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Novel-Tek Company Currently, you are an accountant at Novel-Tek Company ("Novel-Tek"), a publicly traded manufacturer and marketer of innovative music and audio technologies. Novel-Tek has a passion for producing and designing innovations and attributes its success to its ability to consistently deliver innovative products with features and benefits desired by its customers. Over the last few years, Novel-Tek has been developing the next-generation of earbuds. After countless iterations, design improvements and acoustical innovations, the company is eager to move beyond research and development into production. Novel-Tek's most recent innovation, the earbuds, are capable of provide crisp sound quality that fit comfortably in the ear, even during intense movement such as exercising. Unlike traditional earbuds that block all noise, Novel-Tek has designed several versions of earbuds, all of which incorporate Novel-Tek's patented advanced filtering technology. When activated, the earbuds' noise filters will remove background noise and enable consumers to hear music or callers more clearly, Rather than distort and muffle all sounds, Novel-Tek's earbuds will be able to filter high and low frequencies, thus reducing volume while maintaining proper balance and clarity of sound. While wearing these earbuds, consumers will be able to stream music and take phone calls hands-free while the noise cancellation technology reduces noise by up to 12 decibels thus protecting users' ears. The earbuds will be able to connect with any device which consumers can use to customize their listening experience. Specifically, users will be able to blend streamed audio with background sounds to find their preferred balance. Novel-Tek's last product launch was in 2016 and was met with rave reviews. Based on the tremendous success of Novel-Tek's prior innovative and creative wearable products, market participants are expecting big things from Novel-Tek's upcoming earbuds. While Novel-Tek has a reputation for providing quality products, users are highly sensitive to product functionality, such as size, shape, and battery life. Assume it is now January, 2019 and Novel-Tek has funding available to produce one product. Management has chosen the design of earbuds the company will produce and has begun manufacturing the earbuds. Sales of earbuds are expected to start within the month of January 2019. Pertinent Information: Novel-Tek classifies its total costs into one of two categories: (1) Machining Costs, and (2) Non- machining Costs. Machining Costs: Direct materials Direct labour $86 per set of earbuds $14 per direct labour hour Budgeted plant overhead (2019 annual) costs include: Indirect materials (lubricants, cleanup solvents, etc.) Plant supervision Utilities Depreciation, plant equipment Maintenance Lease for plant Insurance on plant Indirect labour Inspection Materials handling Machine setup Total $140,000 130,000 120.000 24,000 52,000 68,000 7.000 64,000 25,000 12.000 30,000 $672,000 For manufacturing, assume the following budgeted amounts: The company expects to produce and sell 16,800 sets of earbuds in 2019. It requires 0.5 direct labour hours to produce one set of earbuds. . Novel-Tek expects the selling price to be $220 per set of earbuds. Novel-Tek uses a budgeted plant overhead rate based on direct labour hours to allocate overhead to each set of earbuds. Non-machining Costs: Non-machining costs are budgeted to be: Administrative expenses Selling expenses Total 2019 Budgeted Costs $440,000 77.440 S517,440 A budgeted rate is used to allocate non-machining costs to each set of earbuds based on the revenue per set of earbuds. Expected annual sales are targeted to be $3,696,000 ($220 per set of earbuds x 16,800 sets of earbuds). Required: 1. Why would companies such as Novel-Tek allocate both machining and non-machining costs to every set of earbuds based on budgeted rates rather than use actual rates? 2. What would happen if the actual costs exceeded the budgeted costs in both cost categories (ie., machining costs and non-machining costs)? 3. Grady is the best salesperson at Novel-Tek and he was recently approached by a potential customer who has offered to buy 2,000 sets of earbuds at a price of $190 per set. Since this is lower than the budgeted selling price of $220 per set, Grady is skeptical about the offer and lacks the financial skills to assess the deal. He has asked you to conduct a profitability analysis. In your analysis, answer the following questions: a. What would be the expected profit or loss on the offer? Should Grady accept the offer? b. What is the profit margin of this offer? c. Assume the company has a policy not to accept any offer that has a profit margin of less than 15%. What would be the lowest possible price that Novel-Tek would sell the earbuds? d. What non-financial factors should Grady consider before accepting the offer