CASE STUDY:PRICING AND DELIVERY AT KAR FOODS

Carlos Ramos, head of supply chain at KAR Foods, wondered why his inventories had not declined despite the significant improvement his team had made in its ability to handle mixed-load and small lot orders from customers. He felt that the problem was the discounting scheme offered by the sales team that encouraged customers to place large orders. Carlos arranged for a meeting with Vanessa Rebelo, head of sales and marketing, to discuss future plans.

Historical Pricing and Costs at KAR

KAR was a large Brazilian food processing company, headquartered in São Paulo, that produced fresh and processed meats. Starting as a slaughterhouse, the company had become a major global player after several acquisitions across the world. The company sold its products to several supermarket chains within Brazil. A typical supermarket chain purchased 10,000 kg of meat each month at a price of 4 real/kg from KAR. KAR incurred a cost of 2.50 real/kg to produce the meat. KAR operations were set up to produce at a steady rate that matched demand. Historically, KAR had encouraged its customers to order in large lots by offering quantity discounts of 2 percent (a price of 3.92 real/kg instead of 4 real/kg) if customers ordered lots of 27,500 kg or more. The quantity discounts were justified by the high fixed cost of 4,000 real that was incurred by KAR to process, load and deliver each order.

Supply Chain Improvements at KAR

As the company grew, it became clear that supply chain operations required significant improvement to compete with other multinationals that were entering the Brazilian market. Carlos Ramos was hired to lead this effort, given his extensive experience in the consumer packaged goods industry. A quick review of the status quo by Carlos identified several opportunities for improvement. He decided to focus on the large amount of inventory that was built up to fill customer orders. A reduction in inventory would free up capital and expensive cold storage space, and would also streamline operations. At the current holding cost of 20 percent, reduction in inventories could save a significant amount in overall holding costs. He quickly realized that the inflexibility of the current distribution system resulted in the high cost of 4,000 real to process, load, and deliver each order. Carlos changed processes and invested in technology to increase flexibility and make it cheaper to handle mixed loads. He also brought in routing software that made it easier to plan deliveries to multiple customers on a single truck. This helped reduce the fixed cost per customer order down to 400 real. Carlos hoped that these improvements would significantly reduce lot sizes and thus inventory.

Costs Faced by Customers

Given that there was very little decrease in lot sizes and inventories, Carlos wanted to understand why things had not changed. Before his meeting with Vanessa, he sought to learn about the costs faced by supermarket chains ordering from KAR Foods. He learned that each supermarket chain itself incurred a fixed cost of 100 real associated with each order. This fixed cost was incurred for order placement and receiving. He also learned that each supermarket chain incurred a holding cost of 20 percent.

1) What do you think of the discount scheme that KAR had used historically? Do you think if was justified given the circumstances?

2) Once KAR has reduced its fixed cost per order to 400 real, what are the downsides to leaving the discounting scheme unchanged?

3) What should Carlos suggest to Vanessa at the upcoming meeting? What are the potential gains for KAR from this suggestion?

Ricardo Heavy Hauling has some earth-moving equipment that cost $362,000; accumulated amortization is $241,400. Ricardo traded equipment with another construction company. The fair value of Ricardo’s old equipment is estimated to be $188,500, and the fair value of the equipment being acquired is estimated to be $238,800. Four different possible scenarios are presented below:

1. The new equipment will perform essentially the same tasks as the old equipment. The estimate of the fair value of the new equipment is the more reliable of the two estimates. The exchange is a straight swap and no cash changes hands.
2. The new equipment has very different functions than the old equipment. The new equipment will permit Ricardo to attract new business that it had previously been unable to obtain. The fair value estimate of the new equipment is the more reliable of the two estimates. The exchange is a straight swap and no cash changes hands.
3. In addition to exchanging its old equipment, Ricardo pays $20,200 cash. The characteristics of Ricardo’s operating cash flows will change as a result of the exchange. The fair value of the old equipment is the more reliable estimate.
4. Assume the same facts as in (c) above, except that the exchange will not significantly alter Ricardo’s cash flows.
5. A large truck, which cost Company A $84,200 ($50,500 accumulated depreciation), has a market resale value of $59,000. The truck is traded to a dealer, plus a cash payment of $16,800, for a new truck that will perform essentially the same services as the old truck, but will look a lot nicer to the customers. The new truck has a list price of $79,800, although discounts of 3% to 4% may be negotiable.
6. Rochester Shipping Co. received a new ferry that has a normal purchase price of $1.90 million. In exchange, the company gave the vendor a parcel of land and a building located on the waterfront. The market value of the land and building is $1.72million. The land cost $448,600; the building cost $1,046,800 and is 30% depreciated. The vendor will use the land and building to operate a maintenance facility. The new ferry will enable Rochester Shipping to launch a new ferry service across Lake Ontario. The ferry was available because the buyer for whom it had been built went bankrupt and was unable to take delivery. The boat remained unsold for two years before Rochester was able to negotiate the exchange. Because the boat had been dormant for so long, it needed some upgrading and maintenance. Rochester agreed to pay for the necessary work, which was estimated to cost $450,000.

7 Journal Entries---Transaction List:

• 1. Record the exchange assuming the new equipment will perform essentially the same tasks as the old equipment.

• 2. Record the exchange assuming the new equipment has very different functions than the old equipment, and recognise gain/loss on exchange.

• 3. Record the exchange assuming Ricardo pays $20,200 cash in addition and operating cash flows will change as a result of the exchange, and gain/loss on exchange.

• 4. Record the exchange assuming Ricardo pays $20,200 cash in addition and the exchange will not significantly alter Ricardo’s cash flows.

• 5. Record the exchange assuming a large truck, which cost Company A $84,200 ($50,500 accumulated depreciation), has a market resale the truck is traded to a dealer, plus a cash payment of $59,000, value of $16,800, new truck has a list price of $79,800, although discounts of 3% to 4% may be negotiable.

• 6. Record the exchange assuming Rochester Shipping Co. received a new ferry that has a normal purchase price of $1.90 million, The market value of the land and building is $1.72 million. The land cost $448,600; the building cost $1,046,800 and is 30% depreciated.

• 7. Record the exchange assuming Rochester agreed to pay for the necessary work, which was estimated to cost $450,000.

Red and Green Ltd is an online retailer of a broad range of art and craft products. You are an audit senior at the firm Rose McKenzie & Co and are planning the financial report audit for the year ended 30 June 2018. Red and Green is a new client to your firm and this is the first year end since you were appointed. The following information was obtained from a meeting with the CEO, Alex Wool.

The company has managed to ride a wave of renewed interest by younger people in arts and crafts and the revenue for 2018 is approximately $3.2 million. This continues a trend that has seen revenue increase by between 20% and 30% consistently for the six years since the company was started by Alex and her tennis partner Sandra Cloth who is the COO. Profits in 2018 are $0.2 million and have not increased significantly in four years despite the increased turnover. In 2019 there are plans to broaden the range of products sold to include bedding, curtains and household furnishings.

Rapid expansion has put pressure on the company’s various systems, not least of which is the online sales order system. Red and Green do not have their own in-house IT function relying on Alex’s sister Tabatha who is responsible for accounting, IT, HR, payroll and general office management.

You are aware that in previous years errors had been detected at the audit stage, partly due to IT system errors and partly due to Tabatha’s inexperience as an accountant. Alex and Tabatha are confident that any errors in the financial report will be immaterial and not worth investigating given how busy they are with the growing business.

As part of the growth of the business the company is looking to raise additional bank borrowings to fund more warehouse space and invest in improvements to the IT systems. Alex has indicated that she needs the audit report signed before 18 September which is when she will be meeting the bank to discuss the details of the loan.

Required: In the following table identify the issues that give rise to risks for the financial report audit you are about to commence and explain why you think it is an issue.

The Crafty Ltd is an online retailer of a broad range of art and craft products. You are an audit senior at the firm Star Wars & Co and are planning the financial report audit for the year ended 30 June 2020. The Crafty is a new client to your firm and this is the first year end since you were appointed. The following information was obtained from a meeting with the CEO, Katrina Maglanque.

The company has managed to ride a wave of renewed interest by younger people in arts and crafts and the revenue for 2020 is approximately $3.2 million. This continues a trend that has seen revenue increase by between 20% and 30% consistently for the six years since the company was started by Katrina and her tennis partner Jade Garrard who is the COO. Profits in 2020 are $0.2 million and have not increased significantly in four years despite the increased turnover. In 2016 there are plans to broaden the range of products sold to include bedding, curtains and household furnishings.

Rapid expansion has put pressure on the company’s various systems, not least of which is the online sales order system. The Crafty do not have their own in-house IT function relying on Katrina’s sister Kristine who is responsible for accounting, IT, HR, payroll and general office management.

You are aware that in previous years errors had been detected at the audit stage, partly due to IT system errors and partly due to Kristine’s inexperience as an accountant. Katrina and Kristine are confident that any errors in the financial report will be immaterial and not worth investigating given how busy they are with the growing business.

As part of the growth of the business the company is looking to raise additional bank borrowings to fund more warehouse space and invest in improvements to the IT systems. Katrina has indicated that she needs the audit report signed before 15 September which is when she will be meeting the bank to discuss the details of the loan. Based on the above information, identify and explain five (5) issues that give rise to risks for the financial report external audit you are about to commence.

Based on the above information, identify and explain five (5) issues that give rise to risks for the financial report external audit you are about to commence.    

Budget Question:  

Gutierrez Company, a publicly held corporation, operates a regional chain of large drugstores. Each drugstore is operated by a general manager and a controller. The general manager is responsible for the day-to-day operations of the store, while the controller is responsible for the budget and other financial tasks. The general manager, Tracie Kappan, has been at Gutierrez Company for several years. Employee turnover is high at Gutierrez Company, just as it is in the retail industry in general. Kappan just hired a new controller, Min Yang.

Yang was asked to prepare the master budget. Each retail location prepares its master budget once a year and then submits that budget to company headquarters for approval. Once approved by headquarters, the master budget is used to evaluate the store’s performance. These performance evaluations directly affect the managers’ bonuses and whether additional company funds are invested in that location.

When Yang was almost done preparing the budget, Kappan instructed him to increase the amounts budgeted for labor and supplies by 20%. When asked why, Kappan responded that this budgetary cushion gives store management flexibility in running the store. For example, because company headquarters tightly controls operating funds and capital improvement funds, any extra money budgeted for labor and supplies can be used to replace store furnishings or to pay bonuses to help to retain good employees. She explains that the chance of getting extra funds from company headquarters is not good; this “cushion” is usually the only opportunity to replace store décor or to pay bonuses to key employees. Kappan also needs extra funds occasionally to make “under the table” payments to employees as incentives to work extra hours or to keep them from leaving for a higher-paying job.

Yang feels conflicted. He is eager to please Kappan, and he is wondering what he should do in this situation.

1. Who are the stakeholders in the scenario?

2. Who is responsible for the situation Min Yang is in? The Company or the General Manager? Why do you think that?

3. What would do if you were Min Yang?

For the following prepare all necessary journal entries for the current year (except closing) for both the fund-based (designate the fund) and government-wide (designate the activity) financial statements. Use the letter of each transaction and YE for related year-end transactions to date the journal entries.

The Hamlet of Oakridge, which is run by a Council, began 2017 with a General Fund, which had two activities (education and conservation), and an Enterprise Fund, which provides water to the citizens. Oakridge has one school which cost $1,050,000 and has a 20-year life with no salvage value. The water plant cost $618,000 and has a 30-year life with no salvage value. Assume the Oakridge’s fiscal year follows the calendar year. The Council:

a. Decided to build conservation preserve and transferred $73,500 to a capital projects fund, and immediately expended $50,250 for a piece of land.

b. Borrowed $115,500 cash on a long-term bond issue for use in creating the new conservation preserve.

c. Assessed property taxes on the first day of the year. The assessment, which is immediately enforceable, totals $630,000. Of this amount, $535,500 will be collected during 2017 and another $52,500 is expected in the first two months of 2018; 1.25% is considered uncollectible. The remainder is expected to be collected halfway through 2018.

d. Constructed a building in the new conservation preserve for $189,990 cash for use as a nature conservatory. It was put into service on July 1 and should last 15 years with no salvage value.

e. Built a hiking trail through the new conservation preserve for $10,500 cash and put it into service on July 1. It should last for 10 years, but the Council plans to add the trail to its asset network and keep it up to a pre-determined quality level so that it will last almost indefinitely.

f. Opened the preserve and charged an entrance fee of only a token amount, which goes to support general operations. Collections in the first year total $25,000.

g. Built a new water tower for $195,000, paying $20,000 cash and signing a long-term note for the balance. The water tower, which went into operations on July 1, provides additional storage for Oakridge Water Works and is considered part of that function. It has a 20-year life and no salvage value.

h. Received a $95,000 cash grant for the Oakridge school that must be spent for a school breakfast program for under-privileged children. Appropriate spending of these funds is viewed as an eligibility requirement for this grant (reimbursement grant). During the current year, $35,150 of the amount received was properly spent.

i. Bought school supplies for $22,660 cash and uses $17,510 of them. The Council uses the purchases method for all supplies.

j. Received a sculpture by a local artist to be displayed in the lobby of the nature conservatory. It qualifies as a work of art, and the Council has chosen not to capitalize it. The painting has a value of $82,500. It is viewed as inexhaustible.

k. Ordered a new school bus for $101,970.

l. Received the school bus and paid an actual cost of $104,006. The bus was put into operation on October 1 and should last for five years with no salvage value.

m. Paid salaries of $252,000 to schoolteachers. In addition, owes and will pay $31,500 during the first two weeks of 2018. Vacations worth $24,150 have also been earned but will not be taken until July 2018.

n. Paid salaries of $43,260 to staff at the Water Works. In addition, owes and will pay $3,090 in the first two weeks of 2018. Vacations worth $5,150 have also been earned but will not be taken until the summer of 2018.

o. Charged various customers $133,900 for water services provided. Of this balance, $113,300 was collected in cash and the remainder will be collected in April 2018.

p. Paid $9,270 in maintenance charges for the conservatory and trail.

q. Paid $15,000 on the conservation preserve bonds; $10,395 is interest.

r. Accrued interest of $13,390 on the water tower note; it will be paid in June 2018.

s. Opened a landfill that is estimated to be 12% full at year-end. It is estimated that closure costs will be $824,000. The Council made a $20,600 advance payment toward those closure costs.

t. Signed a five-year capital lease at the beginning of the year on equipment that will be used by the school. The first $22,000 payment was made at signing, with the remaining payments to be made at year-end for the term of the lease. The present value of the minimum lease payments is $87,800, based on an interest rate of 8%.

As mentioned in the opening part of the Robatelli's Pizzeria case, there are now 53 locations throughout the greater Pittsburgh area. Each one of those restaurant locations employs a full-time store manager and varying numbers of kitchen staff, servers, and delivery staff. The kitchen staff, servers, and delivery staff vary between full-time and part-time status. There tend to be high rates of turnover, especially among the part-time staff. Robatelli's pays its employees on a weekly basis each Friday for the week ending on the previous Saturday. Employee paychecks include withholdings for federal taxes as well as state and local taxes applicable for the employee's residence. Employees may live in one of three states and over 25 municipalities that are included in the greater Pittsburgh regional area. All payroll accounting is handled by Robatelli's at its home office.

Each restaurant must also maintain various fixed assets in order to operate.Following is a general list of fixed assets for each store:

 Furniture and store fixtures, including tables, chairs, and built-in items such as shelving, counters, and booths

 Kitchen equipments, such as refrigerators, stoves, ovens, and dishwashing machines

 Computers Note that the number of each of these fixed assets maintained at each location varies, depending upon the size of the store. Also note that each member of the delivery staff uses his or her personal automobile (rather than a company-owned car) for customer deliveries.

In addition, the home office maintains the following types of fixed assets:

 Land and the office building

 Office furniture and fixtures

 Computers and other office equipment

 Telephone systems

Finally, fixed assets maintained at the commissary include the following:

 Fixtures, such as built-in cabinets and shelving

 Kitchen equipment

 Computers

 Delivery trucks

All fixed asset accounting is handled by Robatelli's at its home office.

Required:

Describe how you believe an efficient and effective system of fixed assets accounting should be organized at Robatelli's. Be sure to include the following issues in your response:

a. How should the fixed assets accounting department maintain control over fixed assets in the various restaurant locations?

b. How should IT systems be used in the fixed assets process?

Case study

Margaret is a 75 year old woman living in an aged care facility for residents with low-care needs. Margaret had polio as a young child and has one shortened leg requiring a built-up shoe. She also now has arthritis in her hands, back, hips and knees, which is making movement, transfers and balance difficult and painful. Margaret also has emphysema and requires oxygen via nasal tubes, medication via a nebuliser, tablets for her arthritis and she receives injections.

Following is a list of supports outlined on Margaret’s care plan.

Washing: Margaret can sit on a shower chair and independently wash the top half of her body, including genital area. She requires assistance to wash feet, legs and hair.

Margaret must be supervised and may need direction when stepping in and out of shower and transferring in and out of the shower chair.

She needs full assistance with drying herself, as she becomes breathless.

Dressing / undressing: Margaret needs assistance with dressing and undressing as she has difficulty moving and becomes breathless with exertion. She must have a built-up shoe on her left foot.

Grooming: Margaret likes to direct her own grooming and can do her make-up independently. She needs assistance with drying and styling her hair.

Nail care: Margaret needs regular monitoring and treatment for ingrown toenails and corns. She takes care of her fingernails independently.

Oral hygiene: Margaret has upper dentures and requires assistance to clean these and to open lids of cleaning fluid and containers.

Mobility: Margaret uses a four-wheeled walker at all times.

Transfer: Margaret requires direction to use handrails and chair arms, to transfer in and out of chairs.

Toileting: Margaret can use the toilet independently but wears incontinence padding due to difficulty getting to the bathroom in time, which results in occasional leakage.

Eating and drinking: Margaret has all meals in the facility dining room. She requires modified large-handled cutlery due to arthritis in hands.

Question

20.Outline what duty-of-care obligations the support worker has to Margaret.

22.Outline a procedure for a support worker to follow when Margaret is washing.