Application 2 - Dazzle dogs PDF

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Summary

Mandatory assignment needed to complete the course...

Description

To: From: Subject:

Kit Karnes, Founder and President of DDL Bianca Stowell Requested Report

Role, Decision Maker, Assignment CPA WAY Step Description   

Identify your role in the business situation. Identify the decision maker. Identify the specific assignment you have been given.

Solution 

A CPA, controller for DDL

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Kit Karnes, Founder and President of DDL Prepare a Memo outlining analysis and recommendations related to each of the options identified in the situation (see below).

Options/Issues to be Assessed 1. Which of the two materials, steel or titanium is more cost effective? 2. Which dog crate option, make or buy, should DDL considered? 3. Whether or not DDL should add dog crates to its product line?

Issue #1 Analysis: Is steel or titanium more cost effective? Quantitative Analysis: Referring to the calculations in the Excel worksheet, it shows that DDL will increase profit if they chose to replace Titanium with Steel. Per the calculations, to produce the seat belts using Titanium would have a $63 per unit Contribution Margin. If you were to replace Titanium with Steel, there is a protentional that the contribution margin would increase to $83.33 per unit, in best-case scenario as done in the sensitivity analysis in the calculations. Unfortunately, due to the prices of Steel potentionally increasing by 20% next year, the worst-case contribution margin would be $62.87 per unit produced. There is a significant cost reduction in both scenarios, with the base-case scenario being $94.67 per unit and the worst-case being $115.13 per unit (see calculations in Excel). The decrease in costs ranges from 20% to 42%. Given the fluctuation in the price of steel and from business perspective, it makes sense to stay with the Titanium. Using Titanium in your seat belts also gives you differentiation in the market.

Qualitative Analysis: Opportunities of switching to steel Advantages  

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Working with steel is easier to work with and a more common product in the market. There is protentional for an increase to your contribution margin, and your costs are significantly reducing, specifically in the direct labor time being down by 10 to 20 minutes.

Disadvantages 

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DDL would have to reduce its selling price to stay competitive, which could make the company less profitable. Titanium is known to be a more sustainable metal compared to steel, there would be compromise on quality.

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The competition of DDL are already selling steel, suggesting that there is an established market for a steel seat belt.

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Modifications to the machine would have to be made to produce Titanium, resulting in a $50,000 cost. This cost would not be recoverable.

Issue #2 Analysis: Dog Crates – Manufacture VS Outsource Quantitative Analysis: Based on the calculations in the Excel workbook, manufacturing one crate is $2 cheaper than outsourcing it. The cost to manufacture the crates is $195 per crate, which is less than the $197 per crate it would cost to purchase them. Annually, this will be $10,000 cheaper to produce crates.

Qualitative Analysis: Opportunities of diversifying 1. There is a growing demand for dog crates. There could be a potential increase of profit if DDL were able to maximize the production of crates to meet the demand. 2. Diversifying the product line to include dog crates may enable DDL’s chances to grow as a company because there could be an opportunity to sell crates not only to existing customers, but to new potential customers as well. Risks of diversifying 1. Seat belts are currently recommended over crates by the National Pet Passenger Safety Board because of possible injuries a dog can endure within a crate if there was a car accident. Seat belts are a safer choice and there is less risk of lawsuits. 2. The vision of DDL is not met with the production and sale of crates.

Manufacturing the Dog Crates Advantages   

Full control of the crates quality will ensure that the company’s reputation is not at risk. Sales repairs and maintenance will be more attainable and cost effective. Inventory control and timing of when product is needed, with no limitations to order shipment amounts and risks of import tax, shipping rates, duty and possible delays.

Disadvantages 

Seat belts are recommended over crates by the National Pet Passenger Safety Board. Manufacturing the crates will expose DDL to potential risks if demand for the crates in the market decrease.

Recommendation: I recommend DDL to manufacture the dog crates. The increase in total Contribution Margin under this option is $550,000. This would outweigh the additional fixed costs of $55,000 and the lost Contribution

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Margin on the seat belts of $315,000. The crates are more profitable and would increase profit by $180,000 ($495,000 - $315,000).

Selling the Dog Crates Advantages 

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There is a huge demand in the market for dog crates. This could lead to an expansion of DDL’s customer base which could mean an increase of sales and profit. Diversifying into selling dog crates could bring in clients into the store which could lead them into buying seat belts as well.

Disadvantages 

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Per The National Pet Passenger Safety Board, they recommend seat belts over crates. There could be a contradiction to this recommendation and increase exposure risk. Selling the dog crates might contradict DDL’s vision since the dogs would be trapped in the back of the vehicle. It could also contradict DDL’s mission statement since dog crates aren’t as safe as seat belts.

Recommendation: I recommend for DDL to expand into producing and selling dog crates. An additional $180,000 in profit a year would be made if the expansion of manufacturing the dog crates happened. Keeping in mind that the mission and vision is met when designing the crate for comfort and safety. The dog’s injuries should be minimal when inside the crate in case there is a car accident and the dogs should feel comfortable when inside of the crate. Please contact me if you have any questions after your review. Regards, Bianca Stowell

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