Read the case: Hayya Football Company (Information below)
Required:
Assuming you are the financial controller who has been employed by the management of Hayya Co. to present solutions of the issues facing the company. You are required to write a report to Mr. Khalid Yaseen (President of the company) addressing the issues shown below.
Your report should contain:
(a) Group assessment cover sheet.
(i) To be signed by all members of the group.
(b) A separate title page (not included in page limit): The title page must include your team members’ full names and student ID numbers.
(c) A maximum of 7 pages of text covering all of the requirements set out in the assignment parts (1 to 3 below), excluding the title page, reference list, and appendices:
(i) Please use Times New Roman, 12 font in double spaced, and minimum of 2cm on each margin for the body of the report.
(ii) The excel file that shows all the calculations including the formula used for these calculations.
(d) Appendices which report all your calculations and reference list. Please use external references instead of the book.
Hayya Football Company
Hayya is a football accessories manufacturer, headquartered in Lusail, Doha. The company manufactures football related products and accessories. The company uses a traditional costing system to account for the manufacturing costs of the company’s main products. The company allocates total manufacturing overhead of $6,000,000 to four products using a manufacturing overhead rate based on total direct labor cost. That is, the manufacturing overhead cost for each product is determined by multiplying the direct labor cost of each product by the manufacturing overhead rate.
Part 1: The manufacturing cost of the traditional football
The president of the company Mr. Khalid Yaseen has been showing concerns lately with respect to the profitability of the main product (traditional football) because of the increase in its Manufacturing overhead related costs which is over than 150 QR per unit. The president thinks that pricing the traditional football above its full cost of 265 would lead to a drop in the market share as competitors with similar specifications are priced aroud 250QR. The president has hired you as a new financial controller, who holds a Certified Management Accountant (CMA) certificate to assess the profitability of each product before eliminating the traditional football product.
On the first week you requested the Management and Cost Accounting Department to provide you with additional data related to the four products. Additional data summarizes the direct costs, cost drivers of the overhead categories and the number of units produced:
Goalkeeper Gloves Goal Nets Training supplies Traditional Football
Units Produced 1,200 1,300 1,300 20,000
Direct Material Cost 500,000$ 500,000$ 900,000$ 1,550,000$
Direct Labor Cost $200,000 $300,000 250,000$ $750,000
Overhead Categories
Purchase orders written 180 40 130 50
No. of production run setups 200 407 445 355
Material movements 980 460 926 420
Machine hours 10,500 3,500 28,000 28,000
Design hours 990 345 980 805
Inspection hours 1,520 990 1,540 1,450
On the first week of your work, the management and cost accounting department provided you with the following table summarizing manufacturing overhead categories and their associated costs:
Purchasing $ 2,062,000
Machine Setups for productions runs $ 703,500
Material Movements $ 696,500
Machinery $ 658,000
Design $ 780,000
Inspection $ 1,100,000
Total $ 6,000,000
After reviewing the information in the above tables, you surprised to find out that the company has been implementing the traditional costing system even though manufacturing overhead has been driven by several activities. You tried to talk to the president not to dropp the traditional football product by explaining that the current costing system of the company is inadequate. You further explained that the traditional football product could be more profitable than what it seems under the traditional costing system. You advised the president to use a more accurate costing system that assigns overhead costs to activities and then assigns the costs to the four main products based on usage of the activities. The president showed interest in the suggested method and subsequently asked you to prepare a report summarizing the cost per unit for each product accordingly.
Required:
a) Prepare a report to Mr. Khalid that shows the calculations of the cost per unit for each product under the traditional costing system (10%)
b) Prepare a report to Mr. Khalid that shows the calculations of the cost per unit for each product under and the suggested costing system (ABC). (30%)
c) Explain the meaning of overcosted products and undercosted by using the given cost information in Hayya company. (5%)
d) Write your recommendations to Mr. Khalid assuming he is going to sell to the market at cost plus 20% as a profit margin. (5%)
e) Lastly, explain how the new costing system suggested by you improves the accuracy of reported cost of individual models compared to the old costing system. (5%)
Section Two: Product Pricing and Performance Metrics
Mr. Khaled, The general manager of the company, was impressed by your experience as the financial comptroller. He has requested to meet with you to discuss the new selling prices for each of the company products based on your report on the unit cost under the new costing system (see Section 1). Write your recommendations in detail to Mr. Khaled assuming that he is considering selling the company products to the market at the “cost plus 20% profit margin”. You have been informed that the invested capital is $5,500,000 for each of the goalkeeper’s gloves and goal nets, and $2,500,000 for each of the training equipments and the traditional footballs. The required 15% return on investment for all products has been reached. The general manager has asked to increase the price by 2% and to allocate that amount for product development as they are planning to bring in new machines that possess technological capabilities while helping to preserve the sustainable environment. Mr. Khalid has also informed you that all units produced are expected to be sold by the end of this year. Based on the abovementioned information, you have been asked to help Mr. Khalid to set the target prices for each of the four products.
Required:
(a) Calculate the target prices that should be charged to each product according to the proposed pricing plan, knowing that the company has started to adopt the activity-based costing method to determine the cost per unit. (20%)
(b) Calculate the profit margin as a percentage of the total cost of each product. (5%)
(c) Calculate profit as a percentage of sales (i.e. return on sales). Which of the two performance measures (i.e profit as a percentage of cost, or profit as a percentage of sales) is better for the company as a basis for evaluating products? Discuss the reason behind your choice. (5%)
Section Three: (Sustainability)
Assume that your growing interest in the surrounding environment and your strong belief in taking advantage of the available natural resources have motivated you to initiate a talk with the production engineer of Haya on how to set up a project that serves sustainability. You have noticed that the electricity bill had reached $200,000 with the presence of unutilized large areas on the top of the the factory roofs that can be used for a solar system to reduce the electricity bill. After contacting the “contractor” company that installs the solar system services, and after studying the company’s financial position, we learned the following:
• Electricity costs are expected to increase in the coming years by up to 5% annually.
• The space necessary for installing the solar system is available and can be utilized for that solar project without affecting the current production processes of the factory.
• The payback period for this project is 3 years and the costs of the project reach $600,000 and are payable over two years.
Required:
(a) Prepare a summarized management report advising on the adoption of this solar system project. The report should highlight the anticipated financial and non-financial benefits. (15%)
