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ACCT 356v9: Assignment 2 Credit Weight: 15% of your final grade Due Date: After completing Lesson 11 Scope: Covers Lessons 6–11 Part 1: Case: Sustainability (30 marks) Part 2: Performance Evaluation (20 marks) Part 3: Customer Profitability Analysis (20 marks) Part 4: Probabilities (20 marks) Part 5: Nonprofits (10 marks) Part 1: Case: Sustainability (30 marks) Amazon is the largest internet-based retailer in North America. Amazon started as a book seller but quickly expanded into other household items such as electronics, entertainment, furniture, home décor, beauty, and other retail items. Amazon sells goods directly to consumers and, in Canada, ships its products from warehouses across the country. In addition to direct sales, however, Amazon also offers its platform as a place where third-party retailers can list and sell their products. Shipping for these third-party sales may be handled by the external retailer, not Amazon. This means that items in a consumer’s shopping cart may be shipped by multiple shippers. It is not uncommon for an order of five items ordered through Amazon at one time, for example, to arrive as five separate packages from five different locations. Amazon Prime is a subscription service offered through Amazon that covers all shipping fees. Customers pay an annual fee that includes shipping and other customer perks like media streaming. Required: 1. What are the “business cases” for implementing sustainability practices at Amazon? Your Lesson 6 reading (Whelan, T., & Fink, C. The comprehensive business case for sustainability) discusses the business cases for implementing sustainability practices. Describe at least five reasons why sustainability would be advantageous to Amazon’s business. Discuss why each reason would be beneficial for Amazon specifically. (10 marks) 2. Discuss five challenges that Amazon might encounter with implementing sustainability practices. (10 marks) 3. Looking at Amazon’s sustainability report for the most current year, answer the following: Discuss three areas of sustainability that Amazon does well. (6 marks) Discuss two areas that Amazon could improve on in terms of its triple bottom line. (4 marks) *Do not forget to provide references and citations (using APA) if you cite external information. Part 2: Performance Evaluation (20 marks) Hightech Industries specializes in manufacturing medical equipment, a field that has become increasingly competitive. Last year, Pedro Rodriguez, president of Hightech, decided to revise the bonus plan (based entirely on operating income at the time) to encourage division managers to focus on areas that were important to customers and that added value without increasing cost. In addition to introducing a profitability incentive, the revised plan includes incentives for reduced rework costs, reduced sales returns, and on-time deliveries. The company’s new plan calculates and awards bonuses semi-annually on the following basis: a base bonus is calculated at 2% of operating income; this amount is then adjusted by the following factors related to rework, deliveries, and sales returns: Rework The bonus is reduced by excess of rework costs above 2% of operating income No adjustment is made if rework costs are less than or equal to 2% of operating income. Deliveries The bonus is increased by $4,000 if more than 98% of deliveries are on time and by $1,500 if 96–98% of deliveries are on time. No adjustment is made if on-time deliveries are below 96%. Sales Returns The bonus is increased by $2,500 if sales returns are less than or equal to 1.5% of sales. The bonus is decreased by 50% if sales returns are over 1.5% of sales. Note: If the calculation of the bonus results in a negative amount for a period, the manager simply receives no bonus, and the negative amount does not carry forward to the next period. Results for Hightech’s West and East divisions for 2021, the first year under the new bonus plan, follow. In 2020, under the old bonus plan, the West Division manager earned a bonus of $20,295 and the East division manager a bonus of $15,830 based on 2% of revenues. The old bonus plan did not adjust for rework, on-time deliveries, or sales returns. West Division East Division Jan-Jun 2021 Jul-Dec 2021 Jan-Jun 2021 Jul-Dec 2021 Revenues $3,150,000 $3,300,000 $2,137,500 $2,175,000 Operating income $346,500 $330,000 $256,500 $304,500 On-time delivery 95.4% 97.3% 98.2% 94.6% Rework costs $8,625 $8,250 $4,500 $6,000 Sales returns $63,000 $52,500 $33,560 $31,875 Required 1. Why is revenue alone not an ideal measure of performance? What specifically about the revised performance measures compels the managers of the East and West divisions to pursue the company’s goals? (6 marks) 2. Calculate the semi-annual bonuses earned by each manager for each six-month period and in total for the 2021 year. (10 marks) 3. The managers were not advised of the new plan until after their first bonus in June 2021. What effect did the change in the bonus plan have on each manager’s actual behaviour in the second half of 2021? What changes, if any, would you make to the new bonus plan? (4 marks) Part 3: Customer Profitability Analysis (20 marks) Mark’s Comedy Emporium provides entertainment for birthday parties. Over the last year Mark’s has entertained at over 150 birthday parties and it seems the Mark’s business is booming! Customers generally must book six to eight months in advance to secure a spot, and the company has parties booked solid for the next six months. Business is busy, customers are extremely happy, and employees are happy, but Mark is barely breaking even. He cannot understand, with his business being so successful, why he is barely able to pay himself a wage. Mark has asked you to help him figure out what he is doing wrong. The services provided at each party vary. Some customers only want a clown to perform, and they handle the other party details themselves. Other customers want a full package—clown, food, cake, entertainment, cleanup, party favours, decorations, and costumes for the kids. Mark’s can provide the following services at a party: Clown: Most parties include a clown who performs for one hour at the party. Mark pays a clown $40 per party. Food (excluding cake): When customers order food for their party through Mark’s, he outsources this service to Carl’s Catering. Carl charges an average of $12 per child for food. Cake: Mark sources birthday cakes through his sister, Sarah, who runs a small bakery and makes custom cakes for Mark’s. Her smallest cake is 8” in diameter (serves up to 10 kids) and costs $40. She also makes a 10” cake for $60 (serves up to 20 kids). Cleanup: Mark’s provides cleanup service. Cleaning staff are paid $15 per hour, and cleanup averages two hours per 20 kids. Cleanup is a variable cost based on number of kids attending the party. Party favours: Party favour bags can also be ordered through Mark’s. These cost $5 per bag to assemble. Decorations: Mark’s will also fully decorate a party. Decorating staff are paid $15 per hour, and it takes one hour to decorate a party for 20 kids. Decorations cost an average of $50 for party of 20 kids. Decorating staff and decorations are fully variable based on the number of kids. Costumes. Mark’s also provides costumes for parties so that kids can dress up based on a theme. On average, costumes cost $40 each and can be worn 25 times before they need to be replaced. Costumes are cleaned after each use at a cost of $5 each. Mark has set up a fee schedule for each service as follows: Service Fee charged to customer Clown $60 per party Food $15 per child Cake $2 per child Cleanup $2 per child Party favours $6 per child Decorations $2 per child Costumes $6 per child In a two-week period, Mark catered six parties with the following services: Customer 1 2 3 4 5 6 # of kids attended 20 25 45 15 5 12 Clown Y Y Y Y N Y Food services Y Y N N Y N Cake Y N N Y Y N Cleanup Y Y N N Y N Party favours Y Y N N Y N Decorations Y Y Y N Y N Costumes N N Y N Y N Required 1. Calculate the customer-level operating income for each customer by preparing a customer profitability analysis. Rank the customers according to profitability. (10 marks) 2. Mark would like to earn a return of 50% on costs. What price should he have charged per child for each customer to earn a 50% return on costs? How does this compare the original fee he charged per child? What are the main reasons for this variance? Create a new fee schedule for Mark’s based on your analysis. (10 marks) Part 4: Probabilities (20 marks) Jack Elementary has plans to build a new playground in 2021. The school received a $120,000 government grant to be used for building the playground. They hope to break ground in May 2021 and complete the project by the start of school in September. Before they can start the project, however, they must dismantle the existing playground that no longer meets current safety standards. They also plan to complete soil testing once the existing playground is dismantled, as several residential properties in the community have tested positive for soil contamination. Due to recent news articles, parents are concerned about the potential for soil contamination and are demanding a full test to ensure their kids are not playing on a contaminated playground. Rayna May, the principal, has compiled the following estimates for the new playground: Cost for dismantling existing equipment $22,000 Salvage value from selling the metal from existing equipment $7,000 Soil testing $18,000 New playground equipment $45,000 Cost of installation $16,000 Cost of resurfacing play area in rubber $55,000 Cost of landscaping (including $5,000 for gravel) $22,000 Cost of removing and replacing soil $73,000 The costs for installation, resurfacing, landscaping, and soil removal are the costs quoted by professional contractors. Ms. May was approached by the president of the student council, Jay Wong, who has volunteered the council’s time for installing and landscaping the new playground. This will save the school approximately $25,000 in costs and May has decided to accept this offer, as two of the council members who will be helping are journeymen carpenters. The school has two options for dealing with the potentially contaminated soil. The first option is to forgo the soil testing and simply resurface the play area with a poured-rubber matting that can cover the entire play surface. This will cost approximately $55,000—a significant portion of the playground budget. The other option is to perform the soil testing and address the outcome if needed. A municipal worker has estimated that there is a 40% chance that the soil is contaminated. If the soil proves to be contaminated, the school will either need to resurface the area with rubber matting for $55,000, or it can have the contaminated soil removed and replaced for $73,000 plus the cost of gravel. Rayna is wondering what they should do and has asked for your help. Required Prepare an analysis of the potential project costs for the following scenarios. Note: There is no need for gravel if the play area is resurfaced. However, if the soil is not contaminated or if they need to remove and replace the soil, the gravel will be needed. 1. Resurface the ground without testing the soil. (5 marks) 2. Complete the soil testing. In this case there are two options: a. Complete the soil testing and remove/replace the soil if contaminated. b. Complete the soil testing and resurface if contaminated. Use the probabilities provided by the municipal worker to determine a weighted cost for each of these outcomes. (10 marks) 3. What option would you recommend for the school? Why? What other non-financial considerations might you need to include in your decision? (5 marks) Part 5: Nonprofits (10 marks) The Peachland Research Centre is an agricultural research facility that is funded through provincial and federal grants. Most of the centre’s work is focused on developing new innovations that help produce higher yields in crops and better quality of food products. Recently the centre has become interested in biofuels. It plans to implement a new project that has the objective of growing switch grass, a crop that has potential to replace fossils and decrease dependence on them. In January 2020, the government has committed a one-time grant of $800,000 to the centre that will be restricted to purchasing land that will be used to produce biofuels. With this grant, the centre is planning to purchase a 200-acre plot of land for growing switch grass. They have estimated that they will require three workers to clear, plant, maintain, and harvest the crop. They anticipate that they will need these additional staff for eight months of the year. The staffing costs will be approximately $15 per hour for approximately eight hours per day, 20 days per month. Other costs will include seeds, water, and utilities at $3 per tonne, while accumulated depreciation on the equipment will total $10,000. Once the crop has been harvested, they will send the grass to a facility that will manufacture fuel pellets. This will cost the centre approximately $10 per tonne of grass. Each acre that is planted is expected to return two tonnes of switch grass. Once the fuel pellets are produced, the organization is planning to sell the pellets to local homeowners who have converted their standard gas furnaces to pellet furnaces. It is estimated that approximately two acres of switch grass will be required to heat an average-sized home for the winter. The cost to the homeowners will be $100 per tonne of grass. Marty McGuire, the director of the Peachland Research Centre, has asked you to provide an overall budget for this venture. He is hoping that your report will support his belief that this project is viable and will be self-sustaining. He tells you that it is very important for the project to support itself through the sale of pellets. Required 1. Prepare a budget for the project. Does this appear to be a viable venture for the Peachland Research Centre? What changes, if any, need to be made to improve the project’s viability? (7 marks) 2. Every project comes with a degree of risk. What are the specific risks associated with this venture, and how can the centre mitigate these risks? (3 marks) ACCT 356v9 Assignment 2 7 © Athabasca University June 10, 2021