Accept Don Bell’s Proposal but Include Environmental Costs

Mini Case #1

Baska Ltd.

Student Name

Student Number

Course Number, Section

Due Date

Memo

To:        Rob Keen, President Baska, Ltd.

From:        Student Name, Consultant

Date:        December, 2013

Re:        Accept Don Bell’s proposal but include environmental costs

I recommend that Baska, Ltd. accept Don Bell’s proposal to reduce variable costs by switching raw materials and changing the production process but the proposal must be updated to include potential environmental costs. Mr. Bell’s proposal increases the Company’s annual profitability by $480,000 from a loss of $220,000 to a profit of $260,000, which addresses Baska’s issue of operating at a loss, which will eventually lead to closing the Company and laying off the employees.

I analysed the three alternatives of a) accepting Mr. Bell’s proposal as is, b) accepting the proposal but with environment costs included to better show your stakeholders the true picture, and c) finding alternative ways to improve your 2014 operating income.  

The quantitative analysis shows that it would be most profitable to make the raw material change. However, the report also points out that the new raw materials are damaging to the environment and that, ethically, related costs should be included. Not being transparent to the Company’s stakeholders could seriously damage Baska’s reputation. It is my recommendation to make this change only if we can quantify and include the potential environmental costs in Don’s analysis.

I trust you will find this report helpful for making the decision about the raw materials and operations at Baska Ltd. If you have any questions about the information contained in the report, please contact me at student@kpu.ca or at xxx-xxx-xxxx.

Introduction

This report outlines background information that is relevant to the analysis, identifies the issues and alternatives, qualitatively and quantitatively assesses each alternative and makes recommendations.  All relevant calculations and tables can be found in the Appendices.

Background Information

Baska manufactures lenses for webcams in a competitive environment.  It had an operating loss of $220,000 in fiscal 2013 and breakeven revenues of $8,478,261 (see Exhibit 1). Employees are concerned about their job security and competitors have already made the switch to the environmentally damaging raw material.  

Alternatives

Don Bell has suggested that Baska switch raw materials and alter the production process to reduce variable costs to 48% of revenues.  However, Clair Watson, Controller, believes a key piece of information is missing from Don’s proposal; potential environmental liabilities caused by the toxic raw material.  The company has three alternatives: