Pendants Plus Company

Pendants Plus Co. manufactures medals for athletic events and other contests. Its manufacturing
plant has the capacity to produce 10,000 medals each month; current monthly production is
7,500 medals. The company normally charges $225 per medal. Variable costs and fixed costs for
the current activity level of 75 percent are shown in Appendix A. Pendants Plus managers’ bonus
is based on an increase in revenue of 10% and ROI of 15%.
Pendants Plus has just received a special one-time order for 2,500 medals at $115 per medal. For
this particular order, the company will incur the same variable and fixed costs as their regular
medals except no variable marketing costs will be incurred. Kim Smith, Senior Accounting
Manager with Pendants Plus, has been assigned the task of analyzing this order.
Kim has asked you, management accountant, for assistance. Kim would like to know whether the
company should accept or reject the special order and the current full manufacturing (i.e., prior
to the special order) average cost per unit and the recalculated full manufacturing average cost
per unit, including the effect of the special sales order. The prospective customer has suggested
to increase the special order by 500 medals to 3,000 medals if the price can be further reduced.
Kim would like to know the minimum acceptable price for the 2,500 unit and the separate order
of 500 additional units.
After examining the costs, Kim suggested to her supervisor, Gord Penn, who is the controller,
that they request competitive bids from vendors for the raw materials, since the current quote
seems high. Gord insisted that the prices are in line with those of other vendors and told her that
she was not to discuss her observations with anyone else. Kim later discovered that Gord is a
brother-in-law of the owner of the current raw materials supply vendor. How should Kim try to
resolve the ethical conflict arising out of the controller's insistence that the company avoid
competitive bidding?
In addition, Pendants Plus has experienced some accounting department issues (Appendix B) and
she wants you to evaluate the accounting department processes and provide advice about how to
improve them. She also needs advice if the company should purchase a new assembly machine
for the company. The assembly machine purchase decision is not related to the special order
issue (Appendix C).

Required:
Prepare the analysis requested by Kim Smith.
 Appendix A

Current manufacturing capacity = 10,000 units per month

Current production output = 7,500 units per month
Normal sales price per unit = $225.00

Current Product Costs:

Variable Costs:
Manufacturing:
Labor $375,000
Material 300,000
Marketing 187,500
Total Variable Costs $862,500
Fixed Costs:
Manufacturing $275,000
Marketing 225,000
Total Fixed Costs $500,000
Total (i.e., Full Manufacturing) Cost $1,362,500

Information regarding the special sales order:

Number of units 2,500
Offer price, per unit $115.00

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 Appendix B
Accounting Processes

A summary of the conversation concerning the accounting processes is as follows:

 The accounting department has been severely overworked during the past year because of the
loss of two employees who have not been replaced.

 For the past several months, the accounting department has consisted of the accounting
manager and two assistants: one of whom is responsible for the billing, collection, and cash
receipts function; for preparing and making bank deposits; and, for handling related customer
enquiries; the other is responsible for the purchases, payables, and cash disbursements
function; for the payroll function; and, for the general ledger function.

 The accounting manager tries to prepare the monthly bank reconciliations and to review the
monthly financial statements prepared by the employee who has responsibility for the general
ledger, but has not had time to do so for the past four months.

 The receptionist answers the telephone, handles some customer service issues, and opens the
mail daily.

 New desktop computers were purchased for the accounting department. All employees log
in using the same login name and password to access the files.

 The accounting manager is very frustrated with the inventory accounting. He spent many
hours trying to reconcile the year-end inventory count to the inventory records as at
November 31, 2021. He is upset because the shipping documents are manually numbered
and dated before the inventory is actually shipped; and, when it is really busy the shipping
department employee responsible doesn’t always remember to record shipments in the
shipping log. The last entry in the shipping log was three weeks before year-end.

 The inventory and cost of sales accounts in the general ledger have been adjusted by $75,000
at November 31, 2021 to adjust the balance in the inventory account to agree with the
inventory amount determined by the inventory count of finished products. The inventory
count determined that finished goods inventory was less than the amount reported in the
accounting records. The accounting manager believes the difference may have resulted from
inventory counting errors made by casual help hired to help with the inventory count.
 Appendix C

Information related to the Machine Purchase Decision

 The firm is considering the acquisition of a new machine. The new machine is far more
efficient than the present assembly machine used for its products. The machine would cost
$87,600, would cut annual cash operating costs from $72,000 to $48,000, and would have a
$4,000 terminal disposal value at the end of its useful life of three years. Assume the
applicable income tax rate is 40% for this analysis. The after-tax required rate of return is
14%.

 The current machine has been used for one year. It will have no useful life after three more
years. It cost $105,000 when acquired, has a current disposal price of $39,200, and a
residual disposal price of $7,200 after three years.

 Both machines qualify for a capital cost allowance rate of 20%, declining balance.

 CCA tax shield formula

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