Smith Down Lid. (SDL) manufactures bicycles and sells them to retail stores across Canada. SDL manufactures three different models. The models are distinguished by the quality of materials used and the sophistication of the design. The bikes vary in price; the Basic model is the most basic and cheapest, the Classic is a mid-price-point product, and the Excel is the most expensive model. Quality control is critical for SDL. The company prides itself on not just meeting but exceeding the minimum requirements. Industry surveys have shown that quality is the most important factor for customers. SDL also has a strong reputation for excellent customer service and timely delivery. It is January 31, 20X1, and you, CPA, work for a consulting firm. Mike Brown, the controller of SDL asks you to help him with several items in preparation for an upcoming board of directors meeting. He informs you that sales have grown to the point where SDL is now operating at capacity and struggling to meet demand. Mike provides you with the following statement of income by product line for the year ended December 31, 20X0. The average selling prices were $300, $460, and $650 for the Basic, Classic, and Excel models, respectively. Basic Classic Excel Total Sales $18,087,000 $19,425.800 $20,475.000 $58,887 800 Direct material 5,715,000 6,518.000 6,575.000 18,808.000 Direct labour 3,430,000 4,083.000 4,705.000 12.198.000 Variable MOH 3,112,000 2,687.000 2,240.000 8,019.000 Fixed MOH* 205,800 243 780 282 300 731.880 Fixed selling and 1,139,220 1,165.548 1,228.500 3,533.268 administrative** * Fixed MOH is allocated based on direct labour costs. "Fixed selling and administrative is allocated based on sales. Production capacity is limited by the available machine hours (MH), since there is not enough space to add the equipment necessary to increase production. There are 145.000 MH available in a year. Basic Classic Excel MH per unit 0.80 1.20 1.30 The marketing team has provided the following summary of forecasted demand and sales commitments for the upcoming year. Basic Classic Excel Forecasted demand 67,000 48.000 38.000 Sales commitments 50.000 40.000 25.000 Determine the number of units of each bike model that should be produced to maximize profitability in the next year while still meeting sales commitments, assuming that no additional capacity is added. LAF841 Final Exam 2241 page 2 of 4One of the final stages in the bike manufacturing process is the painting of the bike, referred to as finishing- Management is considering outsourcing the finishing process to add Mike has provided the following information about the board of directors: production capacity. SDL has approached XYYZ, a company that specializes in industrial spray painting. to perform the finishing. O SDL has five board members, including Daniel Grichuck, SDL's CEO and the board chair. The remaining board members consist of an advertising executive, a former Member of XYYZ has been in business for five years and has experience painting everything from Parliament, a pediatrician, and a lawyer. kitchen cabinets to bicycles. The bikes would be sent to the facility for painting and then sent back to SDL for a quality inspection, packing, and shipping. XYYZ has provided SDL O The board members serve two-year terms, with two new members elected in even years with two customer references, both of whom indicated that they were satisfied with the and two new members elected in odd years. The CEO remains constant. quality and service they have received from XYYZ. O The board meets on an annual basis to review the financial performance of SDL and discuss strategic issues. The proposal would be for a three-year term with a minimum volume of 125,000 units annually. XYYZ would charge $30 per unit. Shipping costs. estimated to be $7.50 per unit. O The accounting department provides SDL's year-to-date statement of income at each would be SDL's responsibility. SDL has the right to reject any units that do not meet the board meeting. agreed-upon quality specifications. The controller has provided you with the following per-unit costs for the finishing process: Provide an analysis of SDL's board of directors, and make recommendations for improvement, if applicable. Direct materials $14.00 Direct labour 12.50 Required: Variable MOH 6.00 Fixed MOH* 5.00 Prepare a report as requested. Quality inspection 1.50 Fixed MOH includes building amortization, insurance, and property taxes. There is one plant supervisor dedicated to overseeing the finishing process. His salary is $75,000, including benefits. The production manager, who earns $100,000 per year, spends approximately 20% of her time dealing with the finishing process. The equipment used in the finishing process has a total cost of $860,000 and is being amortized over eight years. If the finishing were outsourced, the machines could be sold to a used equipment dealer for $50,000. Prepare an analysis of the outsourcing proposal and make an overall recommendation, considering both qualitative and quantitative considerations. Assume that 137,500 units will be produced in a year. Big Co, a big box store, has approached SDL about a special order. BigCo would like SDL to manufacture a bike for its in-house brand, Value Plus. The order would be for 10,000 units. The product development team has reviewed the specifications provided by BigCo and estimates that it will cost $20,000 to design a suitable bike. The team has provided the following cost estimates related to the order: Materials $79.00 Direct labour $45.50 Variable MOH $45.00 MH per unit 0.70 Calculate the minimum price that SOL should accept for the order as well as any other factors that should be considered. LAF841 Final Exam 2241 page 3 of 4 LAF841 Final Exam 2241 page 4 of 4