Walter W. Windsor is the founder and owner of Walters Wood Works Ltd. Located in British Columbia. Mr. Windsor, a craftsman by trade, has always followed a hands off management style, trusting his controller to essentially run the administrative side of the company. However, since his controller recently decided to move back to the east, Mr. Windsor has been reviewing the draft income statement for the first six months of 2006 left by him (See Appendix A) and has some significant managerial and accounting concerns. Thus, he has arranged a meeting with you, a recently hired management accountant, to discuss these matters.

At the meeting, he elaborates on his concern that he doesnt understand or trust the brief information provided by his former employee. He points out that, in recent years, the interim income statement for the first six month has indicated very rosy results. However, by year-end, the results typically do not appear nearly as favorable. He questions the usefulness of such interim statements.

His concern is heightened by the fact that he has a special marketing opportunity and a strong desire to understand how the new Langley facility has impacted on the firm. He requests that you look into the companys business and answer his concerns in a concise report.

Your investigation into the company reveals the following information.

Walters Wood Works Ltd. is a public corporation with 32 shareholders. It has been producing wooden chairs for 40 years out of a plant in New Westminster, B. C. The New Westminster facility has a maximum capacity of 300,000 units which cannot be increased. This was inadequate to meet the growing demand for its unique product, the solid pine chair. The chair has been dubbed the W W W and is sold throughout Western Canada by a leading hardware chain and a number of furniture stores.

In 2002, a new facility was added in Langley, B. C. where a 10-year tax holiday was given by the City of Langley. At first, the new Langley plant operated well below the break-even level of activity. In 2005, however, break-even was achieved in Langley facilitated by growing sales and by a shift in production and sales from the New Westminster facility.

In 2006, the Langley facility expects a normal operating activity which is 30% in excess of break-even production of 200,000 units. The Langley facility has a maximum capacity of 350,000 units.

Total production costs for the chair in the Langley plant are $7,800,000 made up of $1.7 million in materials, $2.1 million in labor and $4 million in overhead. This gives a standard cost of $30 per unit.

Ironically, the standard cost of production for 2006 in the older New Westminster facility is also $30 per unit for the normal production volume expected in 2006. The $30 cost breaks down to $6 in material, $9 in labor and $15 in overhead. This normal activity in 2006 is expected to be two-thirds of capacity for the older plant.

On further inquiry, you are advised that break-even activity for the New Westminster facility is 140,000 units per year which is 70% of normal activity.

W W W Ltd. Has set its selling price at $40 per unit for 2006. Normally, such prices are set for 2 3 year periods. All sales are made to wholesalers or retailers at this uniform price F. O. B. factory (Langley or New Westminster).

Selling expenses are uniform 12.5 % of sales for all units sold. This represents commissions to sales representatives. In addition, fixed selling and administrative expenses for the two facilities total $600,000, divided more or less evenly between the Langley and New Westminster facilities. In 2006, sales of 460,000 units are expected in total: 200,000 for New Westminster and 260,000 for Langley.

W W W Ltd. Has a unique opportunity to sell up to 125,000 units to a mail order house which operates in Eastern Canada only. These units will not affect existing markets in Western Canada in any way. The mail order house is prepared to purchase in 2006 a minimum of 70,000 units and a maximum of 125,000 units F. O. B. factory (Langley or New Westminster). The selling price for this special order is $25 per unit which is far below the regular selling price of $40 per unit. Variable selling expenses are expected to be only 8% of sales on this special order and total fixed selling and administrative expenses are expected to increase by 7% if the special order is accepted.

It is expected that should the order be accepted in 2006, it will be available again in 2007 and beyond at comparable prices and under similar terms.

One person opposed to the special order is the Vice-President of Marketing, who is fearful that this order will use up available capacity and interfere with the expected sales growth of 30% per year. He feels that if the special order is allowed to put the plant or plants up to capacity, the company will soon be turning away regular customers and creating the same type of dissatisfaction that it had back in 2002 before the Langley plant was built. It is going to be difficult to convince him that the proposal should be accepted.

Another concern is the impact of these units on the Eastern Canadian manufacturers who might retaliate by dumping under priced products in the western market. In the past, freight and relative productivity have made this a minor concern.

The company has traditionally had an uneven activity level. Production and sales are normally two-thirds in the first half of the year and one-third in the second half. 2006 is expected to be the same as other years in this respect.

W W W Ltd. Does not give its shareholders quarterly statements but does send them interim income statements for the first six months showing net income after income taxes.

For income tax purposes, the company has unapplied non-capital losses carried over from 2005 of $400,000. This was caused by an extraordinary loss in 2004 as a result of a major fire in a customer warehouse containing W W W Ltd. Inventory. In the past, the company has not been eligible for the small business deduction. There is no reason to expect this to change in the next few years. The applicable federal corporate tax rate is 46% and the provincial corporate tax rate is assumed to be 12%.

All variances are written off to the cost of goods sold in the period incurred.

APPENDIX A

W W W Ltd.

Draft Income Statement for the First Six Months of 2006

(rounded to the nearest hundredth)

Sales	$12,266,700
Gross Profit	3,794,700
Net Income Before Taxes	1,961,400
Net Income After Taxes	1,305,600

REQUIRED:

Prepare a report for Mr. Windsor to answer his concerns with respect to:

1. interim income statements,
2. the impact of the new Langley facility, and
3. the special marketing opportunity.

Full justify your recommendations.