable to product cost (column c) and package label. period cost (column d). Mixing labor: The cost amount consists of 22% supervisory salaries and taxes and the (d) period cost - in each cost items listed in column (a) enter the period cost $ rest hourly workers. Mixing labor workers are organized into four categories: production amount when applicable or enter zero in column (c). If the cost item is line (formulae mixing, stirring and settling), packaging, sanitation and warehouse (all allocable, allocate the $ amount applicable to period cost (column d) and included as part of cost of goods sold). product cost (column c). Administration Salaries: Includes taxes and benefits for the Director of Operations, the accountant, HR Manager and two administrative support people.3. Applying the "Theory of Constraint" describe the constraint that Forest Enterprises should anticipate. Address the requirements provided in Phase One & Two in APA format (an inch margin 4. The accountant of Forest Enterprises also requested you to prepare a Balanced each side, double spacing, etc.). Provide all your calculations in your submission and Scorecard for the company to serve as their guidepost to their expansion. ensure that all your assertions and narratives are cited. Include a cover and reference page. There is no minimum page requirement. However, your paper will be graded with majority of consideration on the completeness of your submission. Your Tasks - Phase Two Forest Enterprises' owners Max and Red liked what they read in your proposal, and they think you are on the right track in helping determine more accurate cost information relating to Forest Enterprises products. Now they would like your recommendation on which of the following two equipment investment opportunities they should take. Alternative 1 Forest Enterprises just received a request for proposal (RFP) from a national retail chain to provide upscale individual custom bottle packaged in clear flip-top lid with the chain's label. The chain will pay Forest Enterprises $1.50 per bottle for a 3-year agreement guaranteed for 2,200,000 bottles (with the possibility of extension depending on the success of the agreement). The hand sanitizer would be made using existing formulae but would require a large investment in special packaging machinery of $500,000 with a 10-year life. Forest Enterprises would expect to achieve a 15% net profit margin on the agreement. Alternative 2 Alternatively, as labeling is considered the primary bottleneck, Forest Enterprises is also considering a new labeling machine (different from the machinery required in Option 1) with an estimated five-year life. Some variety packs require especially heavy labor to assemble the different scents, flip-top lid, and affix the labels in the right spot. The new machine would cost $500,000 and save an estimated $14,500 per month in labor cost. It is also expected to increase throughput by $13,000 revenues per month with roughly 20% markup on incremental production costs (excluding new investment). Requirement: Analyze each of these business opportunities from financial, strategic and risk perspectives and provide all the necessary supporting calculations in your presentation. Use the following as a guide when making your recommendations: 1. Assess the opportunities in terms of increased profitability and return on investment (ROI). What does this analysis suggest for Forest Enterprises? 2. Comment on the strategic, technical and risk factors that are relevant to this decision. What does this analysis suggest for Forest Enterprises? 3. What action do you recommend for Forest Enterprises at this time? Submission Requirement