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 Donovan’s 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Conner has outlined the following alternatives to replace an outdated milling machine: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. Dan’s 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 2,000 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

$22,364,000

Cost of Goods Sold

$14,760,240

Gross Profit

$7,603,760

Selling and General Administrative Costs

$3,578,760

Allocated Costs (based on sales)

$1,677,300

Income Before Income Taxes

$2,347,700

Return on Sales – 10.5%

Return on Investment – 8.5%

Investment (Historical Cost)

$27,626,118

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 $26,000 while special purpose machines can save an additional $14,000 in maintenance. Also there would be a significant savings in insurance as the price for a general purpose machine would drop to $3,000 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 doesn’t 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

$55,000

Direct labour (DL$)

$90,000

Variable overhead (50% of DL$)

$45,000

Fixed overhead (25% of DL$)

$22,500

TOTAL

$212,500

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

Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.