Bragan Manufacturing Ltd.

Overview

Case: Bragan Manufacturing Ltd. (BML)

Short Cycle Process

Who: Bill Bragan, Owner of Bragan Manufacturing Ltd; Paul Profit, the controller; Jim Marshall, CMA Consultant.

When: June 1987

Where: Canada

Case Analysis

ISSUES: 

• To buy or keep leasing the equipment, as no debt would show up on the balance sheet.
• Lease is too expensive.
• To report or not record US sales separate from Canadian sales.
• Whether BML should hire an internal auditor to minimize risks.

MANAGEMENT ACCOUNTING/BUSINESS CONCEPT:  Operating and capital leases.

ANALYSIS:

• Lease of equipment should be classified as capital lease.
• Lease has a purchase option at the end of five years; Present Value (PV) of lease payment (pmt) is $289,599.91, excess of the fair value of the equipment. Cost of lease for five years would be $445,000 and to purchase it, it would cost $300,000.
• Lease should be recorded as an asset and a liability, as a liability it will show as a debt.
• Supervisor costs have been added as a variable cost, which should be a fixed cost as the supervisor is paid a salary regardless of the amount of units produced.
• External auditor looks at risks once a year, which could be too late. With BML rapidly expanding it is important that these risks be continuously managed.
• It is important to maintain separate records for US sale and Canadian sales, due to the fluctuation in the foreign exchange rate. If separate records aren’t kept then sales could be overstated or understated if US dollar depreciated or appreciated in respect to the Canadian dollar.
• It is important to track customer preferences as well as growth opportunities within the US market.

RECOMMENDATIONS:

• Should take option 2, adjusted profitability analysis. It has the highest projected profit of $21,000.
• BML should hire an internal auditor.
• Report the US sales.
• In order to get a more reasonable projection, the company should apply a weighted-average method, which will take all the probabilities of occurrence into consideration.
• Supervisor’s salary should be recorded as a fixed cost.
• BML should buy the equipment instead of leasing.

ACTION PLAN:

• BML should purchase the equipment at the current list price.
• BML should keep separate records of US sales to better monitor its performance.
• Hire an internal auditor to better manage and improve its internal controls and minimize risks as soon as possible.