Baska Case

Mini case #1 – Baska Ltd.

Baska Ltd. produces a lens used for webcams. Summary data from its year 2013

income statement are as follows:

Revenues

Variable costs

Fixed costs

Operating Income

$8,000,000

4,320,000

3,900,000

$(220,000)

The president of Baska, Rob Keen, is very concerned about the company’s

operations. He has discussed the situation with Operations Manager, Don Bell and

controller, Clair Watson.

After two weeks, Don returns with a proposal. After researching various component

parts, he advises that he can reduce variable costs to 48% of revenues by changing

both the direct materials and the production process. The downside of this proposal

is that the new direct material (although cheaper) results in more waste and is more

toxic to the environment. Currently, waste produced in the production process does

not require any special treatment and is disposed of normally. Don points out that

there are no current specific laws governing the disposal of this waste created by

the use of the new material, and therefore production costs can be cut by using this

material. Clair is concerned that this would expose the company to potential

environmental liabilities. She believes that these potential future costs need to be

estimated and included in the analysis. Don disagrees and reiterates that there are

no laws being violated and replies,

“There is some possibility that we may have to incur costs in the future, but

if we bring it up now, this proposal will not go through because our senior

management always assumes these costs to be larger than they are. The

market is very tough and we are in danger of shutting down the company.

We don’t want all our colleagues to lose their jobs. The only reason our

competitors are making money is because they are doing exactly what I am

proposing.”

Required: IN REPORT FORMAT, ANSWER EACH OF THE FOLLOWING

QUESTIONS

1. Calculate Baska’s breakeven revenues for 2013.

2. Calculate Baska’s...