CO22101 E PC01 Case Annotated PDF

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Accounting or accountancy is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations...

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Core 2 — Practice Case 1 Case (60 minutes) Dazzle Dogs Ltd. (DDL) manufactures and sells designer seat belts for dogs. When a law was recently passed that all dogs must be secured when travelling in a vehicle, the founder and president of DDL, Kit Karnes, saw a need for this product. Knowing that many dog owners spare no expense for their dogs, Kit decided to offer a premium product that is both fashionable and functional. DDL has a mission to provide functional, safe, and fashionable travel accessories for dogs. DDL’s vision is a world where dogs are always included as a member of the family. It is now November 25, 2020, and you, CPA, were recently hired to be the controller for DDL. You have just been called into Kit’s office for a meeting. Kit is really happy with how things are going. DDL has been profitable since it began operations a few years ago and is expected to show increased profit in the upcoming December 31 year end. She is hoping that DDL will become even more successful in the future. Information on current operations is included in Appendix I.

Chartered Professional Accountants of Canada, CPA Canada, CPA are trademarks and/or certification marks of the Chartered Professional Accountants of Canada. © 2021, Chartered Professional Accountants of Canada. All Rights Reserved. Les désignations « Comptables professionnels agréés du Canada », « CPA Canada » et « CPA » sont des marques de commerce ou de certification de Comptables professionnels agréés du Canada. © 2021 Comptables professionnels agréés du Canada. Tous droits réservés. 2020-11-25

Commented [CPA1]: Timing: This case is 60 minutes. Start with 15 minutes for reading, outlining, and planning (ROP), and 45 minutes for writing. Note your start and end time for the case and the ROP on your outline. This is a good habit to get into to ensure you stick to your time budget. Commented [CPA2]: User: Kit is identified here as th owner of DDL and should be noted as a key stakeholder on your outline. Commented [CPA3]: In this case, Kit wants functiona safe, and fashionable accessories for dogs, and for dogs to be treated as members of the family. Her mission and vision are not entirely cost driven — she i primarily concerned with the dogs. Commented [CPA4]: Timeline: The “now” date shou be taken to your timeline on your outline. Commented [CPA5]: Role: CPA, Controller — it is important to always write your response from the perspective of your role. Note this on your outline.

Core 2 — Practice Case 1

Case

Kit is considering switching the material used in the seat belts from titanium to steel as a potential cost savings measure. She would like to know the range of potential savings related to this switch and whether this would be a good idea for the company. Kit is also considering expanding the product line to include dog crates. She wonders if it would be best for DDL to manufacture the crates or to purchase them from a supplier. She would like a decision on purchasing or manufacturing dog crates first, and then, based on that, she would like a decision on whether DDL should expand to include dog crates. Kit has never been a fan of crates because the dogs are isolated in the rear of the vehicle, and the National Pet Passenger Safety Board indicates that dogs in crates sustain injuries 25% of the time when in motor vehicle accidents. Conversely, statistics show that the risk of injury when a properly fitted dog seatbelt is used is only 5%. Kit recognizes that there is an increased demand for the product, but is unsure whether it would be the right move for DDL. Kit would like you to draft her a memo outlining your evaluation and recommendations related to each of the business decisions. Notes on both opportunities are included in Appendix II. Your response should be no longer than 1,800 words, excluding any Excel files.

Commented [CPA6]: Required #1 (R1): Kit is looking at changing from titanium to steel and has specifically asked for “the range of potential savings” — be sure to capture this detail on your outline so you don’t miss that she is looking for a range. Kit also wants to know “whether this would be a good idea .” This is to remind you that you need to consider qualitative factors and provide a conclusion — note this on your outline as well. Commented [CPA7]: Required #2 (R2): The second required from Kit is that she is asking “if it would be best for DDL to manufacture the crates or to purchase them from a supplier.” Be sure that you are clear on what the required is and that you understand all components of it before you write it on your outline Commented [CPA8]: Required #3 (R3): This require must come after the second one because it utilizes the results of that analysis to determine whether DDL should expand to include dog crates. You will need to consider both quantitative and qualitative factors. A ke thing to note is that choosing between titanium and steel must be determined first. When you are at the planning stage, this is an example of when certain requireds must come before others. Commented [CPA9]: This information provides you with a qualitative (qual) factor to support the quantitative (quant) analysis of whether DDL should add dog crates to the product line (isolation in the rear of the car). Be sure to note on your outline that a quant, a qual, and a conclusion are required here. Commented [CPA10]: Each case in PEP will include word limit at the end of the narrative to ensure that you limit your analysis to what would be attainable in 60 minutes. On exams, you will only be given a time limit, not a word limit.

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Core 2 — Practice Case 1

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Appendix I Current operations In the current year, 10,000 seat belts have been produced and sold. The costs of producing a seat belt comprise the following: Direct materials Direct labour Variable manufacturing overhead Total

$ 144 11* 7** $ 162

* This is based on a direct labour rate of $22 per hour for 30 minutes. ** Variable overhead is allocated at a rate of $14 per direct labour hour. DDL’s customers are pet boutiques across Canada. Boutique owners have been very pleased with the quality and design of the seat belts, and the sales price of $225 has been well received. In fact, a well-known pet products consumer website recently named DDL’s seat belts as “excellent quality at a fair price.” Orders are already being placed for 2021. One of the reasons for DDL’s success is that the specially designed hooks and buckles on the seat belts are made with titanium. Titanium is an extremely strong, lightweight metal, which makes the hooks and buckles virtually impossible to break. This makes DDL’s seat belts safer and longer lasting than those of DDL’s competitors. Recently, a survey was included as part of the warranty registration process for DDL. In the survey feedback, the use of titanium in seat belts was selected as “a major factor in my buying decision” 10% of the time, “somewhat of a factor in my buying decision” 25% of the time, and “not a factor in my buying decision” 65% of the time. 90% of consumers completed the survey.

Commented [CPA11]: R1: This number may be important for a quantitative analysis you must complet for Kit, so highlight it and make a margin note until you know where it might be needed. This may help you to remember it.

Commented [CPA12]: R1: The variable costs will hel in calculating the contribution margin (CM) for the existing product when deciding whether DDL should switch materials. The direct labour rates are not needed here but will become important when you learn more about the proposed change to steel in Appendix II. It is a good idea to make a mental note, asking yourself, “Why are they telling me this?” Commented [CPA13]: R1: A qualitative factor that th boutique owners may not be pleased if the materials are changed to steel. Commented [CPA14]: R1: The sales price is another important number to be noted for your analysis. This will be used to calculate the CM. Commented [CPA15]: R1: More qualitative details to note: boutiques have already placed orders, so if a change is made to the product, they may cancel their orders, which would impact sales. Commented [CPA16]: R1: More qualitative details to note: titanium is stronger, so there could be an impact on sales resulting from the switch. Commented [CPA17]: R1: This paragraph provides more qualitative details for your analysis by stating tha 65% of the purchasers do not even consider titanium i their purchasing decision, and only 10% see it as a major factor, so switching might not be an issue.

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Appendix II Potential opportunities Steel versus titanium Titanium is expensive and DDL is questioning whether it is necessary, given that most competitors use steel, which currently costs $60 less per unit in direct materials. However, there is some concern that the price of steel may increase by as much as 20% in the upcoming year. DDL estimates that a drop in sales price to $178 would be required in order to maintain current sales volumes. Steel is an easier material to work with, and as such each unit would require an estimated 10 to 20 minutes less of direct labour time. When manufacturing equipment was originally purchased, an additional $50,000 was spent to have the machinery specially modified to be capable of cutting titanium.

Commented [CPA18]: R1: This section is going to give you the information you need to calculate whethe DDL should stay with titanium or switch to steel. Commented [CPA19]: R1: The direct material costs o steel are noted here. The numbers should be tracked on your outline or using margin notes so that you can easily prepare the quantitative analysis. Note that the costs are described in comparison to titanium. You wil need to tie the information here to the quantitative information provided in Appendix I. Commented [CPA20]: R1: This provides you with a range for the direct materials. Kit specifically asked for a “range,” so these numbers can be used to help you arrive at this range. Commented [CPA21]: R1: The sales price for the seatbelts made from steel is necessary to calculate th CM. Commented [CPA22]: R1: Direct labour cost for a steel seatbelt can be calculated with this information. You will use this in conjunction with the labour time an cost in Appendix I. Commented [CPA23]: R1: This is the cost of machinery modifications to be able to use titanium, bu this cost was incurred in the past and is a sunk cost fo the purposes of this analysis. Therefore, it should not be included in the analysis of steel versus titanium.

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Dog crates DDL is considering whether it would be better to manufacture and sell 5,000 seat belts and 5,000 dog crates annually. The dog crates are specifically designed for use in the cargo area of automobiles. Sales price and production costs on a per crate basis are as follows: Sales price Direct materials Safety label costs Direct labour Variable overhead

$305 $155 $4 1 hour Allocated based on direct labour hours at the same rate as seat belts

No additional fixed costs are required. Inspecting the crates and labelling them for safety will require 0.25 hours per crate, which is the only common cost between both the manufacture and purchase option and is included as part of the 1 hour of direct labour noted above. Alternatively, comparable crates could be purchased from an overseas manufacturer at a cost of $895,000 for each 5,000-unit shipment. DDL will also be responsible for paying non-recoverable import duties and taxes of $25,000 per shipment based on current rates. Although the demands on manufacturing equipment will be less, the space needed to inspect and store the crates will limit DDL’s capacity for manufacturing seat belts to 5,000 regardless of the decision to outsource or not. DDL has no desire to purchase additional manufacturing equipment or rent additional space at this time. Advertising and selling an additional product would cost $55,000 annually.

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Commented [CPA24]: R3: This is the reason for the information on 10,000 units of seat belts in Appendix I DDL appears to be able to make only one or the other The CM from 5,000 seat belts will have to be dropped to make the dog crates. Kit made it clear that the first decision to be made is whether the dog crates should be manufactured or purchased, as you noted on your outline. This is important when reaching the planning phase and determining which required to address first.

Commented [CPA25]: R2: This is the information necessary to determine the CM that will be provided b manufacturing dog crates. Note the location of this information on your outline or carry it forward to your outline, whichever you think is easier to access when doing your analysis. Commented [CPA26]: R2: Purchase price of 5,000 crates, which is needed to compare to the manufacturing cost of crates. Commented [CPA27]: R2: Additional cost of purchasing the crates, which you will need to include i your analysis. Commented [CPA28]: R2: As with the other quantitative numbers, make a margin note or add thes to your outline. These are additional costs of selling dog crates (whether made or bought), a fixed and relevant cost for determining whether DDL should add dog crates to its product mix....