Question
Required: Assume the role of Evette , and prepare a report to Charles, president of BBC. The report should analyze BBCs current operations and provide
Required: Assume the role of Evette , and prepare a report to Charles, president of BBC. The report should analyze BBCs current operations and provide advice for the future. It should include the following tasks:
1. Preliminary analysis (8 marks) Provide a discussion of the 20X2 to 20X4 sales and manufacturing costs using the preliminary analysis provided in Exhibit 3 in the Project Details. The analysis should address the concern the president has in relation to the eroding bottom line on the operating statement (Exhibit 1). It should also address the operations managers concerns relating to the change in unit costs and usage of prime costs (Exhibit 2). Additionally, there should be an analysis of budgeted versus actual sales, sales price and associated variable selling and administrative costs per pair (Exhibit 1). Your analysis should focus on changes greater than 4% (in Exhibit 3) and trends between 20X2 and 20X4 that will be meaningful to the companys management team.should be used? Explain your thought process.
2. Fixed cost allocations and determination of overhead allocation rates (13 marks)
a) The introduction of the Robie Reid hiking boot will affect BBCs current fixed manufacturing overhead application rate. Calculate the revised 20X5 fixed manufacturing overhead application rate per pair for Iron Horse and Robie Reid (based on direct labour hours) using data from Exhibit 6 (6 marks): using a single company-wide application rate applicable to both products (Students should first come up with a single allocation rate. Then, using the single allocation rate, stduents should determine an overhead application amount for each product.) using departmental rates based on the table from Exhibit 6. The revised manufacturing processes include costs for each department and the times that the Iron Horse and Robie Reid products consume resources in each department (separating manual process from automated process in the cutting and stitching departments).
Base the calculation on the following guidelines: i. The denominator level for the Iron Horse boot will be based on annual average production (pairs) from 20X2 to 20X5 revised budget, considering 20X2 to 20X4 actual and the planned production of 1,097,000 pairs for 20X5 (per Exhibit 4). ii. The denominator level for the Robie Reid will be based on the planned first year sales of 125,000 pairs plus a desired ending inventory of 1.6% of the next years planned sales. Sales are not expected to change year after year.
b) Assuming that BBC achieves actual production of 1,097,000 pairs of Iron Horse boots and 127,000 pairs of Robie Reid boots as the level of activity and costs in 20X5, determine the over- or under-applied overhead for 20X5. (2 marks): when a single application rate is used, as calculated in part a) when departmental application rates are used, as calculated in part a) The over-or under-applied overhead calculation should be based on the manufacturing overhead costs indicated in 20X5 revised budget as shown in Exhibit 6.
c) Provide a discussion that addresses the following (5 marks): i. The purpose of effective overhead application rates ii. Which method (overall application rate versus departmental application rates) is the most effective approach for BBC? Which makes sense to use before the introduction of the new product and why? Which makes sense to use after the introduction of the new product and why? Consider how well the rate accurately portrays the cost of underutilized capacity. In iii. Would activity-based costing be a practical approach to costing in the first year of operations? Why or why not?
3. Analysis of the profitability of adding the Robie Reid hiking boot into BBCs product mix (12 marks) Prepare a break-even analysis of BBCs option to add the Robie Reid hiking boot into its existing product mix. Use the data provided in Exhibits 4 and 5. Your analysis should consist of a break-even analysis of BBCs existing and proposed products along with a summary discussion. Use the following approach (9 marks): i. Calculate the breakeven in pairs for the Iron Horse work boot using the revised budgeted costs in Exhibit 4 alone. ii. Calculate the breakeven in pairs for the Robie Reid hiking boot using the data provided in Exhibit 5 alone. iii. Calculate the breakeven in pairs for both products combined using information from Exhibits 4 and 5. Base the sales mix on the 20X5 budget for the Iron Horse product and the expected annual demand for the Robie Reid product. iv. Calculate the margin of safety in units and per centage for all three break-even points calculated in parts (i) through (iii). Explain the difference in the margin of safety for the breakevens you calculated in part (iv). Which margin of safety provides a better picture of the risk of a net loss? Why did you select this approach? (3 marks)
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