Questions For all responses, please remember that providing your qualitative (written) rationale can be just as important as your quantitative calculations. 1. Below is Batteries for Everyone's budgeted statement of comprehensive income for the year ending December 31, 2017: Batteries for Everyone-Canada Budgeted Statement of Comprehensive Income -Legal Basis For the Year Ending December 31, 2017 (thousands of dollars) Alkaline Carbon Zinc Total Sales Cost of Goods Sold Gross Margin Direct Overhead Segment Contribution Corporate Overhead Operating Profit 95,000 54,000 41,000 21,500 19,500 15,000 13,500 1,500 900 600 110,000 67,500 42,500 22,400 20,100 19,000 1,100 Additional Information: . In calculating the transfer price to Canada, the producing country marks up alkaline product by 25% and carbon zinc product by 5%. Canada's senior management receives a bonus based on hitting the budgeted operating profit. The base bonus of 10% of a senior manager's salary is paid for hitting the target profit. For every 1% that the actual profit exceeds budgeted profit, the senior manager receives an additional 1% of his or her salary up to a maximum of an additional 30% (i.e., the maximum bonus is 40% of a senior manager's salary). Assume Cost of Goods Sold is variable. . If actual sales volume of alkaline batteries was 2% more than budgeted, what bonus would a senior manager receive if her salary was $100,000? Calculate this amount based upon (a) legal results and (b) market profitability reporting (i.e., transfer pricing markups are removed from both the budget and actual results). Assume the sales mix in both segments is the same for both budget and actual. . 2. Use the information from Question #1, plus the additional information below: Actual sales of alkaline products were $92,000, and actual sales of carbon zinc products were $20,000. The sales force elected to go for team-based compensation based on companywide results. The sales force has a total salary of $8,000. Here are two possible scenarios: . Scenario #1: They receive a bonus of 2% of salary for every 1% that total segment contribution exceeds profit. Scenario #2: They receive a bonus of 4% of salary for every 1% that total actual sales exceeds budgeted sales. Calculate the team bonus the sales force will receive for each scenario. 3. Below is BFE-Canada's budget. Because the Canadian affiliate purchases approximately 30,000 worth of goods from Europe, it used an exchange rate of 1 = $1.50 (CAD). Batteries for Everyone-Canada Budgeted Statement of Comprehensive Income -MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 110,000 56,000 54,000 42,000 12,000 Actual results were as follows: Batteries for Everyone-Canada Actual Statement of Comprehensive Income-MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 115,000 61,500 53,500 42,000 11,500 Assuming the senior management bonus is based on the same parameters as Question #1, (i.e., 10% of salary for meeting budgeted profit and then an additional 1% of salary for each 1% the actual profit is above budgeted profit), what should the bonus be for a senior manager making $100,000 under the following two scenarios? Scenario 1: Actual results include $3,000 in unfavourable variance due to the value of the Canadian dollar eroding relative to the Euro. It is Canadian management's decision whether or not to hedge the value of the Canadian dollar relative to the Euro, thereby essentially locking in the exchange rate used in developing the budget. Scenario 2: Actual results include $2,000 in unfavourable variance due to the value of the Canadian dollar eroding relative to the Euro. It is NOT Canadian management's decision whether or not to hedge the value of the Canadian dollar relative to the Euro. 4. Below is BFE-Canada's budget. Batteries for Everyone-Canada Budgeted Statement of Comprehensive Income-MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 110,000 56,000 54,000 42,000 12,000 In addition, estimated current assets (accounts receivable and inventory) are projected to be $22,000 at year end, and US management has introduced a new policy whereby a "financing charge" of 12% of current assets will be deducted from Operating Profit. This adjustment will be made to both the budgeted and actual profit. Batteries for Everyone-Canada Actual Statement of Comprehensive Income -MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 112,070 56,560 55,510 43,030 12,480 Current assets ended up being $26,000. Assuming the senior management bonus is based on the same parameters as Question #1 (i.e., 10% of salary for meeting budgeted profit and then an additional 1% of salary for each 1% the actual profit is above budgeted profit), what should the bonus be for a senior manager making $100,000 now that there is a financing charge? 5. Below is cost information from two affiliates of BFE. Var Costs 0.27586 Fixed Costs 0.03500 Total Costs 0.31086 Singapore - AA United States - AA 0.29100 0.05600 0.34700 As mentioned in the case, in the spirit of openness, this information was readily available to anybody who cared to look it up, with the provision that they had access. Access was granted based on one's position or one's need for this information to do one's job. The president of BFE Canada saw this information and went ballistic! He was furious that he was forced to buy product from the United States where both the variable cost per battery and the fixed cost allocation were much more than those same costs for batteries made in Singapore. Until the Director of Finance and Information Systems talked him out of it, he was set to phone his boss in the United States and demand that he be allowed to source his batteries from Singapore. Even though Singapore was across the globe from Canada, the additional transportation costs amounted to only two cents more than the transportation costs from the United States. This meant that he could save Canada just over 1.5 cents per AA battery. Upon review of the other common battery sizes, the same relative phenomenon existed: Singapore-produced batteries were cheaper than those produced in the United States. If Canada is allowed to source their AA batteries from Singapore and they purchase approximately 100 million AA batteries per year, what will be the impact (additional costs) on the company as a whole? Questions For all responses, please remember that providing your qualitative (written) rationale can be just as important as your quantitative calculations. 1. Below is Batteries for Everyone's budgeted statement of comprehensive income for the year ending December 31, 2017: Batteries for Everyone-Canada Budgeted Statement of Comprehensive Income -Legal Basis For the Year Ending December 31, 2017 (thousands of dollars) Alkaline Carbon Zinc Total Sales Cost of Goods Sold Gross Margin Direct Overhead Segment Contribution Corporate Overhead Operating Profit 95,000 54,000 41,000 21,500 19,500 15,000 13,500 1,500 900 600 110,000 67,500 42,500 22,400 20,100 19,000 1,100 Additional Information: . In calculating the transfer price to Canada, the producing country marks up alkaline product by 25% and carbon zinc product by 5%. Canada's senior management receives a bonus based on hitting the budgeted operating profit. The base bonus of 10% of a senior manager's salary is paid for hitting the target profit. For every 1% that the actual profit exceeds budgeted profit, the senior manager receives an additional 1% of his or her salary up to a maximum of an additional 30% (i.e., the maximum bonus is 40% of a senior manager's salary). Assume Cost of Goods Sold is variable. . If actual sales volume of alkaline batteries was 2% more than budgeted, what bonus would a senior manager receive if her salary was $100,000? Calculate this amount based upon (a) legal results and (b) market profitability reporting (i.e., transfer pricing markups are removed from both the budget and actual results). Assume the sales mix in both segments is the same for both budget and actual. . 2. Use the information from Question #1, plus the additional information below: Actual sales of alkaline products were $92,000, and actual sales of carbon zinc products were $20,000. The sales force elected to go for team-based compensation based on companywide results. The sales force has a total salary of $8,000. Here are two possible scenarios: . Scenario #1: They receive a bonus of 2% of salary for every 1% that total segment contribution exceeds profit. Scenario #2: They receive a bonus of 4% of salary for every 1% that total actual sales exceeds budgeted sales. Calculate the team bonus the sales force will receive for each scenario. 3. Below is BFE-Canada's budget. Because the Canadian affiliate purchases approximately 30,000 worth of goods from Europe, it used an exchange rate of 1 = $1.50 (CAD). Batteries for Everyone-Canada Budgeted Statement of Comprehensive Income -MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 110,000 56,000 54,000 42,000 12,000 Actual results were as follows: Batteries for Everyone-Canada Actual Statement of Comprehensive Income-MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 115,000 61,500 53,500 42,000 11,500 Assuming the senior management bonus is based on the same parameters as Question #1, (i.e., 10% of salary for meeting budgeted profit and then an additional 1% of salary for each 1% the actual profit is above budgeted profit), what should the bonus be for a senior manager making $100,000 under the following two scenarios? Scenario 1: Actual results include $3,000 in unfavourable variance due to the value of the Canadian dollar eroding relative to the Euro. It is Canadian management's decision whether or not to hedge the value of the Canadian dollar relative to the Euro, thereby essentially locking in the exchange rate used in developing the budget. Scenario 2: Actual results include $2,000 in unfavourable variance due to the value of the Canadian dollar eroding relative to the Euro. It is NOT Canadian management's decision whether or not to hedge the value of the Canadian dollar relative to the Euro. 4. Below is BFE-Canada's budget. Batteries for Everyone-Canada Budgeted Statement of Comprehensive Income-MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 110,000 56,000 54,000 42,000 12,000 In addition, estimated current assets (accounts receivable and inventory) are projected to be $22,000 at year end, and US management has introduced a new policy whereby a "financing charge" of 12% of current assets will be deducted from Operating Profit. This adjustment will be made to both the budgeted and actual profit. Batteries for Everyone-Canada Actual Statement of Comprehensive Income -MPR Basis For the Year Ending December 31, 2017 (thousands of dollars) Total Sales Cost of Goods Sold Gross Margin Overheads Operating Profit 112,070 56,560 55,510 43,030 12,480 Current assets ended up being $26,000. Assuming the senior management bonus is based on the same parameters as Question #1 (i.e., 10% of salary for meeting budgeted profit and then an additional 1% of salary for each 1% the actual profit is above budgeted profit), what should the bonus be for a senior manager making $100,000 now that there is a financing charge? 5. Below is cost information from two affiliates of BFE. Var Costs 0.27586 Fixed Costs 0.03500 Total Costs 0.31086 Singapore - AA United States - AA 0.29100 0.05600 0.34700 As mentioned in the case, in the spirit of openness, this information was readily available to anybody who cared to look it up, with the provision that they had access. Access was granted based on one's position or one's need for this information to do one's job. The president of BFE Canada saw this information and went ballistic! He was furious that he was forced to buy product from the United States where both the variable cost per battery and the fixed cost allocation were much more than those same costs for batteries made in Singapore. Until the Director of Finance and Information Systems talked him out of it, he was set to phone his boss in the United States and demand that he be allowed to source his batteries from Singapore. Even though Singapore was across the globe from Canada, the additional transportation costs amounted to only two cents more than the transportation costs from the United States. This meant that he could save Canada just over 1.5 cents per AA battery. Upon review of the other common battery sizes, the same relative phenomenon existed: Singapore-produced batteries were cheaper than those produced in the United States. If Canada is allowed to source their AA batteries from Singapore and they purchase approximately 100 million AA batteries per year, what will be the impact (additional costs) on the company as a whole