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GAC Corporation

(please open attachment Task 1 to see the questions)

Task List: ACC614-0704A-10 : Applied Managerial Accounting

Scenario:
The Global Automotive Company (GAC) has been in business since 1930. It began business in the United States supplying spark plugs to automotive manufacturers (OEM, the original equipment market) and the automotive aftermarket. Today, GAC has a manufacturing plant in England and in the United States. GAC's plant in England supplies the European automotive markets, and the plant in the US supplies the domestic automotive market.
GAC has introduced a new spark plug manufacturing process in the United States that produces a higher quality spark plug that is guaranteed to last 100,000 miles. The introduction of this spark plug has been very successful in the United States, and GAC is now looking at introducing this new spark plug manufacturing process in Europe. You are GAC's corporate business financial analyst and have been asked to put together the financial analysis to determine if this new product introduction in Europe would be a financial success. GAC expects a 15% internal rate of return on 10-year projects.
Your work on the United States' project was excellent, and you can use the information as basis for developing the European financial business analysis. In addition to these types of projects, your responsibility includes creating and analyzing the monthly performance of each plant and consolidating the results into a set of financial statements footnoted with explanations. You also are responsible for watching the currency exchange rate between the dollar and euro and hedging the exchange rate to reduce the effects of fluctuation in the euro on the dollar.
All information coming to you from Europe appears in euros. You are required to first develop the European financial reports in euros then convert these financial reports into dollars for consolidation. The 2005 average currency exchange rate was $1.21 to 1 euro or .82644628 euros to $1.00. The CFO has set this exchange rate as the base rate for all conversions for the next two years. The practice of setting a fixed exchange rate is done to eliminate the complexity of sorting out the effect of changes in the rate with actual performance of the operations.
The following is the plan and first-year results of the 100,000 mile spark plug project and the financial activity for the US and Europe for 2005.
Click here to view GAC's plan and first-year results.
Global Automotive Company
100,000 Mile Spark Plug Project - USA
Plan Actual
2005 Difference
Investment in Equipment $3,000,000 $3,000,000 $0

Income
Sales $4,000,000 $4,500,000 $500,000
Variable Expenses 2,500,000 2,800,000 $300,000
Contribution Margin $1,500,000 $1,700,000 $200,000
Less Fixed Expenses:
Costs 900,000 950,000 $50,000
Depreciation 300,000 300,000 $0
Net Operating Income $300,000 $450,000 $150,000

Cash Flow
Sales $4,000,000 $4,500,000 $500,000
Less Variable Expenses 2,500,000 2,800,000 300,000
Contribution Margin 1,500,000 1,700,000 200,000
Less Costs 900,000 950,000 $50,000
Net Annual Cash Inflow $600,000 $750,000 $150,000

Here is the problem:
GAC currently uses a basic standard cost system. Management knows very little about other concepts of costing and the benefits of having multiple costing methods. Your superior has asked that you and your team put together a presentation to management explaining various costing concepts as it relates to GAC (explain the usage and benefits of each).
Individual Portion:

As a GAC corporate business financial analyst, you must have an expert understanding of the various costing methods. Within your groups, divide the costing concepts among the individual team members to analyze and become an expert in at least one costing concept within your group. Write a paper to include the following:
? the definition of the concept
? how and when the concept could be used by GAC
? how the application of the concept differs from the other concepts
? its advantages and disadvantages
? The benefit GAC could gain from using each of these costing methods
Costing Concepts:
? life-cycle costing

Attachments

Solution Summary

The Global Automotive Company (GAC) has been in business since 1930. It began business in the United States supplying spark plugs to automotive manufacturers (OEM, the original equipment market) and the automotive aftermarket. Today, GAC has a manufacturing plant in England and in the United States. GAC's plant in England supplies the European automotive markets, and the plant in the US supplies the domestic automotive market.

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