COst Accounting

Lewis and Cooper, LLC is a provider of Oil Drilling, Pumping and Storage equipment. Lewis and Cooper’s market primarily services the Gulf Coast, but historically has won bids and is currently engaged in engineering projects around the world in continents such as North America (Canada and Mexico), Asia (China, Vietnam, Malaysia, and Indonesia), The Mideast (Saudi Arabia, Kuwait, Iraq, and UAE), India, South America (Brazil, Ecuador, and Argentina) and Africa (Nigeria and Algeria). The bulk of their historical and current engineering projects is in the Gulf Coast with multinational companies and in the South China Sea with Chinese oil companies.

The process generally involves an oil company requesting a bid or proposal, usually competitive, for an oil drilling, pumping or storage project. For example, an oil company such as British Petroleum (BP) may request raw materials, parts, or equipment for oil drilling platforms (land or sea), oil pumping stations or oil storage tanks from Lewis and Cooper. In other scenarios, where oil companies have expertise in certain areas, they may work with other oil companies as intermediaries between Lewis and Cooper and themselves. For example, Exxon-Mobil may work with PetroChina to engineer drilling, pumping, and storage equipment, then PetroChina may request a bid or proposal from Lewis and Cooper for raw materials, parts and equipment.

Recently, Monica Lewis, CEO, held a meeting with her executive team to discuss a matter affecting the business as a going concern.

M. Lewis: Team, as you know a recent wave of nationalism has begun to dictate how businesses conduct operations nationally and internationally. Public sentiment has pushed businesses to source raw materials and goods from national sources. Our customers have subsequently added contractual requirements in prospective bids and proposals demanding we purchase raw materials and goods nationally in the regions we do business. As a result, our revenues are down 30% YTD. As you know, some of our customers in the Gulf of Mexico require all raw material and parts be sourced and manufactured in the United States which are the most expensive (“Supplier A”). Some are somewhat indifferent to the latter to a degree yet have some preference for lowest cost but with a significant focus on quality (“Supplier K”). Other customers are indifferent to source and simply want the lowest cost (“Supplier U”). Yet others are foreign based with operations in the gulf coast and prefer raw materials and part to be sourced from their home country where possible, but these represent a very small part of our potential business. The problem is not simply selecting suppliers to meet these requirements for a bid, but that Lewis and Cooper generally operate according to these requirements. In other words, we must either use suppliers based in the United States, the lowest cost suppliers, and/or foreign suppliers.

Dwayne Cooper (CFO): To add to Monica’s comments, revenues are down 30%, but they are down in areas where we see significant margins of 60-40%. Revenues on low margin sales (wiring, basic equipment [drills, hammers, etc.], uniforms, etc.) are relatively flat, but the margins on those sales might at best be 10%.

Ann Williams (President of Production): Can we simply focus on bidding on projects which maximize our margins. I mean we only get about 10-15% of the available projects every year, can’t we simply focus our efforts on trying to win projects which meet one of the requirements, such as US based?

Dwayne: We could at it would be sufficient to probably increase revenues overall perhaps as little as 100%, but we would have to win a substantial percentage of those. Just bidding does not guarantee winning the project, in fact, of the projects we bid on asked or not, we perhaps win 20% of those projects. We can certainly work harder to try and win more, but in some cases, we would have to win 50%, which is a monumental task.

Monica: You see the problem, I need to a team composed of member from production, marketing, and accounting/finance to work the issue. We have compiled historical data of our customers and their orders when we used various suppliers, and we have data which is representative of bids. We think data analysis can assist us with deciding which path to choose as a company. We have purchased Tableau licenses to assist you with that effort.

Required:

Analyze the provided data sets to select a course of action for the Lewis and Cooper, LLC. The choices are: 1) Use more expensive US based suppliers 2) Use low-cost suppliers 3) Use a mix of suppliers for the best raw materials and parts with a minimal emphasis on cost.

1) Write a 2-page, double spaced paper, with one-inch margins top and bottom. Describe the problem in a paragraph (approximately 1/3 of the page). In the next three paragraphs, analyze the options. Include in these paragraphs, information relating to items such as the number of bids projected to win, revenues, costs, and overall profit. In a final paragraph, select the best course of action for the company.

2) Create a PowerPoint presentation summarizing each paragraph above in 1-2 slides and prepare a 8-10 minute presentation.

3) Submit the Paper, Powerpoint and your Tableau Analysis via D2L. Your grade will be based on the Paper and the Presentation of your PowerPoint.