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Baska Ltd

In: Business and Management

Submitted By brudolph
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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 | $8,000,000 | Variable costs | 4,320,000 | Fixed costs | 3,900,000 | Operating Income | $(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:
1. Calculate Baska’s breakeven revenues for...

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