Reference no: EM133042599 , Length: word count:1200

ACCT 202 Managerial Accounting - Virtual Lab Assignment

Relevant cost anahsis (CICA)

Fence Company Ltd. (FC) was incorporated in March 20X4, and is equally owned by Robert and Morn, Womt. The company constructs residential wood fences.

FC's first year was a difficult one. It is now late March 20X5, and the Wood brothers are making plans to improve FC's performance. Having decided that they need outside advice, they asked you to meet with them.

At the meeting, you asked the brothers to describe their operations and to highlight their major concerns. The following paragraphs are your notes from the meeting.

• FC lost business last year because it could not meet its promised installation dates during the peak period. The owners consider, however, that their biggest problem last year was caused by the need to repair fences. They guarantee their work, and they had to go back and change broken boards and cleanup work sites, which cost them money and did nothing for their reputation.

• The owners project that FC will construct 50,000 linear meters of fence this year. To achieve this target, they think that one work team will be needed during the 12 weeks of April, October, and November. and three teams during the 20 weeks from May through September. Their projection assumes an eight-hour day and a regular five-day week. Last year they found that a good work team consisting of three people wuld build a 100-linear-metre fence in an eight-hour day.

• The average labor cost including benefits last year was SS per hour. Labor and material costs are expected to increase 10% in 20X5. Last year there was little control over the amount of wood used on Protects; the owners want to change this situation.

• The brothers recognize that fence building is not a year-round activity and are willing to cover any cash deficiency as long as there are prospects of pmfitability.

• Thc owners need to take out at least $15.000 each per year. In addition, they intend to hire a full-time receptionist to start on April 1 and to employ this person year-round They expect that the salary will be about $12,000 a year but think that the cost will be worth it to ensure continuity and maintain the company's image.

• A truck will have to be rented for each work team, at $500 per month. Robert Wood thinks that they should keep two of the trucks from December to March for snow removal. He and Monis could do the work and lay off everyone except the receptionist.

• FC will also need to rent a machine for $600 a month to dig holes. In addition, it will cost approximately $120 to move the machine from one work site to another.

• The company spent $8,000 on gas and maintenance and $1,200 on telephone last year. Thc owners expect to hold the line on these casts this year.

• Morris Wood estimates that their costs last year were approximately S6 per linear meter for wood and SI for nails and stain.

• The standard selling price last year was $11 per linear meter. Robert Wood thinks that they should try for $13 this year. FC's salesperson complained last year because he could not discount the price. Thc brothers think that it might be a good idea to allow the salesperson to go down to $12 if forced to do so in order not to lose the sale. They are considering offering a special in April -perhaps 4% off- to get things rolling. They may also offer a 10% discount on group orders for fences for four or more houses. This discount offer worked well last year.

• According to the owners, a good incentive for their salesperson is crucial to increased sales. Last year, they paid the salesperson 5% of gross revenue for a basic one-house order for a fence of about 100 linear meters. For a two- or three-house order, they paid 6% and tbr a four-house order, which is about 400 linear meters, they paid 8% They believe that the incentive was responsible kw the fact that FC had a lot of two-house orders last year.

• Starting in April, FC will pay $2,500 a month to rein a warehouse tbr storing wood and equipment for the year. The landlord wants a security deposit of one month's rent. The company also has to buy new tools that cost at least $3,000, since the work teams either stole or broke all the tools used last year.

Required
Being an expert consultant, draft a report to the Wood brothers that presents your analysis of the issue and your recommendation. Use your knowledge of the various types of costs and their effect on the bottom line and the competitiveness of the organization as a guide