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This is managerial accounting. The case needed to be solved is the WWD case. Please follow the sample case format of Baska Case. Body Products
This is managerial accounting. The case needed to be solved is the WWD case. Please follow the sample case format of Baska Case.
Body Products Division of World Wide Drugs Ahmed Diba is the controller of the Body Products Division of World Wide Drugs (WWD). It is located in Winnipeg, which is the headquarters of WWD. Diba is helping develop a proposal for a new product to be called Vital Hair. This product is a cream to be rubbed on the scalp to restore hair growth. Cheryl Kelly, president of the division and Diba are scheduled to make a presentation to the WWD executive committee on the expected profitability of Vital Hair. The fixed costs associated with the development, production and marketing of Vital Hair are $24,000,000. Each customer will pay a doctor $96 per monthly treatment, of which $66.00 is paid to WWD. Diba estimates WWD's variable costs per treatment to be $26.40. Included in this $26.40 is $9.60 for potential product litigation costs. Kelly is livid at Diba for including the $9.60 estimate. She argues that it is imperative to get the R and D funds approved (and quickly) and that any number that increases the breakeven point reduces the likelihood of the Vital Hair project being approved. She notes that WWD has had few successful lawsuits against it, in contrast to some recent \"horrendous\" experiences of competitors with breast implant products. Moreover, she is furious that Diba put the $9.60 amount in writing. \"How do we know there will be any litigation problem?\" She suggests Diba redo the report excluding the $9.60 litigation risk cost estimate. \"Put it on the chalkboard in the executive committee room, if you insist, but don't put it in the report sent to the committee before the meeting. You can personally raise the issue at the executive committee meeting and have a full and frank discussion.\" Diba takes Kelly's \"advice\". He reports a variable cost of $16.80 per treatment in the proposal. Although he feels uneasy about this, he is comforted by the fact that he will flag the $9.60 amount to the executive committee meeting in his forthcoming oral presentation. One month later, Kelly walks into Diba's office. She is in a buoyant mood and announces she has just come back from an executive committee meeting that approved the Vital Hair product proposal. Diba asks why he was not invited to the meeting. Kelly says the meeting was held in Toronto, and she decided to save the division money by going alone. She then says to Diba that it \"was now time to get behind the new venture and help make it the success the committee and her team members believe it will be.\" Required 1 - What is the breakeven point (in units of monthly treatments) when WWD's variable costs (a) include the $9.60 estimate? (b) exclude the $9.60 estimate for potential product litigation costs? 2 - Should Diba have excluded the $9.60 estimate in his report to the executive committee of WWD? Explain your answer. 3 - If you were Diba, what would you do in response to Kelly's decision to make the Vital Hair presentation on her own? Explain in paragraphs. Selected case from Horngren, Cost Accounting, 4th Canadian Edition 3120 WWD Case, Due class 2 ENTR 3120 Mini case #1 - Baska Ltd. Baska Ltd. produces a lens used for webcams. Summary data from its year 2013 income statement are as follows: Revenues Variable costs Fixed costs Operating Income $8,000,000 4,320,000 3,900,000 $(220,000) The president of Baska, Rob Keen, is very concerned about the company's operations. He has discussed the situation with Operations Manager, Don Bell and controller, Clair Watson. After two weeks, Don returns with a proposal. After researching various component parts, he advises that he can reduce variable costs to 48% of revenues by changing both the direct materials and the production process. The downside of this proposal is that the new direct material (although cheaper) results in more waste and is more toxic to the environment. Currently, waste produced in the production process does not require any special treatment and is disposed of normally. Don points out that there are no current specific laws governing the disposal of this waste created by the use of the new material, and therefore production costs can be cut by using this material. Clair is concerned that this would expose the company to potential environmental liabilities. She believes that these potential future costs need to be estimated and included in the analysis. Don disagrees and reiterates that there are no laws being violated and replies, \"There is some possibility that we may have to incur costs in the future, but if we bring it up now, this proposal will not go through because our senior management always assumes these costs to be larger than they are. The market is very tough and we are in danger of shutting down the company. We don't want all our colleagues to lose their jobs. The only reason our competitors are making money is because they are doing exactly what I am proposing.\" Required: IN REPORT FORMAT, ANSWER EACH OF THE FOLLOWING QUESTIONS 1. Calculate Baska's breakeven revenues for 2013. 2. Calculate Baska's breakeven revenues if variable costs are 48% of revenues. 3. Calculate Baska's operating income in 2013 if variable costs had been 48% of sales. 4. What should Rob Keen do? Provide the analysis and recommendations. Mini Case #1 Baska Ltd. Student Name Student Number Course Number, Section Due Date Baska, Ltd Memo To: Rob Keen, President Baska, Ltd. From: Student Name, Consultant Date: December, 2013 Re: Recommendation for alternative raw materials to reduce variable costs I have prepared this report in response to your concern about the $220,000 loss incurred in 2013. I have analysed Don Bell's proposal to reduce variable costs by switching raw materials and changing the production process and showed how this will impact 2014 operating income. The quantitative analysis shows that it would be most profitable to make the raw material change. Profitability would increase $480,000 to an operating income of $260,000. However, the report also discusses some serious qualitative and ethical concerns that should be considered before finalizing this decision. It is my recommendation to make this change only if we can quantify and include the potential environmental costs in Don's analysis. I trust you will find this report helpful for making the decision about the raw materials and operations at Baska Ltd. If you have any questions about the information contained in the report, please contact me at 778-928-4739. Introduction The purpose of this report is to analyze Don Bell's alternative for improving profitability. The report outlines background information that is relevant to the analysis, identifies the issues and alternatives, qualitatively and quantitatively assesses each alternative and makes recommendations. All relevant calculations and tables can be found in the Appendices. Background Information Baska manufactures lenses for webcams in a competitive environment. It had an operating loss of $220,000 in fiscal 2013 and breakeven revenues of $8,478,261 (see Exhibit 1). Employees are concerned about their job security and competitors have already made the switch to the environmentally damaging raw material. Alternatives Don Bell has suggested that Baska switch raw materials and alter the production process to reduce variable costs to 48% of revenues. However, Clair Watson, Controller, believes a key piece of information is missing from Don's proposal; potential environmental liabilities caused by the toxic raw material. The company has three alternatives: 1. Accept Don's current proposal 2. Accept Don's proposal only after including the potential environmental liabilities in the report 3. Reject Don't proposal and find an alternative solution to the profitability problems Assessment of Alternatives Alternative #1 - Accept Don's current proposal Qualitative Analysis The advantages of accepting Don's current proposal are as follows: Employee jobs could be saved Competition is surviving by using this material The disadvantages of accepting Don's current proposal are as follows: It violates competence standards; it is unethical to exclude environmental costs to make the proposal look better It shows a lack of integrity to ignore the environmental impact of this change It violates objectivity standards; all information that is relevant should be disclosed Quantitative Analysis If variable costs can be reduced to 48% of revenues, Baska's breakeven revenue will decrease to $7,500,000 and will generate a $260,000 operating income (see Exhibit 2). This is a significant increase of $480,000 over 2013's operating loss. Alternative #2 - Accept Don's proposal but include potential environmental costs Advantages The company would be transparent with all stakeholders about the negative impact that the change in raw materials would have on costs and the environment The financial benefits of the change could still be achieved if the impact on the above are acceptable to senior management Disadvantages Might increase costs to the point that the proposal is rejected If the proposal is rejected the company may not survive Quantitative Analysis Cannot quantify the potential environmental costs until additional research is done. Alternative #3 - Reject Don's proposal and find an alternative solution to the profitability problems Advantages Could use the information discovered about competitors to market Baska as an environmentally conscious company Avoids potential backlash from customers, environmental groups, etc. Disadvantages Might not have another alternative that produces such a drastic increase to profitability Quantitative Analysis Cannot quantify until additional research is done. Recommendations Of the three alternatives considered, only alternative #2 has a positive impact on profitability and is ethically sound. Don Bell's proposal should only be considered if additional research about the environmental liabilities is performed and included in the analysis. Action Plan Ask Don to revise the proposal with Clair's help and give them one more week to finalize it. Begin contacting suppliers of the new material. Solicit ideas from employees about alternative ways to cut costs or increase revenues or sales volumes. Exhibit 1 - Current breakeven Contribution margin percentage Breakeven revenues = Revenues - Variable costs Revenues = ($8,000,000 - $4,320,000) $8,000,000 = $3,680,000 $8,000,000 = 46% = Fixed Costs/CM Percentage = $3,900,000 .46 = $8,478,261 (rounded) Exhibit 2 - Revised breakeven and operating income (with RM change) If variable costs are 48% of revenues, CM percentage equals 52% (100% - 48%). Breakeven revenues Revenues Variable costs (0.48 $8,000,000) Fixed costs Operating income = Fixed costs Contribution margin percentage = $3,900,000 .52 = $7,500,000 $8,000,000 3,840,000 3,900,000 $ 260,000Step by Step Solution
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