It is late January 2020 and Windows, Doors and More Inc. (WDMI) has just hired you as a consultant. The company’s shares trade on the Toronto Stock Exchange and WDMI is preparing their 2019 year-end financial statements. Your client is Sally Chen, the assistant controller for the company and you have the following conversation with her.

Sally: Welcome to WDMI. As you probably know, in our business we sell doors primarily to building contractors. We do not sell directly to individual consumers. This year however, because of a downturn in the economy, we are undertaking some different types of revenue generating activities and I am curious about the way we should record some of these transactions.

You: No problem. What transactions are you concerned about?

Sally: Well, some of our customers are doing well because they have construction contracts with the government. These customers are growing and they are very important to us.

You: In this economy, I bet your competitors are trying to take business away from you.

Sally: Yes, they are so we have decided to fight back by providing these customers a volume rebate.

You: How will that work?

Sally: We implemented this policy on January 1, 2019. If these customers buy a certain number of doors from us in 2019, which almost all of them have, we will refund 5% of the revenue we have earned from them. We expect to make these rebate payments next week and we are planning to record these payments as 2020 expenses.

You: Did it surprise you that these companies earned these rebates?

Sally: No, we fully expected this to happen. In fact, the rebate amounts were very close to what I thought they would be.

You: Good for you. What else do you have for me?

Sally: We have a bit of an odd situation, but one that needs addressing. We have an employee who is very active on social media and frequently voices his opinion on his personal social media accounts. Some of his opinions are very controversial and he often ends up in heated debates online. One of the debates was with the Vice President of one of our largest customers. When the Vice President found out that the opinion belonged to someone who worked at WDMI, a complaint was filed and they closed their account with us. We do have a Code of Conduct, but it does not specify anything around personal social media accounts. We are a little lost with how to rectify the situation.

You: Wow that is a tough situation. Anything else?

Sally: Yes, due to the downward turn in the economy, we are looking to find cost savings wherever we can. One area we are looking at is our sales staff. We are thinking of moving our sales staff towards 100% commission-based compensation instead of a mixed salary plus compensation based compensation starting in 2021. I would like you to analyze our financials and forecasts and provide a recommendation that will allow us to maximize operating income. (Appendix I)

You: That would be a significant change. What else is happening?

Sally: Well as you know, some of our customers have been having problems paying us on time so for these customers, we are now requiring them to make advance deposits with us as soon as they have won construction bids. One such customer was Vintage Homes. They won a contract with the City in December 2019 and paid us $10,000 to ensure that we would have doors ready for them when their construction job commenced in 2020. Unfortunately, Vintage could not get sufficient financing to undertake this job for the City and they had to back out of the project. They told us about this yesterday.

You: Is the fee they paid you refundable?

Sally: No, the fee is not refundable so we are keeping the money but I have not recorded anything yet because I wanted your advice on how to record it.

You: OK. I will prepare a memo for you addressing all of the issues you have raised with me today.

Sally: Great, I look forward to reading it.

Required:

Prepare the recommendations requested by Sally – use point form, proper format and write concisely.

Appendix I

Current Situation

• Variable selling costs (commissions) are 20% of net sales
• Variable costs (operating) are 35% of net sales
• Fixed costs (salaries) are $1,000,000 per year
• Fixed costs (operating) are $250,000 per year

Proposed Situation

• Variable selling costs (commissions) would be 50% of net sales
• Variable costs (operating) would be 35% of net sales
• Fixed costs (salaries) would be $0 per year
• Fixed costs (operating) would be $250,000 per year

2021 Forecast

• Sales are expected to be $3,800,000.

Answer rating: 100% (QA)

1 The company should not move to 100 commission based compensation for sales staff in 2021 There are ... View the full answer