Accounting – Resubmission Paper

The accounting paper consists of two parts:

 

Baklava Done Better (Rawashdeh & Escamilla, 2018)

Baklava Done Better LLC (BDB) incorporated in Dubai in 2013 by five members of the Kachab family whom all became shareholders. The focus of the business was importing raw ingredients to sell to GCC producers/retailers of Middle Eastern sweets including baklava, maamoul, deblah, and makroud among others. After five years of continuous success, BDB faced a major disruption in the supply of its key ingredient: agave. The agave-base syrup BDB introduced was what made them so successful. With this issue on hand, BDB needs now to decide how to best balance its production to maximize its profits.

Product Innovation History

BDB market research shown that there was an opportunity to introduce the natural and organic trend to the Middle Eastern sweets category. After doing several iterations of consumer tasting samples and perfecting their formula, they launched an “Agave” based syrup to substitute the traditional refined-sugar-cane syrup. For the first two years, the “Agave” syrup was the only product they manufactured generating sufficient profits.

While organically grown, the “Agave” syrup had more calories than the traditional syrup. However, clients of BDB reported that the “Agave” syrup had increased the shelf life of their sweets, which in turn decreased losses on the expired product. BDB’s clients were happy with the “Agave” innovation but wanted a product lower in caloric intake. After several months of trials, BDB was able to refine the agave in a different way hence reducing the number of calories in the product. In 2015, “Agave Light” was introduced and product “Agave Super Light” was added the following year.

These lighter versions of the products were more expensive. Hence not all existing BDB clients adopted them. Rather, other sweets manufacture – first reluctant to adopt a higher caloric raw ingredient – started buying the “Light” and “Super Light” versions. Overall, both lighter versions were an overwhelming success, and BDB’s demand for their products was constantly not met. i.e., their production capacity was enough to satisfy the demand for their agave-based sweeteners.

The Kachab family members were happy with their decision of launching such a heavy innovation business, in what many would consider a traditional homely category. All products were doing well, serving different segments and consumers tastes. There was virtually no overlap on the products due to its different tastes, calories and selling prices. In fact, whenever the next product was launched, it brought no cannibalization of sales of the previously existing products.

Furthermore, empowered by the “Agave” based syrups, Baklava producers were now selling their sweets outside of the Middle East, including securing five large container orders by Wal*Mart in the U.S.

The Kachab Family

Bilal Kachab had the original idea of revolutionizing the baklava sweets industry. As a child, he would spend the Summers at his grandmother’s house in Lebanon. Playing underneath the high table, he would catch and devour all ingredients falling into the floor while his grandmother handmade baklava sweets for her own shop. With his innate love for baklava, it was an obvious field of play to join once Bilal decided he wanted to have his own business. Bilal quit his business development job in the energy industry in October 2012 to pursue becoming an entrepreneur.

Bilal was ready to put the required sweet-equity into a start-up but lacked the funds to do so. He persuaded his aunt Sara and Sara’s husband to invest in the business. The couple was about to retire after having done significant savings and owning their own properties which they rented out. They both agreed to invest, provided that Bilal could produce a solid business plan. They also requested to be part of the management team involved in making strategic decisions. Furthermore, they also asked for their son Mahmoud Kachab – who had just graduated from a reputable Business School – to join the management team.

Bilal, now joined by Mahmoud, moved next to assess the baklava market. After talking with five of his childhood friends, Bilal learned that they had stopped eating baklava long ago because of concerns of ingesting refined cane sugar. Bilal was prone to make rushed decisions. For him, this anecdotal evidence was enough to conclude that a substitute of cane sugar was the solution to revive the baklava industry.

Mahmoud, on the other hand, wanted to do more thorough and extensive market research. Mahmoud was concerned that perhaps there were other reasons why baklava consumption was dropping. After several weeks of arguing, Mahmoud was given the green light by Bilal to do focus groups and surveys to learn more about baklava consumers and producers. Bilal always thought that doing more research was a waste of time and that Mahmoud’s obsession for conducting studies was a result of having become theoretically oriented while pursuing his Business post-graduate degree.

In parallel, and without waiting for Mahmoud’s findings, Bilal reached out to his cousin Abyr Khaled. She was a biologist who spent years studying the multiple uses and properties of Agave in Mexico. Abyr was then commissioned to start formulating an agave-based syrup using Bilal’s small kitchen in his one-bedroom apartment. After just two weeks, she found a recipe for an agave-based syrup that was well received among the extended Kachab family. They liked the taste. Bilal even thought it was better than this grandmother’s version!

While Mahmoud continued working on the market research, Bilal launched a quest to develop relationships with Middle Eastern baklava producers. Bilal had charisma when dealing with people. He was a very good listener and demonstrated genuine care for others. In a short time, Bilal had built rapport with most baklava producers in the region.

A few weeks later, Mahmoud concluded that the trend of organic and natural was growing among consumers and non-consumers of baklava. His study predicted an increase in sales if baklava were to adopt the labels of “Organic” and “Natural.” Mahmoud’s study also favored agave as the main ingredient to support the claim of “organic and natural baklava.” Bilal said: “I knew it, you just waisted time and burned some of our savings in doing that research.” Despite this comment, Mahmoud findings served as the input to prepare the business plan that would secure the funding from auntie Sara and husband.

By February 2013, Baklava Done Better LLC was incorporated in the Dubai Emirate with a capitalization of AED 3,000,000. And the rest is history. The income statement of the last quarter of 2017 is shown below:

Income Statement for last quarter of  2017
		AED
Forecasted sales		13,840,000.0
minus COGS		10,935,000.0
Gross margin		2,905,000.0
Admin expenses	830,000.0
Shipping expenses	465,300.0
Sales commission (5% of sales)	692,000.0
Financial expenses	74,000.0	2,061,300.0
Net Profit		843,700.0

 

Total number of units sold during quarter 4 of 2017 for all products were 106,500 units.

 

Family Compensation

Bilal – like a good salesperson – was aggressive and incentive oriented. To ensure that all family members would stay motivated and driving the business, Bilal persuaded the family to adopt a compensation scheme based on sales performance. Each family member was to receive a low salary, supplemented by an equal share of the total sales. The supplemental commission was set at 5% of the sales price on every unit sold.

Since the company had grown quickly and with higher success than expected, the quarterly budget was rudimentary. The Kachab family would make decisions of production based on gut feeling giving preference for the highest price item. Doing so provided the highest possible sales commission for the family members.

Mahmoud was by far the most methodic member, and he constantly sought to apply his learnings acquired during his Business studies. He opposed to the sales-based commission and preferred a profit-based incentive. He would refer to terms like “profit maximization,” “marginal analysis” and “product mix” which would be quickly disregarded by the Kachab family. The family always saw Mahmoud’s methods as unnecessary bureaucracy.  After all, BDB had a steady growing cash flow without the need of overcomplicating their planning process.

Despite this, Mahmoud would always produce a couple of spreadsheets to forecast the next quarter. He wanted to be assured that the current set of decisions would always generate a higher forecasted profit vs. the year ago. So far, all planning decisions from the Kachab family had – luckily – resulted in higher profits forecast and actuals.

The Sourcing Issue

The main ingredient of the flagship products of BDB became the agave which was imported from Mexico. Until recently agave was widely available, and it was a low-cost ingredient compared to the high price that the agave-based syrup was being sold to BDB’s clients. However, in December 2017, & due to a mudslide the roads & bridges from the fields were destroyed, and the supply of agave from the fields to the port will be disturbed for few months until the roads are fixed.

Abyr quickly traveled to Mexico to assess the situation. Upon her return she called for a meeting with the Kachab family and reported the following:

“I am afraid to inform you that there will be no agave for a while. The authorities estimated that it would be a few months before they can fix the roads. I managed to secure a couple of shipments of agave from a friend of mine, but it won’t be enough to meet our needs for the coming quarter. At most he will be able to provide us with AED 4,350,000 worth of agave (direct imported material) for the JFM 2018 quarter which is close to 50% of our needs”.

The family was devastated after hearing the news. Bilal recomposed himself and turned to Mahmoud and said: “Ok, my Business graduate cousin: this is your chance to shine. Walk us through the forecasts you always prepare, and we never want to look at.” Mahmoud quickly projected on the screen the following two tables:

Best profit estimate for the quarter JFM 2018
		AED
Forecasted sales		15,893,100.0
minus COGS		12,429,810.0
Gross margin		3,463,290.0
Admin expenses*	910,000.0
Shipping expenses**	525,500.0
Sales commission (5% of sales)	794,655.0
Financial expenses***	74,000.0	2,304,155.0
Budgeted net profit		1,159,135.0

 

*ADM expenses are fixed and were increased to include promotions & salary increases

** Shipping costs are mixed, and the variable portion is a function of the number of units shipped

*** Financial expenses are expected to remain the same. No change in the outstanding debt 

 

Production Schedule and Price/Cost Structure per Product
Amounts in AED	Agave	Agave	Agave
		Light	Super
			Light
Sales Price	85	135	160
Direct material (agave)	32	60	75
Direct labor and packing	14	28	18
Production overhead*	18	23	28

 

* Mahmoud has combined both fixed and variable expenses in production overhead. Mahmoud estimated the fixed overhead productions costs at AED 608,000 for the JFM 2018 quarter. He has then allocated these expenses proportionally to the number of units sold for each product.

The company maintains minimum levels of all types of inventory.

Additional processing time & any additional material/agent used for different products are reflected in the variable overhead costs

As the meeting continued, Mahmoud commented that given that the operation the Kachab family run was very lean there would be no place to cut costs. Direct material, packaging, and direct labor would remain the same at least in the short run. Similarly, production overhead won’t change: the variable portion will be incurred as we continue producing, and the fixed portion of overheads is already very optimized.

After a moment of silent, Mahmoud said: “Perhaps we could cut on our sales commission.” Bilal quickly objected and said: “No. We cannot touch the sales incentive. In these moments of crisis, we need it more. This will keep us motivated and in the right direction not to make a rush decision and for example, decide to cut prices. We must continue driving the top line”.

Mahmoud agreed with Bilal. However, he suggested they needed to come up with a limit of sales on each product.

Abyr then interjected and reminded the family that the agave orders she had secured were not enough to produce all three products simultaneously at the proposed quantities. She then also reminded them that since their three products were being purchased by very different segmented clients, cutting one of them out of supply could mean a permanent loss of a group of clients. She explained that all BDB clients should be constrained with the amount of agave-based syrup being supplied to them. Therefore, she proposed that at least 20,000 units should be produced for each of the three products.

Bilal agreed with Abyr’s proposal, and the rest of the family followed along. The meeting concluded with Mahmoud taking the task of reworking the forecasts based on these new constraints.

Your task

Assume the role of Mahmoud as the Business graduate expert in managerial accounting. Prepare a business report addressed to the BDB shareholders (the Kachab family) explaining with words (no more than 1,800) your findings and assumptions made. Be sure to prepare a Word document that combines your qualitative and quantitative work in an organized manner that could be reviewed during the shareholders meeting. Additionally, attach in a different file (typically, an Excel file) all exhibits with your calculations.

The questions to answer (all four are required):

1. Calculate the break-even point for the quarter of JFM 2018 assuming that there is no problem with the supply of agave, and things will go as expected in the budget. Calculate the breakeven point again assuming the shortage of supply. Do you expect the breakeven point to change? Why? Show your calculations.

2. Based on the given constraints, prepare a revised production schedule that maximizes profit for BDB. Ensure you prepare a CM format P&L statement that supports your recommended production schedule. Explain the steps you took to perform calculations in words and justify why you took each step. This will help you to earn partial points in case there is a typo in a calculation.

3. Since Abyr has decided that every product will have a minimum production of 20,000 units, is there any opportunity cost for BDB? In other words, how much profit is BDB foregoing, if any, with the decision of serving all three group of customers for each of its products?

4. You are anticipating that Bilal may propose an aggressive pricing strategy. You think he will argue that BDB clients are now hooked with the agave-based syrup and that even if the price increases the demand will remain not dropped. If Bilal were to propose an increase of AED 32.00 in all three products, would you recommend a different production schedule to maximize profit?

Source:

Rawashdeh, M. & Escamilla L. (2018). Baklava Done Better. Hult Publishing. Inspired by the success story of Hult Graduate Mohammed Khachab and his BMB venture: https://www.entrepreneur.com/article/????. (Links to an external site.)Links to an external site. This case is not factual to the story of the actual Khachab family. All numbers, events, dates, and names have been manufactured to fit the teaching and educational purposes of this Managerial Accounting case.

Part 2: Ethics, Responsibility, and Sustainability (ERS) in Accounting Practices

For this part of the paper you will write, in 850 words (+/- 10%), your reflections on how businesses can use creative accounting to deliver short term – sometimes fictitious – profits, and why this should not be done.

1. Watch the movie “Gibney, A. (Director). (2005). Enron: The Smartest Guys in the Room[Motion Picture]”
2. In ~200 words or less, summarize what the accounting practices used by Enron to boost earnings quarter by quarter were.
3. In ~650 words or less write/analyze the following:
4. a) Pick a company; it could be a current or former company you worked for or a company you would like to work for in the future. Be sure to introduce the company of your choice briefly.
5. b) Which wrongful/unlawful accounting practices your selected company could engage with? Explain clearly how those practices could have a beneficial impact in either the P&L, the Balance Sheet, or the Cash Flow Statement.
6. c) State why your selected company should not engage in such practices and what would be potential consequences of doing so.

Be reminded that resubmission papers are inspected thoroughly for original content. DO NOT share your work with others. DO NOT discuss with others your work, or solution. DO NOT sit next to another classmate when answering any of the sections of this paper. Any evidence of collusion or plagiarism will result in an “F” for this paper, and could potentially lead to more severe consequences.

To re-emphasize, for this paper you will submit three files: 1) Excel spreadsheet containing your model for the BDB problem; 2) Word document in the format of a business report addressed tot he Kachab family ; 3) Word document with the ERS essay.

Resubmission Policy

In the spirit of Hult’s commitment to individual development and the growth mindset, students whose graduation is at risk due to 33.3% NI grades and/or any F grades will be given the option to undertake a new assignment (resubmission) in the course(s) they were awarded the NI or F grade.

• Students can only resubmit where the current course grade is preventing them from graduating.
• The maximum number of courses students can resubmit is three.
• Resubmission assignments can only be submitted one time.
• The highest grade a student can earn in a resubmitted course is a Pass (P).
• If a student resubmits an assignment for a course in which the original course grade was a Fail and the resubmission grade results in a course grade that remains a Fail, the student will be dismissed from the program.
• Resubmission assignments are at the discretion of the Faculty.
• Resubmission assignments are intended to assess all learning outcomes of a course and may exceed in length and scope assessments assigned during the course.

At any stage, if it is deemed that a student mathematically cannot graduate from the program, even though completion of the maximum of three resubmission assignments, the student will be dismissed from the program.

In the event that the student feels that unclear or conflicting information has been provided, it is the student’s responsibility to raise this issue to the Program Dean to obtain written information.

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Rubric

Analytical Written Assignment

Analytical Written Assignment
Criteria	Ratings	Pts
This criterion is linked to a Learning Outcome Calculations and Presentation of Results

threshold: 2.0 pts

4.0 pts

 

Always provides correct and complete calculations in a clear presentation3.0 pts

Mostly provides correct and complete calculations in a clear presentation2.0 pts

Occasionally makes a calculation mistake. Presentation is generally understandable1.0 pts

Makes repeated mistakes in calculations and presents them in a confusing manner0.0 pts

Calculations are almost entirely incorrect and/or not intelligible in their presentation— This criterion is linked to a Learning OutcomeIssue Analysis

threshold: 2.0 pts

4.0 pts

 

Presents an insightful and thorough analysis of all identified issues. Includes all necessary calculations.3.0 pts

Presents an adequate analysis of most of the issues identified, but lacks depth in some areas. Is missing some necessary calculations.2.0 pts

Presents an adequate yet limited analysis of most of the major issues identified, but lacks depth in several areas. Conclusions may lack support.1.0 pts

The level of analysis could use better framing and more depth. Factual and/or computational support for the analysis is omitted.0.0 pts

The level of analysis almost entirely lacks framing and/or depth— This criterion is linked to a Learning OutcomeOrganization and Clarity

threshold: 2.0 pts

4.0 pts

 

Paper demonstrates concise and consistent writing. Transitions between ideas are handled well. Formatting is appropriate and writing is free of grammar and spelling errors.3.0 pts

Paper is organized and clear. Errors do not detract from overall ideas. Could have used better transitions between ideas. Some grammar or spelling errors.2.0 pts

Paper lacks clear organization. Errors sometimes detract from overall ideas. Some weak transitions between ideas. Grammar or spelling errors sometimes detract from overall clarity of ideas.1.0 pts

Writing needs outside support. The main ideas are getting lost as a result of the grammar and spelling errors.0.0 pts

Writing is barely legible to the point that ideas are almost entirely overshadowed by poor grammar and spelling— This criterion is linked to a Learning OutcomeUse of Course Concepts

threshold: 2.0 pts

4.0 pts

 

Demonstrates complete command of tools and concepts from the course. Makes appropriate and powerful connections between identified issues and the strategic concepts studied in the course readings and class lectures.3.0 pts

Demonstrates sufficient command of tools and concepts from the course. Makes some connections between identified issues and the strategic concepts studied in the course readings and class lectures.2.0 pts

Demonstrates partial command of tools and concepts from the course. Makes limited connections between identified issues and the strategic concepts studied in the course readings and class lectures.1.0 pts

Makes only a few, if any, connections between identified issues and concepts from course readings and class lectures.0.0 pts

Fails to make connections between identified issues and concepts from course readings and class lectures.— This criterion is linked to a Learning OutcomeOverall

threshold: 4.0 pts

4.0 pts

 

A3.0 pts

B2.0 pts

C1.0 pts

D0.0 pts

F4.0 ptsTotal Points: 4.0