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Assignment2(SummerSession)
Print
ThisassignmentisbasedonModules1through7andisdueattheendofModule7.Itisworth
10%ofyourfinalcoursegrade.Thetimetocompletethisassignmentisanestimated910
hoursifyouhavereadandmasteredthematerialinthemodulenotesandrequiredreadings.
RefertogeneralassignmentinstructionsinAssignment1.

Criticalthinking
Criticalthinkingisacorecompetencyrequiredinprofessionalpractice.AsaCGA,youwillbe
requiredtomeetthechallengesofconstantlychangingissuesandcomplexdecisionmaking
scenarios.Youwilloftenbeaskedtoanalyze,synthesize,andevaluatedata.
Somequestionsinthisassignmenthavebeendesignedtoassessyourabilitytodemonstrate
criticalthinkingskills.Usethefollowingpointsasaguidelineforrespondingtoquestionsthat
requireanalysisorrecommendations:
Providemorethanjustafactualreportofnumericalfindings.Whatarethepotential
causesandconsequencesoftheresults?
Whenprovidingarecommendation,considerbothinternalandexternalqualitative
factorsthatmayaffecttherecommendation.Thesefactorsmaynotnecessarilybe
discussedintheoriginalcaseorscenario.However,youareexpectedtobeableto
providethisinformationfromtheknowledgeyouhavegainedthroughexperience
andotherareasofyourprogramoflearning.
Reading1.31,WhatisCriticalThinking?isdesignedtohelpyoudevelopyourcriticalthinking
skills.
Asafinalpoint,whenformulatingaresponsethatincludesnumericalanalysis,rememberto
includepertinentnumbersfromtheanalysis.Thereadershouldnotbeexpectedtoreviewyour
calculations.Providefurthernumericalanalysisifitwillhelpthereaderunderstandyour
response.

Question1(27marks)
IPSYSagencycosts

HaroldisapharmaceuticalsalesmanagerwithIPSYS.Thecompanyproducesgenericversions
ofpharmaceuticalsthathaverecentlylostpatentprotection.Therevenuemodelforthe
organizationistosellhighvolumesoftheseproductsatlowmarginsinordertoundercutthe
priceofthedrugsoriginalmanufacturer.Assuch,IPSYShasanaggressivesalesstrategy.The
compensationforsalesmanagersislargelyderivedfromtheirindividualsalestargetsaswell
asthesalesfromthegroupofsalesrepresentativestheymanage.
ThesalescontrolsystematIPSYSisquiteantiquated.Salespeoplefilloutpaperformswiththe

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nameofthecustomer,ordervolume,orderdate,anddeliverydate.IPSYSkeepstheseforms
onfile,andallowscustomerstosubmitthemfordateswellinadvanceoftheactualpurchase.
Thisallowscustomerstoorderwellinadvanceoftheiranticipatedinventoryneeds.Harold
recordsallthesales.Healsoissuesallshippingordersforhisownsales,andforthesalesof
histeam,intoacomputersystem.Theinventorydataarethenmanagedbythecentraloffice.
Becausecustomersarenotinvoiceduntilthedeliverydate,salescommissionsareissuedbased
onthisdate,ratherthantheorderdate.Allinvoicesaresentoutfromtheregionalofficesby
Haroldandhisfellowmanagers.
Thismonthisyearend.Haroldnoticedearlierinthedaythathisteammemberswerebehind
onsalesvolumesandwouldnotmaketheirmaximumbonus.However,bymidafternoonofthat
day,salesslipswerebeingturnedinshowingthatordershadbeenmadeforenoughproductto
satisfythebonusrequirement.Theproblemwasthatthedeliverydatewasfortheweek
followingtheyearend,andsocouldnotbecountedtowardthebonus.Harolddecidestoenter
deliverydatesasthelastdayofthemonth,sotheycanbeincludedinthecurrentyears
revenues.Hedecidestoallowtheproducttobedeliveredearly,andmakesapapernotetobill
thecustomersontherealdeliverydate,notthefalseonehehasjustentered.Haroldassumes
everyonewinsinthisscenariothesalesteamgetstheirbonuses,thecompanygetsgood
sales,andthecustomersgettheirproductafewweeksearlywithouthavingtopayforituntil
thenewyear.
Required

a.
i. Identifythetwoprimaryissuesthatagencytheoryaddresses.(2
marks)
ii. Agencycostscanbecategorizedasmonitoring,incentivecompensation,
bonding,andresidualloss.Identifythreeagencycoststhathavebeen,
orwillbeincurredinthiscase,andindicatewhichcategoryeach
belongsto.Youranswershouldidentifycostsinatleasttwoofthe
agencycostcategories.(3marks)
b. COSOhasidentifiedeightcomponentsofenterpriseriskmanagement.These
componentsassisttheorganizationinidentifyingriskanddevelopingarisk
managementplan.Twoofthesecomponentsarelistedinthefollowingtable,along
withanactionforeachcomponent,specifictoIPSYS.
COSOcomponent

Action/activityforriskmanagementplanning

Internalenvironment

Ensurethereissupportforariskmanagementplanatall
levelsofIPSYS.

Objectivesetting

Objectivesassociatedwithrewardedbonusesshouldbe
setusingachievabletargets,takingintoaccountthat
therehasbeenahistoryofunethicalbehaviour.Also
notingthatbonusproceduresneedtobereviewedona
regularbasis.

Completethetablebyidentifyingtheremainingsixcomponents.Foreach
component,provideanactionthatthecompanycantaketoassistinrisk
managementplanning.TheactionsshouldbespecifictoIPSYS.(10marks)
c. Thetypesofriskanorganizationfacescanbedividedintofourdifferentcategories.
Basedonthesecategories,describethetypesofrisksthecompanyissubjectto.(8

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marks)
d. Haroldsactionsmayleadanemployeetobecomeawhistleblower.Howmight
IPSYScreateanenvironmentwherewhistleblowersfeelsafetocomeforward?(2
marks)
e. SinceHaroldbelieveshisactionscreateawinwinsituation,ishisbehaviour
ethicallyblameless?Explaintheeffectofthisattitudeonhimselfandothersinthe
corporation.(2marks)

Question2(16marks)
HighTechCompanyeconomicvalueadded

ThefollowinginformationpertainstoHighTechCompanyfortheyearendedDecember31,
2013:
Netoperatingincomebeforetaxes

$422,000

EVAadjustedtotalcapital,December31,2013

3,500,000

Researchcostsin2013expensedunderGAAP

75,600

Developmentcostsexpensedin2013underGAAP

55,000

Developmentcostscapitalizedin2013underGAAP

83,000

ImpairmentlossofgoodwillincludedinthecalculationofGAAPincome

23,400

Additionalinformation:
Thecapitalstructureis38%debtand62%equity.
Themarketyieldonequivalentdebtis6.5%.
Themarginaltaxrateis35%.
Thecostofequityis12%.
ResearchanddevelopmentcostswereincurredonJanuary1,2013.
Capitalizeddevelopmentcostsareamortizedoveraperiodof5yearsinGAAP
incomeR&Dcostsareamortizedoverthesameperiodinnetoperatingprofitafter
taxes(NOPAT).
Required

a. Determinetheeconomicvalueadded(EVA)fortheyearendedDecember31,2013,
andexplaintheresults.(4marks)
b. ShouldthefinancialperformanceatHighTechbemeasuredusingEVAorROI?
Addressthefollowingpointsinyouranswer:
i. Thepurposeoffinancialperformancemeasures
ii. Advantagesanddisadvantagesofeachmeasure
iii. Thedifferencebetweenaccountingandeconomicincome
(6marks)
c. Asanoutsideconsultant,youareaskedforsomeadviceoneffectiveperformance
measures.Chapter11oftheMerchanttextdescribessixfinancialresultscontrol
remediesthatcanreduceamanagerstendencytofocusonshorttermresults.
Selecttwooftheseremediesanddraftaoneortwoparagraphmemotothe

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managementaccountantatHighTechwithacomprehensiveexplanationthat
includes:
Howtheremedyincreasesthemanagerslongtermfocus
Issueswiththeremedyanditsimplementation
Anactionplanthatoutlinestwoorthreestepsthecompanyshouldtake
toimplementtheremedy
(6marks)
Note:Foundationreview3providesareviewofmemowritingandtheacceptable
format.

Question3(13marks)
OceanandSalvageRecoveryInc.shorttermdecision

OceanandSalvageRecoveryInc.wasestablishedin2008.Thecompanyspecializesinsalvage,
towage,wreckremoval,andoffshoreinstallationsupportoperations(anchorhandling/supply)
fortheshippingindustryaswellasfortheoilandgasindustriesworldwide.
Thecompanyprovidesadvancedproposalsforitsservicespriortocommittingtotheservices.
For2014,thecompanyisconsideringaproposalforawreckremoval.Hereisanestimateof
therevenuesandcostsforthisremoval.
OceanandSalvageRecoveryInc.
MaritimeWreckRemovalProposal
RevenueandExpensesForecastfor2014
(inthousands)
Revenue

$170,000

Expenses

Directwreckremovalsalaries1

48,000

Removalcoordinatorscontracts

30,000

Surveycosts2

12,000

Externalqualitycontrolcontracts

8,000

Administrationandequipmentinsurance 3

2,000

Groupaccidentandlifeinsurance 4

7,000

Depreciation

8,000

28,000

7,000

Directsitemeals

20,000

Hotelandaccommodationcosts

20,000

Removalsupportemployees1
Equipmentmaintenance 5

Administrativeandheadofficeexpense 6

3,000

Totalexpenses

193,000

Netoperatingloss

$23,000

Notes:
1. OceanandSalvageRecoveryInc.willincuracostof5%ofthesalariesin
severancecostswhenemployeesareterminated.Thiscostwillhavetobepaidif
theremovalproposalisnotaccepted.
2. Surveycostshavealreadybeenincurred.

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3. Administrationandequipmentinsuranceisanapportionedamountofthetotal
annualcostspaidbythecompany.
4. Insuranceispayableonlyiftheremovalisconfirmed.
5. Equipmentmaintenancecostsarespecifictothisjob.
6. Theseexpensesareforrelatedremovalaccommodations,arrangingmeals,and
providingcommunicationservicesduringtheremoval.
Required

a. Basedonthecostsprovideddeterminewhetherthewreckremovalproposalshould
beaccepted.
(4marks)
b. Calculatetheminimumrevenuerequiredtojustifyacceptingthewreckremoval
project.(3marks)
c. Corporationsandtheirmanagersareexpectedtoactethically.Thisispartof
corporatesocialresponsibility.Howevertherearetwocontrastingviewsofwhat
thisresponsibilityinvolves.
i. Contrastthestockholderandstakeholderviews.(2marks)
ii. Underwhatconditionswouldeachviewrecommendthatacompany
meetenvironmentaltargetsbeyondtheletterofthelaw?(2marks)
iii. Usingthestakeholderviewofcorporatesocialresponsibility,listtwo
stakeholdersinthiswreckremovalproject.Foreachstakeholder,
determinewhatqualitativefactorthecompanyshouldconsiderwhen
decidingwhethertotakeontheproject.(2marks)

Question4(10marks)
KyruInc.EOQandreorderpoint

KyruInc.isaretailerthatsellsgameconsoles,electronicgames,andaccessories.Itpurchases
theelectronicgamesfromSotellfor$30each.Kyruexpectstosell18,750electronicgamesthis
year.Competitionforelectronicgamesisstrong,anditiscriticalthatKyruhassufficientstock
tomeetdemand.
Kyrugatheredthefollowinginformationregardinglastyearscostsandactivities.
Descriptionofactivity

Activity

Totalcosts

Costallocationbase

Ordering

Placingordersforpurchases

$176,000 Numberoforders

Shelfstocking

Stockingandrestocking
merchandise

$105,000 Hoursstocking

Other

Facilitysustaining

Total

$16,500 (Notallocated)
$297,500

InadditiontopurchasingelectronicgamesfromSotell,Kyrupurchasesgameconsolesfrom
BitbyteandaccessoriesfromPetersen.Therewere8,000ordersplacedlastyear2,000with
Sotell,1,500withBitbyte,and4,500withPetersen.

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Stockingandrestockinghourshavebeendirectlytracedtoproductlines.Ofthe14,000hours
spentinthisactivity,60%wasforaccessories,25%forelectronicgames,and15%forgame
consoles.Kyrustocked17,500electronicgameunitslastyear.
Theotherrelevantcarryingcostsforitemssuchasinsuranceandbreakageforelectronic
gamesis$0.60perunit.Kyruusesarequiredrateofreturnof8%.Theleadtimeisthreedays.
Kyrucanplacerushorders,butthisadds$3.00tothecostofeachunit.Thisistheonly
quantifiablestockoutcost.
Assume30dayspermonthand360daysperyear.
Required

a. Calculatetherelevantorderingcostsperpurchaseorderandtherelevantcarrying
costspergame.(3marks)
b. Calculatetheeconomicorderquantity(EOQ)fortheelectronicgamesand
determinethenumberofordersthatwillbeplacedinthecomingyear.(Ordering
costsandcarryingcostsshouldbebasedonlastyearsfigures.)(3marks)
c. UsingtheEOQandtotalrelevantcosts,calculatethetotalorderingandcarrying
costsfortheperiod.(2marks)
d. Assumingdemandisuniformthroughouttheperiod,whatshouldthereorderpoint
be?(2marks)

Question5(34marks)
AtlantaHomeLoancontrolfailure

ReadtheAtlantaHomeLoancaseonpages2226oftheMerchanttextandanswerthefollowing
questions.Usetheninestepcaseanalysismethod,asinstructedintheRequired.Toreviewthe
casemethod,gototheResourcestabandselectHowto,thenAnalyzeacase.
Required

YouareaconsultantwhohasbeenhiredbyAlFiorini,thefounderofAtlantaHomeLoan,to
assesstheeventsthattookplaceinthecase.ConsiderthatAlwillbeclosingdownthe
businesshowever,inthehopeofstartingasimilarbusiness,hewantstolearnfromthis
situation.PrepareaMemotoAlconsistingofthefollowingsections:
a. Identifyproblemsandissues,andanalyzethedata(steps3and4ofthecase
method).(12mark)
Thefollowingquestions/requirementsareprovidedtoguideyouranalysis:
i. ListthecontrolsthatAlFioriniusedtocontrolhisbusinessbothbefore
andafterhewentbacktoschool.Classifyeachcontrolasaresults,
action,orpersonnel/culturalcontrol.
ii. Weretheproblemsdescribedinthecasecausedbyfailuresinthe
companysstrategyorcontrolsystem,orboth?

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iii. WhatdidAldowrong?Includeadiscussionoftheeffectivenessofthe
controlsthatAlimplemented.
b. Generatealternativesandselectdecisioncriteria(steps5and6ofthecase
method).(8marks)
i. ConsiderthatAlwantstolearnfromthismistake,andrememberthe
laststatementinthecase:Whatmighthehavedonetopreventthis
disasterfromhappening?
Youranswershouldfocusonthefourtypesofcontrols.
ii. Inpreparingtomakearecommendation,whatisonedecisioncriterion
youwillusetodetermineanappropriatesetofcontrolstopreventa
similaroccurrence?
c. Analyzeandevaluatethealternatives(step7ofthecasemethod)(8marks)
Evaluatethealternativesgeneratedinpart(b)basedonthedecisioncriterionyou
selected.Yourdiscussionshouldleadtocontrolsthatareimportanttothissituation
andpreparethereaderforyourrecommendation.
d. Recommendation(step8ofthecasemethod)(6marks)
Recommendthreekeycontrolsthatshouldbeinplacetoreducetheprobabilityof
thecaseeventsreoccurring.Yourresponsewillbeassessedonthebasisofyour
abilitytolinkyourrecommendationtoyourdiscussionoftheproblemsandissuesin
part(a),yourassessmentofthealternativesbasedonthedecisioncriterioninpart
(b),andyouranalysisinpart(c).
Note:Whileaformalreportisnotrequired,yourresponsemustconsistofparts(a)to(d)and
shouldbeinmemoformat.Submityourresponseinthesamedocumentasyouranswersto
thepreviousquestionsinthisassignment.
100

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