Question

Question: Discuss the impact of each idea on TED’s future operational and financial performance.

TED Management's Ideas to Increase Projected Operating Income • Offer incentives to entice customers to order product that they would ordinarily order during the first quarter of next year before year end this year (i.e., entice customers to "shift" some of their planned purchases of TED product from next year to this year). These incentives include "bill and hold” terms, where TED bills the customer for product that TED will hold in their warehouses until the first quarter of next year, at which point the product will be shipped to customers. TED would recognize these sales in 2016. In addition, if customers are willing to take delivery of additional product before year-end, TED will offer to "buy back" unsold product from their customers at cost in 2017. Increase production to spread fixed overhead costs over more inventory units, increasing the amount of overhead that is capitalized as part of the cost of the inventory on hand at 12/31, and reducing the amount of overhead that is included in COGS for the current period. • Reschedule routine year-end maintenance usually performed by 12/31 to January 2017. • Classify repair expenses for non-production machinery as additions/replacements that should be capitalized. • Temporarily loosen the credit approval process to allow orders from “marginal” customers, without increasing bad debt expense and the allowance for doubtful accounts. • Reduce the bad debt expense percent toward the lower end of the estimated tolerable range of 1 percent to 4 percent of sales. • Extend depreciable lives for certain pieces of equipment. • Cut Advertising and/or R&D spending in the last two months of the fiscal year.

Answer 1

Answering the first 4 parts as per answering guidelines. Kindly ask rest of the parts separately.

As there is some information gap, I am assuming that current year is 2016 in the question.

Impact on future operational and financial performance would be:

1. Offer incentives….

By doing this, the company is booking the sales in 2016, which will normally materialize in 2017. The sales of 2017 will automatically reduce as the company is not attracting new customers, but just encouraging the existing customers to prepone the purchases from next year to current year. The holding cost would increase for the company for the goods held in the warehouse. So income for current year will increase but income for next year will decrease by the same amount.

‘Buy-back’ scheme may be a tricky scheme for the company as the bought back products would be difficult for the company to dispose off and payment of cost to the customers would drain the cash resources when payment is to be made.

2. Increase production…

The increase in production would incur additional costs for the company, which may be added to closing stock and hence would not affect the profits. But holding costs for the inventory would increase, and may risk goods getting obsolete, expire or get damaged. This would increase the holding costs for the company in coming years and reduce the profits.

3. Reschedule routine…

The postponement of maintenance affects the efficiency and life of the machinery. This will impact the profits of the company in the coming years, by increasing the costs.

4. Classify repair….

This is ethically not correct. But even if the company decides to do this, it will shift the expenses which should be booked in the current year to coming years and would be expensed off with normal depreciation slowly. So profits of coming years will reduce.