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Problem 1 (30 marks)
Review enough information about Trinidad Drilling Ltd. to propose a vision and strategic objectives for the company. Develop a balanced scorecard that will help the company achieve this vision and monitor how well it is accomplishing its strategic objectives. Include a strategy map in table format that shows objectives and performance measures, with arrows illustrating hypothesized cause-and -effect relationships. Provide rationale for your strategy map. The body of your report should not exceed 1,000 words. Cite material you used to prepare the response and provide references in an appendix.
Problem 2 (20 marks)
Ajax Auto Upholstery Ltd. manufactures upholstered products for automobiles, vans, and trucks. Among the various Ajax plants around Canada is the Owlseye plant located in rural Alberta.
The chief financial officer has just received a report indicating that Ajax could purchase the entire annual output of the Owlseye plant from a foreign supplier for $37 million per year.
The budgeted operating costs (in thousands) for the Owlseye plant’s for the coming year is as follows:
Indirect plant 5,000 19,000
Depreciation – plant 6,000
Utilities, property tax, maintenance 2,000
Pension expense 4,500
Plant manager and staff 2,500
Corporate headquarters overhead allocation 3,000 18,000
Total budgeted costs $52,000
If material purchase orders are cancelled as a consequence of the plant closing, termination charges would amount to 10 percent of the annual cost of direct materials in the first year (zero thereafter).
A clause in the Ajax union contract requires the company to provide employment assistance to its former employees for 12 months after a plant closes. The estimated cost to administer this service if the Owlseye plant closes would be $2 million. $3.6 million of next year’s pension expense would continue indefinitely whether or not the plant remains open. About $900,000 of labour would still be required in the first year after closure to decommission the plant. After that, the plant would be sold for an estimated $1 million. Utilities, property taxes, and maintenance costs would remain unchanged in the first year after closure, but disappear when the plant is sold.
The plant manager and her staff would be somewhat affected by the closing of the Owlseye plant. Some managers would still be responsible for managing three other plants. As a result, total management salaries would be about 50% of the current level, starting at closure and remaining into the future.
Assume you are the company’s chief financial officer. Perform a five-year financial analysis and make a recommendation whether to close the Owlseye plant on this basis. Provide support for and cautions about your recommendation with organized, clearly-labeled data. Use bullet points where appropriate.
Problem 3 (16 marks)
Braithwaite Company manufactures two types of kayaks, the Intrepid and Explorer. Previously, the company has allocated manufacturing support costs using a plant-wide rate based on direct labour hours. It has been suggested that the company consider assigning support costs to the equipment using activity-based costing. The following data has been collected:
Units produced and sold
Direct labour hours used
Direct labour cost
Number of times each unit is handled
Number of cuts per unit
Number of design changes (total)
Number of product setups (total)
The actual manufacturing support costs incurred were as follows:
The direct material cost for the Intrepid model is $500 per unit, and for the Explorer model, $700 per unit.
1. Determine the unit cost of each product using direct labour hours to allocate all manufacturing support costs.
2. Determine the unit cost of each product using activity-based costing.
3. Explain why the unit cost is different in requirements 1 and 2.
Problem 4 (10 marks)
Winn’s Winery Ltd. has assembled the following information about its customer base:
Variable costs (% of rev.)
Fixed cost allocation
Net revenue (loss) per customer
Winn’s annual fixed costs consist of marketing expenses of $300,000 and administration costs of $1,700,000. These are allocated to each customer based on relative revenue [e.g., customer 1 fixed costs = $2M x ($4,899,507/23,565,709) = $415,817 (rounded)]
1. Analyze the relative profitability of the company’s customers and make recommendations for change.
2. (5 bonus marks) Create an appropriately-labelled whale curve.
Problem 5 (12 marks)
Dallas Company had sales of $40,000,000 in 2010. In 2014, sales had increased to $50,000,000. A quality improvement program was implemented at the beginning of 2008. Overall conformance (prevention and appraisal) quality was targeted for improvement. The actual quality costs for 2010 and 2014 follow. Assume any reductions in costs are attributable to improvements in quality.
Internal failure costs
External failure costs
Total quality costs
1. Compute the quality costs-to-sales ratio for each year.
2. Calculate and compare the relative distribution of costs by category for 2010 and 2014. What conclusions do you draw from this comparison? Are further reductions possible?
3. The quality manager for Dallas indicated that the external failure costs reported are only the measured costs. She argued that the 2014 external costs were likely much higher than those reported and that additional investment ought to be made to prevention and appraisal costs. Discuss the validity of her viewpoint.
Problem 6 (12 marks)
Whyte Trucks Inc. produces large, heavy duty trucks. It is attempting to reduce manufacturing costs. It polled customers with respect to product requirements and obtained the following information:
Whyte identified the following target costs for various truck components:
Whyte engineers produced the following quality function deployment matrix:
Required: Determine which function groups are candidates for cost reduction.