Specialty Products Canada $($SPC$)$ is a small company established in $2010.$ It supplies a variety of specialty products to wholesalers across Canada. SPC has been successful in building its reputation for its quality products and timely delivery. Despite a successful past, the financial performance for the past two years has been declining.

Jill Parker, the president of SPC$,$ is bothered by the poor operating results in $20$X$1$ and called a meeting with the senior management team $($SMT$)$ to discuss the results and build a strategy for turning the company around.

Here is a summary of discussions at the meeting:

Jill Parker $($President$)$: $$Looking at our financial results, we are in an unsustainable position! We are running close to the limit of our operating line of credit at the bank and I am getting uncomfortable day by day. Thanks, Naya, for supplying us with last year$$s budget and our actual results against our plan. I want you folks to tell me how we can turn SPC around. All of you have Exhibits $1$ to $5.$ The plan and the actual results are at variance resulting in a disturbing monetary loss.$$

Sam Marchand $($Sales$)$: $$This is not what happened just in the past twelve months Jill. Things have been getting worse each year. We have been steadily losing ground to our competition for the past two years. Our plans and results are off as Production is unable to meet the market demand.$$

Mark Dubois $($Production$)$: $$The production$-$end of things has been smooth lately. The new automated machinery throughout the plant has eliminated most of our production problems. $90\%$ of our overhead costs are now relatively fixed for things like depreciation, salaries, and maintenance. These are easy to budget for and we do not have any variances in these costs.$$

Sam Marchand $($Sales$)$: $$The biggest problem we are having is keeping the small volume items in stock.

I can fill out lots of orders for the major items like Beta and Ceta. Other products like Alpha, Delta and Gamma are always running out of stock. Our costs are easy to control as our salespeople are on fixed salaries, and the rest of the costs are for advertising and promotion. We price our products based on full cost plus $10\%.$ I admit that some of our prices are out of line with the competition as can be seen from Exhibit $4.$ If we could straighten these prices out, our salespeople think that the mix of sales would change dramatically for the better.$$

Naya Rahman $($Controller$)$: $$Not really! I have looked at our budget and results for the last year $($Exhibit $1).$ The pricing and unit cost summary for our products are based on information from Marketing and Production $($Exhibit $2).$ My analysis is based on the typical standard costing approach. What concerns me$,$ as Jill indicated, is the enormous deviation of actual results from our plan. Based on Exhibit $4,$ our product prices are certainly out of line compared to competition. We seem to have a sub$-$optimal capacity utilization issue.$$

Mark Dubois $($Production$)$: $$Our major problem lies with our sales forecast and order management. As you know, we would like to schedule our production runs about two months in advance. For the last couple of years, the sales department has been constantly changing its mind and making all sorts of rush demands for certain products as they run out of stock. We are running close to our capacity now, so this creates some problems down on the shop floor. Refer to Exhibit $5$ for production efficiency$.$

Jill parker $($President$)$: $$Well$,$ the SMT should analyze our current situation, and make recommendations to turn SPC around. We need drastic improvements to our business model, and realize our targeted $10\%$ return on sales, before taxes, for $20$X$2.$ We do not want SPC to become a target for takeover.

Exhibit $1$

Specialty Products Canada

Budgeted Income Statement for year $20$X$1$

Products Alpha Beta Ceta Delta Gamma Total

Volume $10,00060,000180,00036,00013,000299,000$

Revenues $($$CDN$)57,800762,6003,222,000790,200585,6505,418,250$

Cost of Goods Sold $($$CDN$)$:

Material $10,000180,000990,000252,000195,0001,627,000$

Labour $5,00060,000225,00054,00039,000383,000$

Overhead $35,000420,0001,575,000378,000273,0002,681,000$

Total Costs $50,000660,0002,790,000684,000507,0004,691,000$

Gross Margin $($$$)7,800102,600432,000106,20078,650727,250$

Selling & Admin $($$$)2,50033,000139,50034,20025,350234,550$

Operating Income $($$$)5,30069,600292,50072,00053,300492,700$

Exhibit $2$

Specialty Products Canada

Pricing and Unit Cost Summary $($All in $CDN$)$

Products Alpha Beta Ceta Delta Gamma

Currently Budgeted Unit Costs

Direct Material $1\mathrm{.}003\mathrm{.}005\mathrm{.}507\mathrm{.}0015\mathrm{.}00$

Direct Labour $0\mathrm{.}501\mathrm{.}001\mathrm{.}251\mathrm{.}503\mathrm{.}00$

Overhead $(1)3\mathrm{.}507\mathrm{.}008\mathrm{.}7510\mathrm{.}5021\mathrm{.}00$

Manufacturing Costs $5\mathrm{.}0011\mathrm{.}0015\mathrm{.}5019\mathrm{.}0039\mathrm{.}00$

Selling & Admin. $(2)0\mathrm{.}250\mathrm{.}550\mathrm{.}780\mathrm{.}951\mathrm{.}95$

Standard Product Costs $ $5\mathrm{.}2511\mathrm{.}5516\mathrm{.}2819\mathrm{.}9540\mathrm{.}95$

Wholesale Price