This document summarizes the financial reporting environment and two key issues facing a company. It provides projected financial statements for 2016-2018 showing increasing sales and profits. Outsourcing production to a partner company could save costs but requires a 5-year commitment. The company's current information system, eSel, is prone to crashes and lacks security, but a new system will be available in 3 months. In conclusion, the document recommends outsourcing production and maintaining strict internal controls while continuing to use eSel temporarily until the new system is ready.

1. Post-Acquisition
Transition Team
Ecaterina Smirnov, Kody Leung,
Shubhangi Vashisht, Ye Na Lee

2. Introduction to Case

3. Executive Summary
• Overview of Financial Reporting Environment
• Statement of Cash Flows projected for next 3 years
• Payback Period
• Issue #1: Outsourcing to Ritenow Co.
• Pros + Cons of Outsourcing
• Issue #2: Information System
• Weaknesses of eSel
• Potential Solution
• Conclusion

4. Overview of Financial Reporting Environment
• Role – Advisors from Oscar, Martin, and Gunn LLP (OMG)
• Users – bank, shareholders, RN Co., MF Investments Ltd.
• Constraint – ASPE but turning to IFRS

5. 2017 2018
Sales $ 8,552,750.00 $ 8,888,025.00
GM $ 3,308,209.43 $ 3,463,228.95
Expenses
Design&Eng $ 273,700.00 $ 273,700.00
SB $ 1,090,000.00 $ 1,090,000.00
Sales $ 25,887.50 $ 16,763.75
AP $ 342,110.00 $ 355,521.00
GA $ 427,637.50 $ 444,401.25
consult $ 325,000.00 $ 325,000.00
Income before
tax $ 823,874.43 $ 957,842.95
income after tax $ 605,547.70 $ 704,014.57

6. Statement of Cash Flows 2016-2018
2016 2017 2018
Net Income 651,000.00 605,547.70 704,014.57
adjust for non cash
ammortization 279,000.00 279,000.00 279,000.00
Interest Payable 120,000.00 120,000.00 120,000.00
Net increase operating 810,000.00 764,547.70 863,014.57 2,437,562.27
Investing Activities
Financing activities
issue shares 5,000,000.00 - - 1
bank loan 1,500,000.00 - - 2
Increase in financing 3
7,310,000.00 764,547.70 863,014.57

7. Payback Period
payback schedule
-1125000
810,000.00 - 315,000.00
764,547.70 449,547.70 1.41 years to payback
863,014.57

8. Issue #1: Outsourcing
• Salaries and benefits – major expense on projected I/S
• Could be lowered by outsourcing  minimize
• Current year production + sales: 9000 units
• Projected year production + sales: 11,500 units
• Product price per unit: $520.83

9. If Outsource to RN Co.
• Unit cost of production/cost of outsourcing = $210
• Projected total cost of outsourcing = $210 x 11,500 = $2,415,000
• Pay transportation fees for metal stamping operations in Mexico
• Still pay indirect labor: $205,000 regardless of # units produced
• 70% of annual purchase volume = $210 x 11,500 x 0.7 = $1,690,500
• Auditor costs
• Fixed overhead costs and indirect labor remain same, variable costs eliminated
• Unit Contribution Margin = $310.83

10. If not outsourcing
• Total cost of production = materials + direct and indirect labor +
manufacturing overhead = $2,340,000
• Unit cost of production = $260 (based on 9,000 units)
• Projected production cost = $260 x 11,500 = $2,990,000
• Unit Contribution Margin = $260.83
• Conclusion: save more by outsourcing

11. Pros to Outsourcing
• Proven to be leaders in industry
• Location benefits
• Same direct labor force
• Meets volume commitment – no shortage
• Reconfiguration of obsolete machinery

12. Cons of Outsourcing
• Contract constraint – 5 years of commitment
• Could possibly be a cheaper alternative
• Royalty to Mike based on snowblower patents
• Still pay fixed expenses
• Forced to produce up to cap of 12,000 units

13. Contingency Plan
• Outsourcing: if sales grow beyond 12,000  overtime premium 25%
• 2% increase due to inflation  12,697 units by 5th year
• Renegotiate at the end of contract: offer higher price for more production
• Direct labor increases from $785,000 to $981,250

14. Issue #2: Information System
• eSel operating under Terry Battie
• Multiple functions system is responsible for  heavy reliance on system
• Lack of maintenance staff
• Increase importance in training programs to staffs

15. Weaknesses of eSel
• Prone to system crashes
• Poor userID and passwords
• Manipulation of commissions and sales records
• Unauthorized returns
• Overall, poor internal control

16. Potential Solution
• Hire more fixers/maintenance staff
• Currently heavily reliant on Terry to fix eSel when crashes occur
• 3 months until new IT system is available for use
• Makeshift information system would be a hassle to learn how to use
• Only administrative staff can edit sales records

17. Conclusion
• Outsource the Bildsom products to RN for the next 5 years
• Negotiate subsequent years for higher production volume
• Vigorous internal control - sales people can’t edit invoices
• Continue using eSel temporary term of 3 months
• Hire more fixing admin staff

18. Questions?