Case Analysis
There is no set length to the report but clear succinct and concise language and organization will be considered favourably in the grade.
Students will submit the final report as a word document through the submission link below.
The Case
You are a Senior Consultant for the professional service firm BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your final week on the job and a Manager asks you for some help prior to your departure. Eager to leaving a lasting impression you start reading the background information provided by the Manager.
Lesley Donovan is the controller for the East division of Explorer Ltd. Jason Conner head of plant engineering has just left Donovans office after presenting three alternatives for submission in the capital expenditure budget for the fiscal year 2014. The budget is due to the CEO in two days and therefore Donovan realizes that time is of the essence.
Conner has outlined the following alternatives to replace an outdated milling machine:
Explorer Ltd. is a well-established company. The company was set up about 30 years ago by two brothers Dan and Kevin Thompson in Huntsville Ontario to produce accessories for the automobile industry. The Central division continues to serve the auto industry and is the largest division in the company with sales of $35 million annually. Dans son is now head of this division. Kevin is still active in the company and is the Chief Executive Officer (CEO). His office is located in Toronto.
The parts division supplies seals to the mining and petrochemical industry from a plant in Toronto. This division is only ten years old and until 2010 was highly profitable. As a result of the downturn in the sector of the economy sales in 2012 were only $12 million.
The East division located in Scarborough is the engineering division. Full time employees tend to work approximately 2000 hours in the division. Regular product lines include industrial fans industrial cooling units and refrigeration units for industrial users. The division is highly capital-intensive and sales tend to be directly related to general economic conditions.
Each division runs independently and performance is based upon budgeted return on investment. Bonuses are paid if the budget target is achieved. Annually each division prepares a detailed budget submission to Kevin outlining expected profit performance and capital expenditure requests. The milling machine proposal is part of the capital expenditure request.
The 2013 pro forma income statement for East division is set out below:
Sales
$22364000
Cost of Goods Sold
$14760240
Gross Profit
$7603760
Selling and General Administrative Costs
$3578760
Allocated Costs (based on sales)
$1677300
Income Before Income Taxes
$2347700
Return on Sales 10.5%
Return on Investment 8.5%
Investment (Historical Cost)
$27626118
Jason Connor has pointed out to Donovan that the existing machine is not only outdated but maintenance costs are becoming prohibitive. Jason also noted that maintenance costs of new general purpose machines are only $26000 while special purpose machines can save an additional $14000 in maintenance. Also there would be a significant savings in insurance as the price for a general purpose machine would drop to $3000 while a special purpose machine would be 67% higher than the general purpose machine. The machine has no market or salvage value and he is sure that its book value is now zero. The trouble is that he doesnt know which proposal is best for the company. In addition to the cost and revenue date provided Connor provided comments on each alternative below:
Material and parts
$55000
Direct labour (DL$)
$90000
Variable overhead (50% of DL$)
$45000
Fixed overhead (25% of DL$)
$22500
TOTAL
$212500
General comments
The required rate of return for this investment class has been set at 8% by Kevin Thompson.
Required
Prepare the budget submission to Kevin.
Evaluation
The following rubric indicates those areas you should be focusing on in preparing your assignment and how the instructor will weigh these components relative to one another.
Activity/Competencies Demonstrated
% of TotalGrade
Identification and Analysis of Issues (90%)
a. Issue identification
/5
b. Identification of Key Success Factors
/10
c. Identification of Alternatives
/5
d. Quantitative Analysis
/40
e. Qualitative Analysis
/30
Recommendation (10%)
a. Recommendation on course of action
/5
b. Circumvention of Potential Problems
/5
Total
/100
