Prabjot Gill is the proud owner of Happiland, a theme park located just outside Lumby, BC. Prab truly believes in their slogan "The funnest place in Canada". Though they have brought fun and excitement to generations, they have had trouble recently with several areas of their park, something Prab is worried about. In the preceding few years costs have come up and revenues down, and Prab is at an impasse. She tells you "I just don't know what to do. Things were going so well! Now, not so much. Please help!" You vow to do whatever you can, after all you are now a CPA and capable of great things! You do some digging through the company's financials and find the attached exhibits, certain you will need to analyze them further to get any useful information you can from them. After spending many hours interviewing Prab, you have come to the conclusion that the main issues she is facing are as follows: She is looking at adding a new ride to the park and is unsure of the costs or benefits of doing so. She wants to know what her customers are really coming for, what is truly important to them, and focus her spending there. Happiland's candy is made in-house, and there has been some squabbling among managers of the different candy divisions and the stores that sell it as to pricing and who gets access to the production machines and for how long. She would like to understand the returns that her two restaurants are making, as a starting point to understand where the real value is added in her company. She also wants to know how to allocate costs to the different restaurants. She would like to look at her company from more than just a profits and loss perspective, and believes a more balanced approach for performance measurement would be a worthwhile endeavor but she just doesn't know where to start. Finally, she would like to know how to properly compensate her core group of managers and ensure their interests are aligned with those of the company. You run these issues by her to make sure you are on the right track. She says "Yes, these are the main issues. That being said, if you see anything else that needs addressing as you go through my business please do let me know!" Required: Prepare the quantitative analysis request below. Put each task on its own tab and clearly label your work. NO HARD CODED SUBMISSIONS WILL BE ACCEPTED. You will have one week to complete your quants and submit them before the final exam. Questions can NOT be asked about the deliverables. If unsure, please state your assumptions and continue with the task. During the written exam, expect to answer questions based upon your quantitative analysis. 1. Calculate Happilands weighted average cost of capital. 2. Compute 3 appropriate quantitative tools for both buying and leasing Woofers of the Last Bark. 3. Optimize the customer experience relative to costs. 4. Provide the optimal production schedule for the candy division. 5. Determine the current profit of both Happiburger and Pizzantastic. Next, provide a more suitable allocation approach for Happiland's restaurants. 6. Prepare sensitivity analysis on ROI and RI. 7. Prepare three different transfer prices on a per unit and total basis for Prab to consider. Exhibit 1 - General Financial Information E1-1 Happiland Capital Structure Debt Preferred Shares $7,200,000 $1,200,000 Common Shares $3,600,000 The debt is currently yielding 5% The preferred shares cost The common shares cost 7% 11% Tax rate 30% Exhibit 2 - Information About the Potential New Ride The new ride is a dog-themed rollercoaster called "Woofers of the Last Bark". Guests follow the story of Illinois Jones, heroine dog whisperer, as she searches for the Bark of the Covenant, a whistle to control all dogs! They believe this ride would have a useful life of 10 years. There is an option to buy the ride or to lease it on an annual basis. If Happiland buys the ride, it would cost $500,000 up front delivered and installed. The ride would be in CCA class 8, 20% and eligible for the accelerated investment incentive. They would need to pay $20,000 per year in maintenance costs, with extra training costs incurred in year 5 of $32,000. The ride would be able to be sold at the end of 10 years for $75,000 to a travelling circus. Leasing the ride would cost $90,000 at the beginning of each year. The cost of the lease includes maintenance of the ride and any additional training required. Whichever option they choose, they are expecting additional ticket sales that will result in net after-tax cashflows of $75,000 a year from the ride. Exhibit 3- What Customers Want and How to Give it to Them Happiland undertook independent market research to determine what their customers valued most from their time at the park. The results of the customer survey are as follows: Quality of rides Short lines Experience or feeling Total Importance 60 40 100 200 Further research was done into the main components and their costs per customer, of the service that Happiland provides: Ride upgrades Character experiences Cleaning and maintenance staff Total Cost $10 $4 $6 | $20 The group was unsure how each of these cost components will change the customer experience but they think the ranges should be: Ride upgrades Character experiences Cleaning and maintenance staff Quality of rides 30-50% Customer criteria Short lines 20-40% 30-50% TTI 10-30% 30-50% 100% 20-50% 100% Experience 10 - 40% 20 -60% 30-50% 100% Now that they have the data, management is unsure how to use it to optimize the customer experience relative to their costs. Use professional judgement in selecting any required inputs. State your assumptions and if applicable, why you think that input is a good fit based on case facts. Exhibit 4 - Resource Allocation Happiland is dealing with some capacity challenges in their candy division. They currently produce three types of sour candies, Sugarbombs, Cherrysqueezes, and Sourblasters. They all use the same type of sour flavouring, "Xsour", and there have been challenges getting that flavouring. The company is unsure of which to produce, and so have been basing their production on demand numbers (ie Sugarbombs first then the other two). Data is as follows: Selling price per bag Demand (in bags) Variable costs/bag Fixed costs/bag KG of Xsour per bag Minimum bags produced Sugarbombs $5.50 Cherrysqueezes $4.50 Sourblasters $7.00 2000 1000 1000 4.00 3.50 4.50 .75 .50 .65 0.05 0.25 0.10 100 100 100 The Xsour costs $5 per KG and Happiland can only procure 245 KG of Xsour. They must produce a minimum of 100 bags of each type of candy. They are unsure how to proceed to determine the optimal production structure subject to these constraints. Exhibit 5-Performance Measurement and Cost Allocation Happiland has two main restaurants in the park, Happiburger and Pizzantastic. They are both treated as profit centres. Though the two restaurants are separate, they share a common kitchen. The principal costs in the kitchen are fixed, about 75%, with about 25% being variable. The kitchen costs are allocated half to each restaurant each restaurant. Total kitchen costs for each month were $36,000. Information from each restaurant for the last two months is as follows: This Month Happiburger Customers served 2,500 Revenue $40,000 Restaurant costs (not including $27,500 allocated kitchen costs) Pizzantastic 8,000 $70,000 $35,000 Last Month Happiburger Customers served 7,000 Pizzantastic 2,000 Revenue $80,000 $20,000 Restaurant costs (not including $60,000 $10,000 allocated kitchen costs) Additional Information: Square footage of restaurant Number of Employees Number of dining tables Number of point of sale systems Happiburger 3,000 Pizzantastic 4,000 17 15 45 55 7 2 The manager of Happiburger saying the current allocation model for kitchen costs is unfair. Her bonus is based on the restaurant's profit and she says she should only be paying for her volume, not a fixed 50%. Prab just wants the fighting to stop. They are struggling with arriving at a more suitable performance measurement approach that go beyond just the numbers. Exhibit 6 - Divisional Returns Prab is trying to understand the company's profits and where they come from better. She used to calculate only ROI and RI for the company as a whole. Based on the information she has from last year, she calculated an ROI of 13.33% and a RI of $2,000,000 for the park. She would like you to drill down into these numbers further. Current information: Division Rides Food Merchandise Accommodation Operating Income $8,000,000 $2,000,000 $7,000,000 $3,000,000 Average Assets $75,000,000 $5,000,000 $25,000,000 $45,000,000 She used 12% as her required rate of return but there is a lot of volatility in the market so rate are fluctuating up and down by 2%. She would like to know how the park would look under ROI and RI if her required rate of return were to change. In addition, both the managers of the Rides and the Accommodation divisions feel their numbers may be unfavourable. The both argue that without rides and a place to stay, no one would buy food or merchandise, and therefore they should be judged by different rates of return. Think about what you may say to Prab and to them with regards to their relative performance. Exhibit 7 - More Problems in Candy Prab is having even more issues in Happiland's candy division. The sweet section of their candy production is broken down into two independent SBUS, both run as profit centres. Both are free to purchase or sell their products internally or externally. Initial Manufacturing (IM) currently purchases sugar and flavourings from outside suppliers and produces a base upon which all Happiland's sweet candies are based. Final Production (FP) takes the candy bases and makes a variety of sweet treats from them. The managers of the two units have been unfriendly with each other for some time. IM's manager used to work for the manager of FP, but a breakdown in their working relationship (despite each of them being good managers in their own right) lead to them each heading their own independent division. IM has been approached by an outside purchaser and the purchaser has offered to buy 3,000,000 units per year at a price of $0.15 per unit. Though IM doesn't have the capacity currently to take the order, they have threatened to cut production internally to 7,000,000 units and take the external order if FP doesn't up the transfer price to $0.15 per unit. Information from each division: Initial Manufacturing Current production Capacity 9,000,000 units 10,000,000 units Outside order volume 3,000,000 units External selling price $0.15 per unit Internal transfer price $0.10 per unit Variable cost $0.03 per unit Current fixed costs (based on $450,000 per year 9,000,000 units) Final Production Demand 9,000,000 units Selling price $0.19 per unit Variable costs $0.02 per unit (not including transferred-in costs) Transferrred-in costs $0.10 per unit Fixed costs $550,000 per year Prab is frustrated with their squabbling and is concerned they are not doing what is in the company's best interests. They are currently transferred at $0.10 per unit, though no one can remember how this number was chosen