Case Analysis #1
Galaxy Incorporated
Objectives
·
to develop an ability to identify and
assume an assigned role;
·
to be able to identify and rank the
importance of explicit issues;
·
illustrate the importance of hidden
(undirected) issues that arise from a detailed analysis;
·
to identify accounting issues
(GAAP/IFRS compliance issues), assess their implications, generate
alternatives, and provide recommendations within the bounds of GAAP/IFRS to
meet the client’s needs;
·
to examine how accounting standards
impact financial measures (ratios, covenants, etc); and
·
to prepare a coherent report and
integrated analysis that meets specific user needs.
Instructions:
In order to complete your case analysis successfully:
·
identify the role you are playing;
·
assess the financial reporting
landscape, considering the user needs, constraints, and business environment;
·
identify the issues;
·
analyze the issues (qualitatively and
quantitatively); and
·
provide a recommendation and
conclusion.
An average grade will result from answering all questions with basic
coverage and accuracy, showing all your work. Additional points come from
including greater detail, astute, informed commentary where appropriate and
connections to readings and other content.
Respond in a single Word doc (or comparable text editor.)
Background:
You are a 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 first day on the job and a Manager
asks you for some help with a client in the aerospace sector. Eager to please
on your first day, you head over to Galaxy Incorporated and sit down with the
Executive Vice President to obtain more information.
“That R2D2 model is such a stinker! I think it’s time to cut back its
production and shift our resources toward the new BB8 model,†said Justin
Medakiewicz, Executive VP of Galaxy Incorporated. “Take a look at this Income
Statement I’ve received from accounting. The BB8 is generating over eight times
as much profit as the R2D2 on one-sixth of the unit sales. I’m convinced that
we should focus on the BB8 going forward.†The year-end statement which Justin
was referring to is shown below.

Model

Total

R2D2

BB8

Sales

$11,125,000

$9,000,000

$2,125,000

Cost of
Goods Sold

6,900,000

5,490,000

1,410,000

Gross
Margin

4,225,000

3,510,000

715,000

Less:
Selling and Administrative Expenses

3,675,000

3,450,000

225,000

Operating
Income

$550,000

$60,000

$490,000

Number
of Units Produced and Sold

30,000

5,000

“The numbers sure look that way,†replied Melissa Montoro, the company’s
sales manager. “But why isn’t the competition interested in replicating the
BB8? I know we’ve been producing the model for only three years, but I’m
surprised that more of our competitors haven’t recognized what a cash cow it
is.â€
“I think it’s our new automated plant,†replied Justin . “Now it takes
only two direct labour-hours to produce a unit of the R2D2 and three direct
labour-hours to produce a unit of the BB8. That’s considerably less than it
used to take us.â€
“I agree that automation is very beneficial,†replied Melissa. “I
suppose that’s how we’re able to hold down the price of the BB8. Trekkie
Corporation in the UK tried to bring out a BB8 but discovered they couldn’t
come close to matching our price. But Trekkie is killing us on the R2D2 by
undercutting our price with some of our best customers. I suppose they’ll pick
up all of our R2D2 business if we move out of that market. But who cares? We
don’t even have to advertise the BB8; it just seems to sell itself.â€
“My only concern about automation is how our manufacturing overhead rate
has shot up,†said Justin. “Our total manufacturing overhead cost is
$2,700,000. That comes out to be a hefty amount per direct labour-hour, but
Timothy down in accounting has been using direct labour-hours as the base for
computing overhead rates for years and doesn’t want to change. I don’t suppose
it matters as long as costs get assigned to products.â€
“I’ve never understood that debit and credit stuff,†replied Melissa.
“But I think you’ve got a problem in production. I had lunch with Lily
yesterday and she complained about how complex the BB8 is to produce.
Apparently they have to do a lot of setups, special soldering, and other work
on the BB8 just to keep production moving. And they have to inspect every
single unit.â€
“It’ll have to wait,†said Justin. “I’m writing a proposal to the
board of directors to phase out the R2D2. We’ve got to increase our bottom line
or we’ll all be looking for jobs.â€
Required:
1. Compute the predetermined overhead rate based on direct labour-hours
that the company used during the year. (There was no underapplied or
overapplied overhead for the year.)
2. Direct materials and direct labour costs per unit for the two products
are as follows:

R2D2

BB8

Direct
Materials

$75

$120

Direct
Labor

$36

$54

Using these data and the rate computed in (1) above, determine the unit
product cost of each product under the company’s traditional costing system.
3. Assume that the company’s $2,700,000 in manufacturing overhead cost can
be assigned to six activity cost pools, as follows:

Expected Activity

Activity Cost Pool

Estimated Overhead Costs

Total

R2D2

BB8

Machine
setups (number of setups)

$??312,000

$?1,600

1,000

600

Quality
control (number of inspections)

540,000

9,000

4,000

5,000

Purchase
orders (number of orders)

135,000

1,200

840

360

Soldering
(number of solder joints)

675,000

200,000

60,000

140,000

Shipments
(number of shipments)

198,000

600

400

200

Machine-related
(machine-hours)

840,000

70,000

30,000

40,000

$2,700,000