Strategy, plans, and budgets are interrelated and affect one another. The strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans. The budgeted performance is a better criterion than past performance for judging managers because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets. In many organizations, budgets impel managers to plan. Without budgets, managers drift from crisis to crisis. Research also shows that budgets can motivate managers to meet targets and improve their performance. Thus, many top managers believe that budgets meet the cost-benefit test. This case is about a decision to be made for the future, however, relying on the past. Also, some ethical issues involved. Benjamin Inc. is a manufacturer of mountain bicycles that are sold across Canada. Spencer Walker, a Chartered professional accountant, was hired as a project manager to assess if any outsourcing would take place. The Specter Pro is Benjamins most popular model and currently sells for $123 each. The following information pertains to the current years production of the Specter Pro: Number of units manufactured and sold 10,000 Direct materials cost per unit $ 37.25 Direct labor cost per unit 18.35 2 Variable manufacturing overhead cost per unit 7.75 Fixed manufacturing overhead cost per unit 25.60 Total unit cost $ 88.95 Island Cycle and Motors has offered to supply Benjamin with up to 15,000 units of the Specter Pro at a price of $84.50 each, including all shipping costs. Benjamin, the president, and the CEO expects the following for the next year: Sales price per unit $ 123 Number of units manufactured and sold 12,000 Increase indirect materials cost per unit + 2% Increase indirect labor cost per unit + 5% Decrease in variable manufacturing overhead cost per unit 2% Increase in fixed manufacturing overhead cost per unit + 16.67% Required a. Determine whether Benjamin should keep manufacturing the Specter Pros or buy them from Island. Assume that 30% of the fixed costs allocated to the Specter Pro are avoidable and some employees would be laid off. Show all calculations and justify your answer. b. Strictly from a financial point of view, indicate what price offered by Island would make Benjamin indifferent between manufacturing the Specter Pros or buying them from the island. c. Benjamin was looking for a way to increase net income by laying off a large number of employees and using cheaper and lower quality parts if outsourced. Walker knows that in fact, it would report a larger net income. Walker is unsure about following the president's instructions. He also wonders how the company's independent auditors would react if they reviewed the statements and records and found that the adjusting entries were not made. What do you think Walker should do? d. Describe the ethical dilemma faced by Spencer Walker and the alternative courses of action that he might take. Explain how your answer would differ given the following assumptions: 1) Walker knows that the company's financial statements are not going to be audited and he could forge them when outsourced; 2) Walker knows that the president's bonus depends on the amount of income reported in 3 the year; and 3) Walker's job depends on complying with the president's wishes

Variable manufacturing overhead cost per unit 7.75 Fixed manufacturing overhead cost per unit 25.60 Total unit cost $88.95 Island Cycle and Motors has offered to supply Benjamin with up to 15,000 units of the Specter Pro at a price of $84.50 each, including all shipping costs. Benjamin, the president and the CEO, expects the following for the next year: Sales price per unit $123 Number of units manufactured and sold 12,000 Increase in direct materials cost per unit + 2% Increase in direct labour cost per unit + 5% Decrease in variable manufacturing overhead cost per unit 2% Increase in fixed manufacturing overhead cost per unit + 16.67% Required a. Determine whether Benjamin should keep manufacturing the Specter Pros or buy them from Island. Assume that 30% of the fixed costs allocated to the Specter Pro are avoidable and some employees would be laid off. Show all calculations and justify your answer. b. Strictly from a financial point of view, indicate what price offered by Island would make Benjamin indifferent between manufacturing the Specter Pros or buying them from Island. C. Benjamin was looking for the way to increase net income with laying off a large number of employees and using cheaper and lower quality parts if outsourced. Walker knows that in fact, it would report a larger net income. Walker is unsure about following the president's instructions. He also wonders how the company's independent auditors would react if they reviewed the statements and records and found that the adjusting entries were not made. What do you think Walker should do? d. Describe the ethical dilemma faced by Spencer Walker and the alternative courses of action that he might take. Explain how your answer would differ given the following assumptions: 1) Walker knows that the company's financial statements are not going to be audited and he could forge them when outsourced; 2) Walker knows that the president's bonus depends on the amount of income reported in the year; and 3) Walker's job depends on complying with the president's wishes