CGA advanced course assignment

PA2 Assignment 3 Page 1 of 3 Module 3 assignment Note: Before you begin this assignment case, please click the Module 3 assignment link in the online course navigation pane for instructions on how to collaborate with your discussion group on the case analysis and response. (60 minutes) Mallory Music Boxes Inc. Mallory Music Boxes Inc. (MMB), a private family-owned and operated business, specializes in the design and production of a wide variety of music boxes. The designs are exclusive to MMB and the company is noted for its handcrafted workmanship. MMB has built a reputation across Canada for its music boxes, due to the intricate box designs and the high quality of the components used to produce the music. Competitors enter and leave the market, but MMB’s good reputation enables it to maintain its market share. The music boxes are meticulously handcrafted by a staff of professional carpenters and are well known for their signature inlaid metal lids. Two types of musical movements are available for the music boxes — windup movements and electronic touch button musical movements. Customers who prefer historical accuracy are the most frequent purchasers of the wind-up option but most customers choose the electronic touch button models. The electronic touch button musical movements are manufactured in China and shipped to MMB. The wind-up movements are produced in-house and are used for smaller music boxes with more intricate designs. MMB has two separate divisions; Division A, which produces small music boxes with wind-up movements, and Division B, which produces large music boxes with electronic touch buttons. Each division has a general manager in charge of production. Matthew Mallory, the President and CEO of MMB, is currently investigating the opportunity to add miniature clocks to the product offering. Initial market surveys indicate there is a strong demand for high-quality miniature clocks and MMB expects to leverage its current reputation to successfully gain market share in this product. The miniature clocks would be manufactured by Division B due to the ease of adapting the production lines. New equipment would be required at a cost of $100,000. The high-quality mechanical movements required for the clocks can be purchased from MMB’s current supplier in China. Jake Armstrong, the general manager of Division B, has found a new supplier located in Thailand which produces similar mechanical movements, but at a significantly lower price. This supplier’s production department does not communicate in English, so a translator would be required. Jake strongly recommended that MMB select this supplier and has stated that the translator would be able to manage the ordering process on behalf of MMB. It is June 15th, 20X1 and you, CGA, have just accepted the newly created position of Director of Finance. You are aware that MMB uses accounting standards for private enterprises and its fiscal year ends on December 31st. MMB provides annual audited financial statements to the bank that provides its line of credit. Mr. Mallory has provided you with a draft NPV calculation produced by one of the accounting clerks who works for you. The initial assessment of the NPV analysis indicates that the first proposal is not financially feasible. Mr. Mallory mentions that the clerk has expressed concern about her unfamiliarity with preparing this type of analysis, so he has asked you to review the exhibit and identify any adjustments that are needed. Although his preliminary choice is the second option, since it is the only option with a positive NPV, he has Continued… PA2 Assignment 3 Page 2 of 3 requested that you provide your comments on which proposal would be the best option for MMB once you have completed your assessment. You have been informed that the general manager of each division has an annual bonus based on sales volume and gross margin increases over the prior year. Bonuses have been calculated for the 20X0 fiscal year but have not been paid yet. The bonus plan has been in effect for several years, but recently Jake Armstrong has expressed his frustration about the impact of fluctuations in the exchange rates on gross margins. All purchases from the supplier in China are ordered from their wholesale catalogue and MMB is invoiced in U.S. currency. In the past eight months, the Canadian dollar has been falling in value against the U.S. dollar. Mr. Mallory believes it is time to revise the bonus plan for Jake now that the expansion into the miniature clock line is under serious consideration. He has an e-mail from Jake which presents a new proposal for accounting for the cost of freight related to the import of the mechanical components. Jake maintains that the cost of freight should be excluded from the cost of sales since the division’s gross margin is unfairly penalized by the additional costs of importing the electronic components, which are not incurred by Division A. He has noted that there will be even more freight charges when the production of miniature clocks commences. Mr. Mallory would like to ensure that the bonuses are equitable and has agreed to the change in accounting approach, stating that there are no concerns since freight would now be in overhead and would not change the net income calculation for the financial statements. He has asked you to ensure that this adjustment is made retroactive to the beginning of the year. Mr. Mallory has advised you to inform the general managers that they will not be paid their 20X0 bonuses until he has made the final decision about the expansion into the miniature clock line. He has indicated that this decision will not be made until he meets with the board of directors in July and will be relying on your input on the expansion proposals. At the meeting he would also like to discuss potential changes in the bonus plan for Division B and has asked you to provide a proposal that addresses the concerns raised by the general manager of this division. PA2 Assignment 3 Page 3 of 3 Exhibit 1 NPV analysis for the miniature clock line Notes from the accounting clerk: • Note 1: The category “other costs” includes all other operating and administration costs, including amortization for the new equipment. The new equipment is amortized on a straight-line basis over 10 years. • Note 2: Translation costs have been estimated and included in the “other costs” for option 2. There is no estimate of costs for repair of clocks for option 2, but these should be considered due to the lower quality of the mechanical movements from the supplier in Thailand. • Note 3: The net cash flows line reflects the inclusion of an allowance for returns. Required 1. In your discussion group, analyze the case as a whole and identify all the issues required to respond to the President’s requests, including the information required for the next board meeting. Note: Candidates must participate in the online discussion. Failure to post in the online discussion and respond to the posts of others will result in failing the discussion-based communication competencies. 2. Complete a memo (900 to 1,100 words) to the President and submit as an individual hand-in assignment. Option 1 - Existing Supplier in China year 0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 cash flows capital outlay -100,000 sales revenue 70,000 73,500 77,175 81,034 85,085 89,340 93,807 98,497 103,422 108,593 cost of sales -42,000 -44,100 -46,305 -48,620 -51,051 -53,604 -56,284 -59,098 -62,053 -65,156 other costs (note 1) -20,000 -20,400 -20,808 -21,224 -21,649 -22,082 -22,523 -22,974 -23,433 -23,902 net income 8,000 9,000 10,062 11,189 12,386 13,654 14,999 16,425 17,936 19,535 net cash flows -100,000 9,600 10,648 11,759 12,938 14,186 15,509 16,910 18,393 19,962 21,623 Net Present value of investment: -13,179 discount factor is 10% Option 2 - New Supplier in Thailand year 0 year 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 cash flows capital outlay -100,000 sales revenue 70,000 73,500 77,175 81,034 85,085 89,340 93,807 98,497 103,422 108,593 cost of sales -35,000 -36,750 -38,588 -40,517 -42,543 -44,670 -46,903 -49,249 -51,711 -54,296 other costs (note 2) -25,000 -25,500 -26,010 -26,530 -27,061 -27,602 -28,154 -28,717 -29,291 -29,877 net income 10,000 11,250 12,578 13,987 15,482 17,068 18,749 20,531 22,419 24,419 net cash flows -100,000 11,800 13,104 14,487 15,954 17,508 19,155 20,899 22,745 24,700 26,768 Net Present value of investment: 7,150 discount factor is 10%