The Good Boat Company (TGBC) Ltd

TGBC Ltd was incorporated in August 1997.

It is now August 2020 and a variety of operational and tactical management issues have

arisen upon which you, as the chief management accountant of the company, are

required to comment on and brief the Executive board on these issues in a report to the

Executive Board (from herein, referred to as 'The Board')

New design supplier for Surania (fictional Middle East country)

In 2017 TGBC Ltd undertook a review of potential growth markets and identified Surania

as a potential growth market for the sale of its core products; luxury boats.

The new boat building facility in the Middle East is nearing completion and is due to be

opened a little later than originally planned in February 2020.

However, the issue of the interior design supplier for the luxury boat line remains

unresolved.

Stefan Gil has indicated that expectations are high for the Suranian sales levels with

50% of the customers expected to come from within the wealthy Middle Eastern region

by 2023. The remaining capacity of the facility will be used up by gradually increasing

sales to other customers. Stefan's long-term view is that the Middle Eastern share of the

Suranian facilities capacity can only increase after 2021 as the region is driven by huge

wealth reserves and a commercial drive to be admired.

Lukas Dian has gathered some background information on two potential design

companies that are willing to carry out the design work for the boats produced in the

Suranian facility.

Option 1: Cooper Designs plc is a multinational boat interior design business based in

Western Europe. It has design centres around the world including a new office based in

Dubaria, a city about 200 miles from the Suranian boat building facility.

Cooper Designs Plc has a long history of delivering traditional designs of high quality but

have also modernised their designs with some success, winning best modern design at

the recent Dubaria international boat show in April 2020. Cooper Designs Plc makes full

use of computer assisted design techniques (CAD) and provides an extranet service

allowing customers to remotely view the current design for their boat at any time.

Although customers cannot make changes themselves on the system, this does allow

interaction between designer and customer to take place regularly leading to a more

reliable end-result.

Cooper Designs Plc is proud of its reputation and charges accordingly, the bespoke

design fees for a typical mid-sized boat in the TGBC Ltd range would be in the region of

100,000. Cooper has also indicated that, should TGBC Ltd be happy with the work it does for the

Suranian built boats, that it has the spare capacity to design for all of the TGBC Ltd

boats wherever they might be built.

Option 2: Arabian Interiors is a Suranian based design business formed a little over four

years ago close to the boat building facility. Although relatively new it has had rave

reviews for its Arabian flavoured design and also won recognition at the 2019 Dubaria

international boat show for the best Arabian designed boat interior.

Arabian Interiors is financed by a wealthy and well-connected Sheik and so almost

limitless funds for expansion are available if needed. It employs only local people but all

are well educated and fully trained in the use of the latest CAD systems.

The Sheik owner is an ambitious entrepreneur and has recognised the potential growth

within the Suranian market for luxury boats. He believes that the growth in the local

market will be far greater than TGBC Ltd's figures indicate and has suggested that the

whole of TGBC Ltd's Suranian production capacity could be used up by local sales by

2023 with an aggressive growth strategy. He feels that with his help and local contacts

the future could be bright for both businesses if working together.

Initial indications are that Arabian Interiors would charge around 90,000 for bespoke

design work per boat.

Lukas would like you to discuss the major factors to consider in choosing between the

two options.

Accident at work

TGBC Ltd's health and safety record has always been good, but more by luck than good

management. One of its employees, a Scotsman called Paulo (Italian parentage),

arrived for work in an intoxicated state. Paulo managed to avoid his colleagues on

arrival at the boatyard and made his way on to a boats hull promptly falling off and

breaking his leg.

Paulo is a good friend of Jesper. Jesper was aware of Paulo's occasional drinking habit

but decided to ignore it, as Paulo has not allowed his habit to interfere with work. A family feud is developing at TGBC Ltd. Jesper has been increasingly keen to assert

himself on the business and in his new marketing role he thinks he has hit on a winning

idea.

TGBC Ltd already sponsors a global speedboat race series at a cost of 5,000,000 per

annum. Jesper wants to build and race a speedboat in the competition. He feels that this

would really make the boating world sit up and take notice of TGBC Ltd. Initially TGBC

Ltd would race for a period of two years but if successful this could continue and develop

into TGBC selling its own range of speedboats.

Jesper is adamant that this step would lead to more sales of TGBC Ltd's performance

motorboats; the P-3000 specifically. Jesper has done some calculations on the P-3000

costing and produced the following analysis.

Description Note m (per boat)Selling price 4.4Hull and other materials 1.2Direct labour 1.4Supervision and management time 1 0.4Allocated general overheads 2 0.6Profit before tax 0.8Alberto is dismayed by this development. He feels that the design, development and

build costs of the first boat could easily be 12,000,000 with no guarantee of success in

the races nor any definite extra sales of the P-3000. He also has spoken to an old friend

of his who has been involved in Formula 1 motor racing for many years who has told him

the travel, accommodation, direct engineer costs could easily be 8,000,000 per year.

'Racing is scary on and off the track', he was told!

Alberto wants to know how many extra P-3000s TGBC would have to sell to breakeven

over the two years and your assessment of the risks and benefits of the idea. Ignore

taxation in this calculation.

Note

1. These would all be existing members of staff working in normal time.

2. These are head office overheads allocated on a per unit basis.

Sales staff

Stefan Gil and Marie Lopp have been discussing the proposal to employ sales staff as

oppose to agents. There is not a uniform position and have asked you to discuss the

various factors that TGBC should consider.

They have both been asked to provide you with at least part of their own case with an

example or two to back up their argument.

Stefan Gil

"Look it is really not that complicated, with agents they work hard or they don't get paid.

There is no slacking, no hiding behind desks, they are motivated to sell and that's what

they do. The boat selling business has been like that for years and in my view if it is not

broke don't fix it applies here. Look at the growth we have achieved over the past few

years despite the recession going on in Europe. A lot of these agents are now loyal

friends with great contacts in the industry; we would be ill advised to turn these people

into enemies."

Marie Lopp

"Things change and TGBC Ltd must change too. If you look at the distribution of our

sales the majority of boats we sell are the smaller and cheaper ones in our range. With

the growth in property prices over the last 30 years many more people can now afford

(on retirement maybe) a TGBC Ltd boat. This new market is under the radar of our

existing, somewhat overeducated agents who seem to want to push the multi-million

boats to the jet set. More employed sales staff working 100% of the time selling to our

core market is what we need not some champagne drinking guy in shades earning

ludicrous sums for selling a boat to a pal at reduced prices."

Alberto feels that both the arguments have grains of truth inside them but both are in

places vested in self-interest or just false. He would like you to provide an objective view,

dealing with all the specific points raised by Stefan and Marie, along with any other

points you feel are relevant. He wants a recommendation along with a few specific

actions that would be required if your advice was followed.

JKL

On the whole JKL have been happy with the performance of their investment in TGBC

Ltd. However, while at head office recently, Simone was having a coffee and a chat with

Jesper where he was talking about his plans for the racing boat. 'Dad is not sure about

the idea at the moment but I will get around him I am sure, after all family is family' he

said.

Simone was supposed to be visiting the financial director, Andreas, but due to a diary

mix up found he was not on the premises when she arrived. Andreas was out on one of

his many charitable visits explaining finance to the children of local schools. Andreas

really liked helping out; 'kids need to know about money. Money changes everything and

it's only funny in a rich man's world. If they understand money earlier maybe they will

grow up wiser and financially independent', he said at a recent Board meeting.

This all confirmed Simone's growing belief that Alberto viewed TGBC Ltd as his personal

property to do with as he wished. She has calculated that charitable work has 'cost' the

business five man-years of time in 2020 alone.Late delivery of a hull from Topcrest

Paul Lavie has received a phone call and email confirmation about a problem with the

delivery of a hull from the hull supplier Topcrest. Topcrest has been so successful lately

that it is struggling to cope with demand for its hulls. It has recently won a new major

client but in doing so had to agree to some additional work jumping the normal queue

thus causing one hull due for delivery to TGBC Ltd on 1 December 2020 now being

expected to be two months late on 1 February 2021. This would mean the finished boat,

assuming normal operating procedures, not being delivered to its Mediterranean

mooring until 31 May 2020 (also two months late).

Topcrest are mortified in having to do this as they have always treated TGBC Ltd well

but the new contract was just too lucrative to turn down. They have given assurances

that this will not happen again and have offered to compensate TGBC Ltd as follows:

1. A payment of 30 per hour for any idle time created by the delay. TGBC Ltd

employees are skilled individuals and TGBC Ltd would rather pay them to be idle

than lay off workers they do not need temporarily. It is estimated that 5% of the

boat-building technicians including supervisors will be idle for 10% of their time over

the two month period in question as a result of the late delivery. Boat builders work

152 hours per month on average. The normal wage rate (inclusive of all

employment costs) for these staff is 18 per hour. The idle time calculation should

be based on the number of boat builders employed as at 31 December 2019.

(note: idle time is hours that are paid for but that are not actually worked)

2. It is accepted that the boat's customer will expect a 25,000 discount for late

delivery. Topcrest will refund this to TGBC Ltd.

3. Topcrest will also pay TGBC an ex-gratia payment of 30,000 by way of an

apology. This will come with a legally binding contract that waives any further rights

to sue Topcrest for any breach of contract.

Paul is furious about this development and has found another hull supplier willing to

supply the hull at short notice. This will cost an extra 50,000 and cannot be delivered

until 15 January 2020 assuming all goes to ideal operating conditions. 'It's the principle

of the issue, Topcrest think they can move us down the pecking order as they wish! We

have been a customer of theirs for 20 years and so we should just not stand for it' said

Paul. Opinions are divided on Topcrests' potential reaction if TGBC cancel the contract

and source the hull elsewhere, but the general view is that the above offer would be

withdrawn at least in the first instance.

Required:

Use relevant calculations, theories and applications of academic models, to support

your evaluation

1 Impact of operational issues and problems

2 Factors relating to performance issues

3 Analysis of options