Michaels Custom Woodworking Ltd. Backgrounder 2005 Exam CMA

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The Societies of Management Accountants of Manitoba, New Brunswick, Newfoundland, Northwest Territories, Nova Scotia, Ontario, Prince Edward Island, Saskatchewan and the Yukon, Certified Management Accountants Society of British Columbia, The Certified Management Accountants of Alberta, Ordre des comptables en management accrédités du Québec

Sample

Entrance Examination

Part 2

Backgrounder The background information relating to the Part 2 case (Backgrounder) is provided to candidates in advance of the Part 2 examination date. The Backgrounder contains information about both the company and the industry involved in the case. Candidates are expected to familiarize themselves with this information in preparation for the strategic analysis that will be required during Part 2 of the Entrance Examination.

Candidates should note that they will not be allowed to bring any written material, including the advance copy of this Backgrounder, into the examination centre. A new copy of this Backgrounder, together with additional information about the company, will be provided at the writing centre for Part 2 of the Entrance Examination.

Candidates are reminded that no outside research on the industry related to this case is required. Examination responses will be evaluated on the basis of the industry information provided in the Backgrounder and the question paper (Additional Information).

Sample – CMA Entrance Examination – Part 2

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Michaels Custom Woodworking Ltd. Backgrounder

Company History Background Born in 1964, Brook Michaels was fascinated by tools from early childhood. However, at his parents’ insistence, he pursued a traditional academic education and managed to graduate from high school in spite of a significant lack of personal interest. Hired after graduation by his uncle, Robert Tremblay, who had a custom cabinet business, Brook learned how to do woodworking on a lathe. In addition, he became responsible for supervising other employees and produced some custom-made items himself. Unfortunately, this venture proved to be financially unsuccessful and, eventually, Brook was laid off. Thereafter, he enrolled in a junior college and obtained a certificate in carpentry. In 1990, Brook was hired by Charette Custom Cabinets (CCC). Specializing in kitchen cabinets and renovations, this small company was located in a medium-sized town (Town) about 80 kilometres (km) from a major Canadian city (City). In 1993, Brook married Lynn Bordeleau, whose family lived on about 25 acres of land approximately 10 km from Town. Lynn’s parents, Guy and Judy, owned and operated Bordeleau Haulage Inc. (BHI). Although Lynn had a certificate in early childhood education, she was employed by BHI to look after the administrative side of the business, a function her mother could also perform. Lynn’s responsibilities included answering the telephones, invoicing customers, ordering supplies, scheduling the trucks, paying the bills, and keeping company records. In addition, since she held a large-truck driving permit, she was licensed to operate all sizes of trucks and vans, as well as trailer-pulling vehicles in these classes. BHI’s truck fleet included eight tractor-trailers, commonly called 18-wheelers, in which Lynn herself logged more than 80,000 km. (The truck component of this type of vehicle is referred to as the tractor.) In 1995, Brook and Lynn bought an 1,800 square foot bungalow on a 10-acre site very close to the Bordeleau homestead. Approximately seven years old, the house was in such disrepair that the young couple was able to acquire it at a very affordable price. Over the next few years, Brook spent most of his spare time renovating the house and, in the process, established a fairly complete workshop in the large basement. He was surprised at the high quality of the work he was able to do on the kitchen. Although he had acquired some knowledge and skills through his employment with CCC, he had not been involved with the installation aspects of the company’s work. Pierre Tremblay, another of Brook’s uncles and only six years his senior, had a successful home construction and renovation business in City. For the most part, Pierre acted as a general contractor and employed subcontractors to do the work. Occasionally, he asked Brook to help him with refinishing or call-back work on a weekend or in the evening. However, Brook was quite busy working on his own home.


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In September 1997, Pierre and his family visited Brook and his wife to see their newly renovated home. Over a barbeque dinner, Pierre asked Brook if he had considered going into business for himself. Brook had always entertained this idea but felt that it would be best to begin by doing some work from home. When Pierre mentioned that he was looking for someone to work on prefabricated kitchens, Brook indicated that he would be interested in producing boxes (the common term for the component of a kitchen that becomes a cupboard) on a contract basis but that he was not really interested in the finishing and installation aspects of kitchens at this point. (See Exhibits A and B for further information on the construction of boxes.) Pierre found a contractor who preferred installation and finishing work but wanted someone else to provide assembled boxes. Pierre asked Brook to generate some prices for him so they could discuss the matter further and, in due course, they came to an agreement. The Early Years Brook realized that he would need some cash flow to finance the box production and that any operation involving power tools should be incorporated. He approached his father, Gordon, in order to obtain a short-term loan. Gordon was delighted to help but, because of the incorporation, suggested that he purchase callable, participating, non-cumulative preferred shares in the company instead. In this way, instead of having to pay interest annually at a predetermined rate, Brook would only have to pay a return on the investment if the company did well enough to pay a dividend on the common shares. In addition, Gordon would leave the shares to Brook in his will so that the loan would never have to be repaid. Thus, as part of the incorporation of Michaels Custom Woodworking Ltd. (MCW), Brook provided for a class of callable, participating, non-cumulative preferred shares having a stated value of $10 per share. The opening transactions for MCW consisted of the issuance of 5,000 preferred shares to Gordon Michaels for cash and the issuance of 60,000 common shares to Brook Michaels and 40,000 common shares to Lynn Michaels in return for their Grand Cherokee Jeep, computer, and tools. The pricing estimates that Brook provided were quite low (see Exhibit C). He had already included labour costs relating to himself and was hesitant to build in a sizable profit margin. Thus, he had decided on a 25% mark-up. Pierre knew that the prices for the boxes were low and did not want to take advantage of Brook. Nevertheless, he decided to agree to these prices until the quality and availability of the product could be assessed. Brook’s well-made boxes were always ready to be picked up at the appointed time according to the contract and Pierre’s installer was very happy with them. Accordingly, Pierre encouraged Brook to increase his prices by 20%. MCW would still be more than competitive and it would still cost Pierre less to pick up assembled boxes from Brook than to purchase unassembled boxes of an acceptable quality from other suppliers. Pierre also asked Brook to consider producing substantially more boxes. Over the next few years, Brook gradually established a local customer base of small house builders and residential renovation contractors. During the same period, he built a shop at the opposite end of his property from where the house was situated, quit his job at CCC (which subsequently became one of his customers), and gradually added employees to meet the growing demand for his assembled boxes. In addition, Brook hired his brother, David, who relocated to Town for convenience. David had some bookkeeping and accounting experience even though his formal education was in political science. Also, he was not without


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woodworking skills since he had spent some time working for Pierre during summer vacations. To keep the company in a strong financial position, David and Pierre agreed to invest $20,000 each in return for common shares of MCW. By the end of 1999, MCW had become a comfortable small business. The Recent Years In the early years, Brook focused on developing the business and did not widen the scope to include delivery, installation, or finishing services. He also resisted the temptation to diversify the product line, despite having received several requests for custom-made cabinets, and did not delve into the pre-assembly market. In 2000, the following factors influenced him to reconsider this position:

1. In the residential housing industry, there was an upturn with respect to both new

construction and the renovations market. 2. Although Brook enjoyed the simplicity of box production, he also enjoyed a challenge. He

discovered that it was unnecessary for him to supervise production directly and that David had become quite competent in the quality control area.

3. On the company’s Web site, considerable interest in purchasing boxes was being expressed

from all over North America. 4. In recent years, Lynn had worked for BHI sparingly and only when absolutely necessary.

Since their two children were now in school all day, she was anxious to either play a bigger part in the business or return to work full-time, and she had experience driving in the United States.

5. Some labour economies could be achieved through an increase in production. Brook felt

that this was necessary in order to compensate for the extra overhead that he had not anticipated originally.

6. Brook believed that he could be more productive himself by accepting some of the requests

to produce custom made cabinets. 7. Belle Kitchen Products (BKP), a company located in Louisiana, had indicated an interest in

MCW products. Lynn was already familiar with BKP, having made several trips to this company while driving for BHI. Brook saw this opportunity as a low-risk starting point for an export business and expected to be able to ship partial loads with BHI.

Brook asked David to take driving lessons with respect to large trucks. David did so and qualified for the requisite upgrade to his licence by the following March. In preparing for 2001, Brook planned for the following changes:

• Some product would be exported, using BKP as a test case. • A production line model involving four stations—cutting, drilling, taping, and assembly—

would be implemented. Each station would require one person and, in order to facilitate the operation of two lines, additional machinery costing approximately $25,000 would be


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required. Brook felt that a production line could increase production to between 30 and 50 boxes per line (group of 4 employees) per day. In comparison, employees working independently, without a production line, could produce an average of 5 boxes each per day, that is, 20 boxes per day per group of 4 employees.

• Neither Brook nor David would be involved directly in production. David would continue to

look after the accounting and would handle most of the quality control. Brook would build a few custom-made cabinets on a trial basis, and would assume the role of production manager. He could also look after quality control as needed. Lynn would be added to MCW’s payroll. Her skills would be used as appropriate, but her main role would be to run the office as she had done previously at BHI.

In March 2001, the necessary equipment was installed to enable the operation of two production lines and the number of line workers was increased to eight. With this configuration, MCW maximized the potential of the existing facility. Although extra shifts could be worked under extreme circumstances, the space was insufficient to allow significantly more production on a regular basis. MCW contracted to supply BKP with 5,400 assembled boxes to be delivered in shipments of 1,800 in each of May, September, and November of 2001. This was possible to achieve because of MCW’s inventory of Base 30, Upper 30, and Upper 12 boxes, the specific units ordered by BKP. These types of boxes also comprised the majority of MCW’s production. Therefore, the company could devote a considerable part of March and April to supplying BKP. BKP agreed to pay MCW’s regular selling price as at January 1, 2001, in U.S. dollars, converted at the rate of 1.55 (US$1.00 = CDN$1.55). BKP also agreed to pay shipping and handling costs at an average rate of US$1.30 per box (CDN$2.00). The contract indicated that BKP would take responsibility for all customs and excise documentation and processing as well as any issues that arose with respect to duty, although none were expected. All amounts were payable on a net 30 days basis. In fulfilling the terms of the BKP contract, MCW encountered the following difficulties:

• The capacity of a trailer is 48 pallets (four-foot square) and these can be stacked two wide

by two high by 12 long (2 x 2 x 12 = 48). Since unassembled boxes could be shipped on pallets of 38 boxes each, 1,800 unassembled boxes could be shipped in one truckload. However, because only 200-250 assembled boxes could be accommodated inside one trailer, and most of the load would consist of unoccupied space, between eight and nine truckloads would be required to ship the same number of assembled boxes.

• The main shipping challenge was to be able to send a full load (or several, if the boxes were

shipped in assembled condition) every two to three months instead of sending an occasional partial load.

Brook determined that the cost of shipping the boxes assembled was prohibitive. He realized that an alternative would be to send an assembler with the truck. Conveniently, David was capable of both driving the truck and assembling the boxes. However, there were other complications in this scenario. It would be necessary for a single driver attempting a trip of approximately 30 hours each way to stop for rest. This would extend the travel time by an estimated 16 hours to almost 4 days. There was also the matter of the time that it would take to assemble the boxes. Assuming that one person could assemble them at a rate of 10 per hour,


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180 hours or nearly 3 weeks of working 10-hour days, 7 days a week, would be required for the assembly of 1,800 boxes. Thus, the total time needed for one trip would be close to a month. In addition, Brook did not have a truck. He had assumed that his father-in-law would handle the deliveries through BHI, which might still be possible. Alternatively, BHI could transport the boxes and David could fly down to do the assemblies. Brook talked to Guy Bordeleau about his difficulties. Guy did not want one of his regular trucks to be sidetracked with a one-way, full load on such a long haul. However, he offered to sell Brook a used tractor-trailer in excellent condition for $80,000. MCW could pay for the truck in 44 payments of $2,000 per month commencing May 1, 2001. In addition, Guy guaranteed that BHI would contract to rent the truck from MCW for a minimum of 100 hours per quarter at the standard industry rates: $75 per hour for both the tractor-trailer and the driver for short-haul loads, and $0.95 per kilometre for long-haul loads. Brook could not refuse such a favourable offer. A new vehicle would cost approximately $140,000 for the tractor and $40,000 for the trailer. Although the proposed arrangement would provide BHI with some flexibility, Brook realized that his father-in-law was trying to provide MCW, and Lynn, with a well-maintained, dependable tractor-trailer as well as the means to pay for the vehicle. At a conservative production level of slightly more than 60 boxes per day, the production line could complete about 15,000 units annually, allowing for statutory and paid holidays. Therefore, Brook decided that he would send one of the regular assemblers to Louisiana with David. He would also send Lynn to drive the second 10-hour segment of the trip and then be dropped off at a convenient airport to fly home. A similar arrangement would be made for the return trip. Brook felt it was possible for the two assemblers to work 12 hours per day for a shorter period and thus reduce the assembly time to eight days. If a problem developed in the MCW workshop, he himself could fill in. Scheduling would become a bit more complicated, but Brook felt that it could be managed. The financial statements for MCS for 2001 can be found in Exhibit D. Industry Background Woodworking History Throughout history, the availability and unique characteristics of wood (see Exhibit E) have made it a basic material for housing, furniture, tools, vehicles, and a multitude of other products. For example, hard, durable oak was fashioned into ship timbers, bridge girders, barrel staves, fence posts, flooring, and paneling. Maple, which is moderately hard and strong, was widely used for furniture and flooring and later became popular for paneling, trim, and moulding. Hickory, because of its combination of hardness, strength, and resilience, was turned into tool handles and spokes for carriage wheels, and subsequently for flooring and cabinetry. Mahoganies have always been popular for making the best furniture. Down through the centuries, artisans have developed hand tools and, most recently, power tools to bring out the special qualities of woods. They have invented a wide range of fasteners and joints to hold pieces of wood together and created waxes, shellacs, and varnishes to enhance and protect the beauty of wood. In addition, because the dimensions of wooden building materials can change slightly under the influences of moisture and heat, skilled


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woodworkers have learned to anticipate these variations and compensate for them in order to maximize the strength and utility of the finished product. In recent years, the depletion of forest reserves has made timber increasingly expensive and the harvesting of trees a target for environmental activism. This has caused the construction and manufacturing industries to rely more heavily on engineered wood products such as melamine, plywood, particleboard, and fibreboard (see Exhibit F). However, other than plywood, composite wood products are not as strong as natural timber and cannot be bent or steamed into different shapes. As a result, furniture built from these products often appears boxy. In addition, screws and nails cannot fasten parts together securely unless plastic or metal inserts, fittings, and connectors are also used in the joints. Woodworking Tools Hand Tools Most of the hand tools used today have changed little since the Middle Ages, the only major improvement being the use of steel instead of iron for the cutting edges. Among the most common hand tools for shaping wood are saws, planes, and chisels. The flat-edged chisel and the semicircular gouge are used in certain instances to remove unwanted wood. The most important hand tools for boring are the brace, the hand drill, and the push drill. Measuring tools are used to mark and check work for size and alignment. These tools include the steel tape measure, the folding wood rule, and the steel rule. The square and the tri-square are used to mark or test right angles and the spirit level is used primarily to test horizontal and vertical alignment. Hammers and screwdrivers are used in conjunction with fasteners. Work that requires gluing is usually clamped with the C-clamp, the bar clamp, or the hand screw (gluing clamp). Portable Power Tools The development of electrically powered tools has greatly reduced the amount of time needed to perform a wide variety of tasks. The most important of these tools are the drill, the saw, the router, and the sander, all of which are available in several sizes. Portable electric drills perform boring operations quickly. In addition, they are often fitted with attachments that permit rotary sanding, polishing, and filing. Portable electric saws, often called circular saws, are extremely versatile and can cut either with or against the grain of the wood. The saber saw employs a narrow blade mounted vertically, which operates in an up-and-down motion, to cut curves and straight lines in relatively thin wood. The router is a device that operates at very high speed. It is used for cutting grooves and channels of many types, shaping straight or curved edges, and making decorative moulding. Two types of portable electric sanders are used to smooth surfaces and to remove the marks left by cutting tools before a finish is applied. The orbital sander causes sandpaper to vibrate in either a reciprocal or circular manner at a high frequency against the work. It removes less material than the belt sander, which runs a sandpaper loop at high speed against the work.


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Stationary Power Tools Lumber yards, furniture factories, and other businesses that process high volumes of wood employ large, stationary machines designed for continuous operation. The radial saw, suspended above a piece of work, can move back and forth on runners to make many types of cuts—crosscut, rip cut, miter cut, and bevel cut—and cuts for many types of joints. The circular bench saw uses a circular blade positioned in a slot on the surface of a metal table to do many types of cutting. The band saw employs a large, flexible steel blade in the form of a loop that is tensioned by means of two large pulleys positioned one over the other. Band saws are used for such heavy work as ripping logs into boards and cutting very thick wood. Smaller versions of these kinds of saws are sometimes used in the home workshop. Power planers, known variously as surface planers, thicknessers, and jointers, are used to speed up the planing operation. In these machines, the work is moved against rapidly rotating cutting edges. Carpentry The art and trade of cutting, working, and joining timber into building structures is the oldest of the woodworking crafts. Before the use of steel and concrete became widespread, the carpenter played a major role in constructing the framework of a building. Modern carpenters build the wooden forms into which concrete is poured for high-rise buildings, highways, and hydroelectric power projects. Carpenters erect the scaffolds for workers in the other building trades; install the partitions, doors, windows, flooring, roofs, and almost every other wooden component of a structure; and do nearly all of the major construction work on houses. New fastenings and framing devices developed in recent decades have multiplied the opportunities to use wood, and employ carpenters, in construction. In addition, the use of component building systems—pre-assembled parts, or modules—instead of rough materials is increasing. In modular construction, entire sections of a structure are built in a factory and later assembled at the building site. Joinery and Cabinetmaking Joinery is the skill of fitting pieces of wood together precisely to form various articles. The word joiner was originally applied to workers in the late 16th century who practiced the craft of constructing and installing doors, windows, cabinets, and fittings for houses and ships. In North America, such workers are called carpenters, cabinetmakers, and mill workers. The term joinery now applies primarily to the skills of the cabinetmaker, the furniture maker, and the shipwright. Cabinetmakers are usually employed by manufacturers specializing in cabinets and furniture for storage and display. The skills of the cabinetmaker can also be applied to the manufacture of pianos and harpsichords, household furnishings, ship's fittings, and other wooden objects. Basic Joints Many different joints can be used in wood assembly. The choice of joint depends on the quality of the wood used, the physical stresses expected in the finished product, and the preference of the artisan. Experienced woodworkers usually choose the least elaborate joint that is suitable


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for a particular assembly. Most joints derive their strength from precise fit and glue; sometimes only wedging is needed, or pinning with brads or nails. The dado joint—frequently found in bookcases, shelves, and drawers—is made by cutting a channel in a piece of wood with a router. The edge of another piece of wood is then fitted, glued, and sometimes nailed into the channel. Finishing The work of cabinetmakers and furniture builders is incomplete until the object being built has been smoothed with sandpaper or steel wool to remove the marks left by the various cutting tools and one or more finishes have been applied to the object. Finishes serve to protect and preserve the wood and to bring out the beauty of the grain. In some cases, a finish can be used to cover up the imperfections of lower quality wood. Common finishes include waxes, oils, bleaches, fillers, stains, shellacs, varnishes, lacquers, sealers, and paints, including enamels. Markets The kitchen cabinet industry is a small portion of the residential renovations industry (see Exhibit G) and residential new construction industry (see Exhibits H and I). In Canada, the total residential construction market is measured in the tens of billions of dollars. The small part that is represented by the Canadian kitchen cabinet industry consisted of some $2.1 billion in deliveries in 2002, up from $1.9 billion in 2001. Part of the reason for the size of the Canadian market is the industry’s substantial net export position. For example, of the $2.1 billion mentioned above, only $853 million in deliveries were made domestically. The U.S. is a major importer of Canadian production and the size of the U.S. market is approximately $8 billion. Although Canada also exports to Japan, the United Kingdom, Bermuda, Malaysia, and Israel among other countries, non-U.S. exports account for less than one per cent of total exports. Competition This is a significant market that lends itself to a variety of competitors. The larger participants generally offer a selection of door styles and finishes, as well as a range of products other than kitchen cabinets. Such competitors include AYA Kitchens and Baths, a relative newcomer (formed in 2000), that has a large production facility in Mississauga, Ontario, and showrooms in several American cities; Modular Kitchen Cabinets, a Tail of the Lion, Inc. operation that sells only over the Internet and is located in the U.S.; and Thomasville Cabinetry, the sole supplier of kitchen cabinets and similar products for The Home Depot. The vast majority of participants in the industry tend to be small and medium-sized local businesses. In order to compete with high-volume sellers, these smaller firms must be able to match product quality and price. Otherwise, their products will not be desirable to customers who may have to travel some distance to pick up the merchandise. Some of these smaller competitors have been very successful and are now among the larger participants. For example, Hanover Kitchens, an Ontario company, is still located in the rural community in which it began operations. Today, it occupies seven acres and has 136,000 square feet of manufacturing space. The company operates as Hearth Kitchens in the United States.


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Exhibit A

DESCRIPTION OF THE PRODUCTION OF A BASE 30 BOX

Assumptions: • all standard base boxes have a height of 35¼ inches(”) and a depth of 23½”; • 1/8” Masonite (white on one side) is used for the back of the box; and • 5/8” white melamine is used for cabinet construction. (Oak could be used for all or part of

the cabinet at about twice the cost of melamine.)

Components: • gables (2); • bottom shelf; • back panel; • straps (5); • adjustable shelf (1); • edge tape; and • assembly materials.

Construction Gables The gables (sides of the box) enclose all of the other components. The bottom, the shelf and the straps are all 28¾” (30”– [2x5/8”]) long and fit between the gables. First, the gables are cut to 36” x 23½”. Then, they are trimmed to the appropriate dimensions of 35¼” x 23½”. Dado cuts are made at the rear edge of the gables so that the back can be inserted easily. A section measuring 4 3/8” high x 3” deep is cut out at the bottom front edge of each gable. This provides a space (referred to as the toe-kicker) for toes to fit under the bottom cupboards when the boxes are installed in a kitchen. Several holes are drilled in the inside wall of each gable in two vertical rows, one near the back of the box and the other near the front, so that the adjustable shelf may be inserted at various heights. The bottom, which is also the bottom shelf, is installed at the top of this cut-out, 4 3/8” from the bottom of the gable. Since there is a 1/8” space, a 5/8” strap and a 1/8” back, the shelf is 22 5/8” deep. Back The back is approximately 31” in height. Because the space beneath the bottom shelf is not visible, the back does not have to extend to the bottom of the gables and need only be a minimum of 30 7/8” (35¼”– 4 3/8”). It is 7/8” narrower than the 30-inch box (29 1/8”) to allow for easy insertion into the dado cuts.


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Straps The five straps are cut from the melamine sheets and are the primary means by which the box is held together. Each strap measures 28¾” x 3½” and, in order to allow for some cutting loss, a total of 18” of melamine is needed for 5 straps. They are used as follows:

• Two on the top at the front edge of the box, flat to the top, one on top of the other, giving a

front facing of 1 1/4” and a flat top surface of 3½”. • One on the top at the back edge of the box, giving a flat top surface of 3½” in front of the

back. • One on the back at the top edge, providing a flat top surface of 5/8” behind the back panel. • One on the back at the bottom edge, providing a flat bottom surface of 5/8”.

Both straps mounted on the back of the box are inset 1/8”, thus enabling the installer to make adjustments more easily for minor inconsistencies in the wall to which the box is to be attached.

Shelves

As described above, the bottom shelf is 28¾” wide and 22 5/8” deep, and is inserted flush with the toe-kicker cut on the gables. The adjustable shelf is 28¾” wide and 21” deep to allow some flexibility in the style of doors to be put on the cupboards. This shelf is sanded slightly on the gable sides to make insertion easier.

Taping

Edge tape is applied to all of the visible edges. These consist of the two front gable edges (2 x 35¼” = 70½”), the two strap edges at the top front of the box (2 x 28¾” = 57½”) and the two front shelf edges (2 x 28¾” = 57½”). Approximately 190” of tape are required per box.

Assembly Although several techniques can be used for assembly, the best choices for small and medium-sized producers are to screw the components together or to set up the shop so that the boxes can be glued together. From the beginning, MCW has used screws for box assembly.

1. The bottom is attached by inserting screws into the shelf through the gables, near the back

and front edges. The screws can be tightened sufficiently so that the flat head of the screw is flush with the side of the gable.

2. The straps are attached to the gables in a similar fashion, beginning with the back-bottom

strap. This is inset exactly 1/8” so that a space (1/8”) is left for adjustment during installation with respect to the wall behind but the dado groove is not obstructed. Care is taken to ensure that the back-top strap is also inset, but does not obstruct the dado groove. The remaining straps are then attached flush with the top of the box, and the dado left unobstructed.

3. The back is slipped into position. It is held in place by screws inserted from the back of the

box, fairly close to the outside, but positioned to avoid any risk of hitting the screws already in place. At the top, the screws go through the back strap and the back panel, and into the


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top strap. At the bottom, the screws go through the back strap and the back panel, and into the bottom shelf.

After installation, the remaining gap in the top will be covered by a counter. Using more material to close in the top of the box at the shop would add unnecessary cost. Costing Standard Unit Purchase Costs

• 1/8” white, one-side Masonite: $10.46 per 4’ x 8’ sheet ($0.32 per sq. ft.) • 5/8” white melamine: $27.74 per 4’ x 8’ sheet ($.87 per sq. ft., rounded to $1) • 5/8” oak, good both sides or white one side: $65.60 per 4’ x 8’ sheet ($2.05 per square

foot rounded to $2 per sq. ft.) • edge tape: $7.50 per 50-ft. roll ($.0125 per inch) • assembly hardware (screws, drill bits, shelf supports) and waste: $3 per box • labour: $20 per hour

Costing of Sample Box Item Amount needed Unit cost Total cost 2 gables 2(23 ½” x 36”) = 1,692 sq. in. =

(1,692/(12 x 12)) sq. ft. = 11.75 sq. ft. $1 per sq. ft. $11.75

1 bottom shelf (28 ¾” x 22 5/8”) /144 = 4.517 sq. ft. $1 per sq. ft. $4.521 adjustable shelf (28 3/4” x 21”) /144 = 4.19 sq. ft. $1 per sq. ft. $4.195 straps (28 ¾” x 18”) /144 = 3.6 sq. ft. $1 per sq. ft. $3.601 back (31” x 29 1/8”) /144 = 6.27 sq. ft. $.32 per sq. ft. $2.00edge tape approximately 190 inches $.0125 per inch $2.37assembly hardware and waste $3 per box $3.00labour 1.5 hours $20 per hour $30.00Total cost $ 61.43


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Exhibit B

SIDES OF A SAMPLE BOX (NOT TO SCALE)

35¼

”

23½”

• • • • • • •

• • • • • • •

Holes for adjustable

shelf

20½” 3”

30⅞

” 4⅜

”

GABLE INTERIOR VIEW

SPACE 3½’’ top straps

⅛” back

⅛” space at back

TOP

⅝” back strap

30’’

23½

”

Top Strap (⅝’’)

Adjustable shelf

28¾”

Bottom shelf

gables (⅝’’)

FRONT Top Strap (⅝”)

35¼

”

gables

28¾”

35¼

’’ 35¼

’’

Back (29⅛” x 31’’)

BACK 3½” back straps

⅝” gables

X

X


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Exhibit C

SUMMARY OF PRICES PROVIDED TO PIERRE TREMBLAY USING A MARK-UP OF 25%

Product Description Material Cost Labour Cost Total Cost Selling Price Base 9 white 1 AS* $19.38 $30.00 $49.38 $61.73 Base 9 1 wood gable, 1 AS* $25.26 $30.00 $55.26 $69.08 Base 12 white 1 AS* $21.59 $30.00 $51.59 $64.49 Base 12 1 wood gable, 1 AS* $27.47 $30.00 $57.47 $71.84 Base 15 white 1 AS* $23.22 $30.00 $53.22 $66.53 Base 15 1 wood gable, 1 AS* $29.10 $30.00 $59.10 $73.88 Base 18 white 1 AS* $24.89 $30.00 $54.89 $68.61 Base 18 1 wood gable, 1 AS* $30.77 $30.00 $60.77 $75.96 Base 21 white 1 AS* $26.54 $30.00 $56.54 $70.68 Base 21 1 wood gable, 1 AS* $32.41 $30.00 $62.41 $78.01 Base 24 white 1 AS* $28.03 $30.00 $58.03 $72.54 Base 24 1 wood gable, 1 AS* $33.91 $30.00 $63.91 $79.89 Base 27 white 1 AS* $29.81 $30.00 $59.81 $74.76 Base 27 1 wood gable, 1 AS* $35.68 $30.00 $65.68 $82.10 Base 30 white 1 as* $31.43 $30.00 $61.43 $76.79 Base 30 1 wood gable, 1 AS* $37.34 $30.00 $67.34 $84.18 Base 33 white 1 AS* $33.10 $30.00 $63.10 $78.88 Base 33 1 wood gable, 1 AS* $38.98 $30.00 $68.98 $86.23 Base 36 white 1 AS* $34.72 $30.00 $64.72 $80.90 Base 36 1 wood gable, 1 AS* $40.49 $30.00 $70.49 $88.11 Upper 9 white 2 AS* $12.44 $30.00 $42.44 $53.05 Upper 9 1 wood gable 2 AS* $14.89 $30.00 $44.89 $56.11 Upper12 white 2 AS* $13.75 $30.00 $43.75 $54.69 Upper12 1 wood gable 2 AS* $16.29 $30.00 $46.29 $57.86 Upper15 white 2 AS* $15.63 $30.00 $45.63 $57.03 Upper15 1 wood gable 2 AS* $18.08 $30.00 $48.08 $60.10 Upper18 white 2 AS* $16.68 $30.00 $46.68 $58.35 Upper18 1 wood gable 2 AS* $19.13 $30.00 $49.13 $61.41 Upper21 white 2 AS* $18.11 $30.00 $48.11 $60.14 Upper21 1 wood gable 2 AS* $20.56 $30.00 $50.56 $63.20 Upper24 white 2 AS* $19.52 $30.00 $49.52 $61.90 Upper24 1 wood gable 2 AS* $21.97 $30.00 $51.97 $64.96 Upper27 white 2 AS* $20.96 $30.00 $50.96 $63.70 Upper27 1 wood gable 2 AS* $23.41 $30.00 $53.41 $66.76 Upper30 white 2 AS* $22.33 $30.00 $52.33 $65.41 Upper30 1 wood gable 2 AS* $24.78 $30.00 $54.78 $68.48 Upper33 white 2 AS* $23.78 $30.00 $53.78 $67.23 Upper33 1 wood gable 2 AS* $26.23 $30.00 $56.23 $70.29 Upper36 white 2 AS* $25.21 $30.00 $55.21 $69.01 Upper36 1 wood gable 2 AS* $27.66 $30.00 $57.66 $72.08

* AS – adjustable shelf


14 CMA Canada

Exhibit D

MICHAELS CUSTOM WOODWORKING LTD. CONDENSED BALANCE SHEET

FOR THE YEAR ENDED DECEMBER 31

2001 2000 ASSETS

Cash $ 6,000 $ 24,000 Accounts receivable 142,000 72,000 Inventory 141,000 82,000 Prepaids 5,000 0 Machinery and equipment (net) 34,000 10,000 Vehicles (net) 106,000 54,000 Computers (net) 5,000 1,000 $439,000 $243,000

LIABILITIES AND EQUITY

Accounts payable, trade $ 93,000 $ 68,000 Income taxes payable 11,000 3,000 Future income taxes 1,000 2,000 Loan payable 64,000 0 Share capital - preferred 50,000 50,000 - common 91,000 91,000 Retained earnings 129,000 29,000 $439,000 $243,000


CMA Canada 15

Exhibit D (cont’d)

MICHAELS CUSTOM WOODWORKING LTD. CONDENSED INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31

2001 2000 Sales $988,000 $535,000 Cost of sales 594,000 357,000 Gross margin 394,000 178,000 Shipping (net) 13,000 0 407,000 178,000 Expenses Amortization 38,000 14,000 Automotive 26,000 22,000 Communications 24,000 16,000 Entertainment and promotion 12,000 9,000 Office 15,000 12,000 Professional fees 8,000 4,000 Rent and utilities 18,000 14,000 Shop expense 34,000 21,000 Salaries and benefits 104,000 48,000 279,000 160,000 Net income before taxes 128,000 18,000 Income taxes - current (29,000) (3,000) - future 1,000 (1,000) Net income for the year 100,000 14,000 Opening retained earnings 29,000 15,000 $129,000 $ 29,000


16 CMA Canada

Exhibit E

CHARACTERISTICS AND RELATIVE COST OF SOME TYPES OF WOOD

Ash ($) is very popular because it is strong, hard, and has a high resistance to shock. Ash's lighter colour and straight grain make it very adaptable in both formal and casual settings. Anyone who has ever used a baseball bat or hockey stick has benefited from the hardness of this wood. Ash is moisture-resistant and, because of its relatively dry fibre, offers superior stability in flooring applications. Cherry ($$$) is a fine-grained hardwood that ranges in colour tone from nearly white through pinks to reds. Its subtle grain patterns are enhanced by localized colour variations of green, pink, or yellow streaks. Cherry is known, and expected, to change with age, developing a beautiful patina. Maple ($$$) is a dense, strong, fine-grained, smooth wood that is mostly off-white in colour with streaks of gold, pink, and brown throughout. It can also have mild, dark streaks. The tightly swirled grain is very muted and subtle. For this reason, natural and light colour stains are very popular. There are more than 10 species of maple in the North and Northwest. However, for the most part, only five are used commercially, the soft maples being the most common. Maple finishes very well. Hickory ($$) is a strong, course-grained hardwood with dramatic variations in colour and grain, including knots. The grain pattern is so intense that it is not uncommon for cabinet parts to vary from extremely dark to almost white. Darker stains will reduce the depth of these variations. The customer should examine a sample before making a decision. Mahogany ($$$$$) Most mahogany comes from the rain forests of the western coast of Africa. The colour is reddish-brown and the grain is typically interlocked but can be straight. The wood is of medium density but not very strong. It takes stain and polishing very well.


CMA Canada 17

Exhibit F

ENGINEERED WOOD PRODUCTS

For the most part, today's cabinets are built with material referred to as engineered wood products. These composite products are made of glued fibre, lumber, and/or veneer to meet specific design criteria. Engineered wood products include:

• melamine; • plywood; • medium-density fibreboard (MDF); • particleboard; and • oriented strand board (OSB).

The word laminated means that thin layers of a product are bonded together, as in the laminated surface of a kitchen countertop. In this regard, Formica is a registered trade name that is commonly used as a generic term to mean a laminated surface.

Melamine

Melamine is widely used in many products. For instance, melamine is used to make dinnerware. The melamine used for cabinets is a coating thermally fused to a core of engineered wood, such as particleboard. Melamine is available in colours, white, black, and shades of gray, as well as in several wood grains. The coating is heat-sealed into the wood for a durable, scratch-resistant finish.

Today’s thermally fused, melamine-coated cabinet material (referred to as melamine) is very dense because of higher pressures used during the manufacturing process. The resins used in the core to bind the particles of wood together are stronger and impregnate the wood more deeply. The resulting material is stronger.

Characteristics of Melamine

• highly resistant to heat and physical/chemical degradation (useful in coatings); • moisture-resistant (useful in adhesives and coatings); • hard, glossy, and scratch-resistant (useful in coatings); and • flame retardant (useful in polyurethane foams).

Advantages of Melamine Finish

• easy to clean; • available in different colours and patterns that simulate wood; • resistant to scratches and stains; and • fused thermally to the core.


18 CMA Canada

Disadvantages of Melamine Cabinet Material

• not water-resistant; the surface is fairly resistant to water but the core will swell and become brittle if exposed to moisture.

Veneers A veneer is a thin sheet (a fraction of an inch) of wood cut from a log of almost any type of natural wood. A veneer is always attached to another product (such as engineered wood) via a manufacturing process involving adhesive, heat, and compression. The veneer is the visible part of the product and provides the appearance of solid wood. However, the only way to know what is behind the veneer is to cut through it.

When solid wood is not an option, veneer-core plywood can be used for cabinet construction. However, manufacturers turn out a variety of other engineered wood panels: medium-density fibreboard (MDF), particleboard, oriented strand board, and panels that incorporate layers of solid wood (veneer-core MDF, veneer-core particleboard, etc.). Such panels can be heavier, cheaper, and flatter than plywood.

Plywood

Plywood is a manufactured board composed of an odd number of thin sheets of wood glued together under pressure, with the grains of the successive layers placed at right angles to one another. The two types of veneer-core plywood commonly used today are made of either softwood (fir) or hardwood (birch, mahogany, walnut, or white ash).

In inexpensive plywood, the layers are glued together with starch pastes, animal glues, or casein. In the strongest plywood, they are glued with waterproof synthetic resins.

Most plywood with a white melamine applied to the surface is not thermally fused since this would expose the variances in the veneer core and the surface would appear rough or flawed. Therefore, a veneer-core material with a white surface is not nearly as resistant to scratches as a thermally fused, melamine cabinet material. Although the core may be strong and last many years, the surface will wear quickly. If the surface is a wood veneer, it must have a finish applied to protect it and must be cared for in the same way as solid wood. Characteristics of Plywood • strong; • durable; • light; • rigid; • resistant to splitting and warping; and • water-resistant.

Medium-Density Fibreboard (MDF)

MDF is a composite board, made of wood fibres, that has a smooth surface. The primary component is softwood that has been broken down into wood fibres. In the U.S., most MDF is


CMA Canada 19

made from pine, but many other softwood species are also suitable for MDF production. Other materials that have been used successfully to make MDF are waste paper, randomly collected waste wood, and bamboo. In addition, wood has been mixed with fibres of various non-wood materials, such as glass, steel, carbon, and aramide, to create successful MDF-type products.

MDF is used for furniture, cabinets, and mouldings. Noted for its good interior machinability, it is being used increasingly for the trim around windows and doors, and for baseboards. In addition, MDF makes a very stable underlay for a laminated countertop.

Particleboard

Particleboard is made from scrap wood that has been ground up and glued together, and is very dense, heavy, and flat. Typically, it is advertised by the type of wood (e.g. Douglas Fir, Southern Pine, Western Pine, etc.) that it contains.

Oriented Strand Board (OSB)

OSB is a combination of waterproof, heat-cured adhesives and rectangle-shaped strands of wood arranged in cross-oriented layers, reminiscent of the alternating grain patterns in veneer-core plywood. This manufacturing process results in a structurally engineered wood product that has many of the same strength and performance characteristics of plywood. Produced in huge, continuous mats, OSB is a solid panel product of consistent quality with no laps, gaps, or voids. Whereas veneer-based boards are vulnerable to distortion, splitting, and delaminating, OSB exhibits none of these stress characteristics, has excellent moisture tolerance, and is one of the best alternatives to plywood.

Solid Wood

Solid wood cabinets are expensive. Most custom shops that provide this construction material use it only to face-frame the cabinets. In other words, the front frames and doors are fashioned from solid wood, but an engineered wood product is used to construct the rest of the cabinet. Using engineered wood eliminates the labour involved in joining pieces of wood together to produce the panel sizes needed to construct the cabinet. In addition, whereas wood constantly changes in size in reaction to changes in temperature and humidity, engineered wood products are more stable in this regard and, therefore, last longer without needing to be refinished.

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CMA Canada 21

Exhibit H

VALUE OF BUILDING PERMITS BY PROVINCE/TERRITORY

All permits 1999 2000 2001 2002 $ millions

Canada 35,645.4 36,950.3 40,856.1 47,262.1Newfoundland and Labrador 296.8 282.9 298.3 383.3Prince Edward Island 140.9 98.8 217.2 146.2Nova Scotia 907.2 878.5 699.9 877.3New Brunswick 481.2 484.6 535.1 663.8Quebec 5,939.6 6,272.0 7,571.1 8,628.4Ontario 16,732.5 17,556.5 19,069.3 22,281.4Manitoba 879.4 853.9 739.2 888.9Saskatchewan 721.6 609.0 703.3 708.6Alberta 4,801.9 5,296.4 5,911.7 6,846.5British Columbia 4,695.5 4,492.0 4,954.8 5,659.4Yukon 48.8 55.5 49.8 31.3Northwest Territories – 23.0 76.0 91.6Nunavut – 47.2 30.4 55.4

(Extracted from the Statistics Canada Web site)

Exhibit I

VALUE OF BUILDING PERMITS BY TYPE 1999 2000 2001 2002 $ millions

Canada 35,736.2 36,950.2 40,856.2 47,262.1Residential 19,957.1 20,342.1 22,619.2 29,586.9Non-residential 15,779.1 16,608.1 18,237.0 17,675.2 Industrial 3,630.4 3,975.7 3,665.1 3,277.3 Commercial 8,462.9 8,906.6 9,307.1 8,642.0 Institutional and governmental 3,685.8 3,725.8 5,264.8 5,755.9

Documents

Michaels Custom Woodworking Ltd. Backgrounder 2005 Exam CMA