dividually students will develop a formal response to theproblem(s) posed in the case, addressing the following areas withinthe analysis, and using the same headings. (Numbers in brackets donot necessarily correspond to length but represent the weight thatwill be given to each section in the grading):

1. Issue Identification (5%): Identification ofthe problem/issue that must be resolved or decision that must bemade. Phrase the problem/cause in the most succinct way possible.Think about:
   1. Differentiating the immediate from the basic problem
   2. The implications of the problem(s)
   3. Identifying the root cause of the problem(s)
   4. Determining the decision facing the key person(s)?
2. Identification of Key Success Factors (10%):Identify the company-specific factors in point form that areabsolutely critical to the success of the organization. These arethe factors that, if ignored, will mean the project will probablyfail. Include the following considerations:
   1. What factors must be managed successfully for the company toprosper?
   2. Key success factors should reflect the top priorities of theorganization in this particular case (eg., quality, productivity,low cost leader, etc.)
   3. These factors are part of the criteria against which you willevaluate solutions (along with basic criteria such as profit)
3. Identification of Alternatives (5%): Identifyalternative solutions. Only deal with feasible alternatives. In thenext three sections, analyse all alternatives against criteria setout in key success factors and basic requirements (eg.,profitability).
4. Quantitative Analysis (40%): Push numbers inan analysis that is relevant to the issue at hand. Differentiatebetween what is relevant and what is irrelevant.
5. Qualitative Analysis (30%): Be sure to analyzequalitative issues – they need discussion in most cases. Inparticular, analyze alternatives in light of key success factors –will this alternative solve the problem and fit with our keysuccess factors.
6. Recommendation on Course of Action (5%): Stateyour recommendation. State briefly the justification for yourrecommended course of action. Make sure your recommendation flowsout of your quantitative and qualitative analyses. Tie yourrecommendation back to the key success factors. The solution andimplementation shout fit with problems and criteria identifiedabove.
7. Circumvention of Potential Problems (5%): Ifthere could be problems with your recommendations, state them. Aswell, suggest ways to overcome these problems – a contingency planto address potential difficulties.

There is no set length to the report, but clear, succinct andconcise language and organization will be considered favourably inthe grade.

Students will submit the final report as a word document throughthe submission link below.

The Case

You are a Senior Consultant for the professional service firm,BUSI 2083 LLP. Your firm specializes in providing a wide variety ofinternal business solutions for different clients. It is your finalweek on the job and a Manager asks you for some help prior to yourdeparture. Eager to leaving a lasting impression, you start readingthe background information provided by the Manager.

Lesley Donovan is the controller for the East division ofExplorer Ltd. Jason Conner, head of plant engineering, has justleft Donovan’s office after presenting three alternatives forsubmission in the capital expenditure budget for the fiscal year2014. The budget is due to the CEO in two days and thereforeDonovan realizes that time is of the essence.

Conner has outlined the following alternatives to replace anoutdated milling machine:

1. build a general purpose milling machine;
2. buy a special purpose numerically controlled milling machine;or
3. buy a general purpose milling machine.

Explorer Ltd. is a well-established company. The company was setup about 30 years ago by two brothers Dan and Kevin Thompson, inHuntsville, Ontario, to produce accessories for the automobileindustry. The Central division continues to serve the autoindustry, and is the largest division in the company with sales of$35 million annually. Dan’s son is now head of this division. Kevinis still active in the company and is the Chief Executive Officer(CEO). His office is located in Toronto.

The parts division supplies seals to the mining andpetrochemical industry from a plant in Toronto. This division isonly ten years old and until 2010 was highly profitable. As aresult of the downturn in the sector of the economy, sales in 2012were only $12 million.

The East division, located in Scarborough, is the engineeringdivision. Full-time employees tend to work approximately 2,000hours in the division. Regular product lines include industrialfans, industrial cooling units, and refrigeration units forindustrial users. The division is highly capital-intensive andsales tend to be directly related to general economicconditions.

Each division runs independently and performance is based uponbudgeted return on investment. Bonuses are paid if the budgettarget is achieved. Annually, each division prepares a detailedbudget submission to Kevin, outlining expected profit performanceand capital expenditure requests. The milling machine proposal ispart of the capital expenditure request.

The 2013 pro forma income statement for East division is set outbelow:

Sales	$22,364,000
Cost of Goods Sold	$14,760,240
Gross Profit	$7,603,760
Selling and General Administrative Costs	$3,578,760
Allocated Costs (based on sales)	$1,677,300
Income Before Income Taxes	$2,347,700
Return on Sales – 10.5%
Return on Investment – 8.5%
Investment (Historical Cost)	$27,626,118

Jason Connor has pointed out to Donovan that the existingmachine is not only outdated but maintenance costs are becomingprohibitive. Jason also noted that maintenance costs of new generalpurpose machines are only $26,000 while special purpose machinescan save an additional $14,000 in maintenance. Also there would bea significant savings in insurance as the price for a generalpurpose machine would drop to $3,000 while a special purposemachine would be 67% higher than the general purpose machine. Themachine has no market or salvage value and he is sure that its bookvalue is now zero. The trouble is that he doesn’t know whichproposal is best for the company. In addition to the cost andrevenue date provided, Connor provided comments on each alternativebelow:

1. Build a general purpose machine:
   • This machine can be built by East division. The division isbelow capacity at present as a major contract has just beencompleted. The division could thus produce the machine withoutaffecting revenue-producing activity, but it will take six monthsto complete. The machine is expected to last five years and have nosalvage value because removal costs will probably equal sellingprice.
   • Connor believes that the division has the technical expertiseto undertake the work. In 2012, the division produced a specializeddrilling machine that has proven very successful. Connor pointedout that David Williams, chief engineer, loves the design challengeof new machines. Donovan sat down with Connor and produced thefollowing cost estimates:

   Material and parts	$55,000
   Direct labour (DL$)	$90,000
   Variable overhead (50% of DL$)	$45,000
   Fixed overhead (25% of DL$)	$22,500
   TOTAL	$212,500

   • Donovan argues that this job should also bear a proportion ofadministrative costs; she suggests $12,000.
2. Buy a special purpose machine:
   
   The advantage of this special purpose machine is that only oneoperator is required and output per hour could increase by 25%. Inaddition, maintenance costs are significantly reduced becausemicrochip circuitry is employed.
   
   Connor points out that this machine is state-of-the-art and wouldprobably mean that new work could be taken on. A numericallycontrolled machine required extensive training of operators. Intotal, 26 weeks are spent in the supplier’s factory located inFlorida. While the training is going on, the supplier provides anoperator to work the machine without charge. Expected costs of thistraining period including hotel, per diem, and travel will cost$3,000 per week, excluding the operator’s labour which is set at$15 per hour.
   
   The machine costs $625,000, and the supplier guarantees the salvagevalue of $25,000 at the end of five years. It is availableimmediately. It is estimated the machine can generate sales of$243,750 annually at full capacity and require $19,500 in directmaterials cost. While the direct material costs are equivalent, thelevel of sales for the general purpose machine are $48,000 lowerthan the special purpose machine.
3. Buy a general purpose machine:
   
   The purchase price of this machine is $295,000 and cost levelsassociated with the machine are expected to be the same as thegeneral purpose machine built by the company because the technologyis similar. The salvage value of the machine net of removal costs,is estimated to be $5,000 in five years. It can be deliveredimmediately.

General comments

The required rate of return for this investment class has beenset at 8% by Kevin Thompson.

Required

Prepare the budget submission to Kevin. .