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Assignment 3: management accounting case: west island products

  Assignment 3: Management Accounting Case: West Island Products   Due Week 8, Day 7 (100 points)  6 pages The […]

 
Assignment 3: Management Accounting Case: West Island Products
 
Due Week 8, Day 7 (100 points)
 6 pages
The specific course learning outcomes associated with this assignment are:
 

 
 
Apply key techniques and concepts in measuring the cost of producing goods and
services.
 
 
 

 
 
Apply management accounting concepts to identify and process relevant financial
information for decision-making purposes.
 
 
 

 
 
Use technology and information resources to research issues in financial management.
 
 

 
 
Write clearly and concisely about financial management using proper writing mechanics.
Assignment:
 
West Island Products (WIP) is a divisionalized furniture manufacturer. The divisions are
 
autonomous segments with each division responsible for its own sales, cost of operations, and
 
equipment acquisition. Divisional performance is evaluated annually based on ROI. Each division
 
serves a different market in the furniture industry. Because the markets and products of the
 
divisions are so different, there have never been any transfers between divisions.
 
The Commercial Division of WIP, manufacturers furniture for the restaurant industry. The
 
Commercial Division plans to introduce a new line of counter chair units featuring a cushioned
 
seat. Roberta Katz, the Commercial Division manager, has discussed the manufacturing of the
 
cushioned seats with Nathan Danielson of the Office Division. They both believe a cushioned
 
seat currently made by the Office Division for use on its deluxe office stool could be modified for
 
use on the new counter chair. Consequently, Katz asked Danielson for a price for 100-unit lots of
 
the cushioned seats. The following conversation took place about the price to be charged for the
 
cushioned seats.
 
 
 
Danielson:
 
 
 
“Roberta, we can make the necessary modifications to the cushioned seat easily.
The raw materials used in the new counter chair seat are slightly different and
 
should cost about 10 percent more than those used in our deluxe office stool.
 
However, the labor time should be the same because the seat fabrication
 
process is the same. I would price the cushioned seat at our regular rate: full cost
 
plus a 30 percent mark-up. According to my calculations, that would be $2,053
 
per lot of 100 seats.”
 
 
Katz:
 
 
 
“That’s higher than I expected, Nathan. I was thinking that a good price would be
your variable manufacturing cost. After all, your fixed costs will be incurred
 
regardless of this job. In addition, I have received a quote from one of the
 
Commercial Division’s regular suppliers to provide us with the counter seats at
 
$1,900 per lot of 100 seats.”
 
 
Danielson:
 
 
 
“Roberta, I am at full capacity. By making the cushioned seats for you, I have to
cut my production of deluxe office stools. The labor time freed by not having to
 
fabricate the frame and assemble the deluxe stool can be shifted to the
 
production of the economy stool. I’d like to sell the cushioned seats to you at my
 
variable cost, but I have excess demand for both products. I don’t mind changing
 
my product mix to the economy model and producing the cushioned seats for
 
you as long as I don’t change my division’s overall profitability. Here are my
 
standard costs for the two stools and a schedule of my manufacturing overhead.”
 
(See Exhibits 1 and 2.)
 
 
JWI 530: Financial Management I
 
Academic Submissions and Evaluations
 
©2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary
 
information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written
 
permission of Strayer University.
 
JWMI 530 – Spring 2014
 
Katz:
 
 
 
“I guess I see your point, Nathan, but I don’t want to price myself out of the
market. In addition to pricing, I am also concerned about delivery. We’ll need the
 
counter seats within two weeks of placing our order or we risk losing some
 
important potential customers. Our outside supplier claims that they can meet our
 
timing needs.”
 
 
Danielson:
 
 
 
“Oh-oh. That lead-time is a bit short considering the production re-scheduling we
need to do. I can’t promise you a lead-time shorter than four weeks at the
 
moment.”
 
 
Katz:
 
 
 
“There’s quite a few issues that need to be addressed here, Nathan. As we have
no previous experience in transferring goods between our divisions, I think we
 
should speak with the controller at corporate headquarters before we can agree
 
on a transfer price.”
 
 
Exhibit 1 – Office Division Standard Costs and Prices
 
Deluxe
 
Office Stool
 
Economy
 
Office Stool
 
Direct materials:
 
Framing ……………………………………………………………………….. $ 7.35 …………………….$.. .6….5..0.. ……………………………………………………………………………………………..
 
Cushioned seat …………………………………………………………….. 6.40 —
 
Molded seat (purchased) ……………………………………………….. — ……………………….6….0..0.. ……………………………………………………………………………………………..
 
Direct Labor:
 
Frame fabrication (0.5 hrs. @ $7.50/hr.) …………………………… 3.75 ……………………….3….7..5.. ……………………………………………………………………………………………..
 
Cushion fabrication (0.5 hrs. @ $7.50/hr.) ………………………… 3.75 …………………………..—… ……………………………………………………………………………………………..
 
Assembly (0.5 hrs. @ $7.50/hr.) ……………………………………… 3.75 ……………………….3….7..5.. ……………………………………………………………………………………………..
 
Manufacturing overhead ($10.00/DLH) ………………………………….. 15.00 ……………………..1..0….0..0.. ……………………………………………………………………………………………..
 
Total standard cost ……………………………………………………………… $ 40.00 …………………..$.. .3..0….0..0.. ……………………………………………………………………………………………..
 
Selling price (including 30% mark-up) ……………………………………. $ 52.00 …………………..$.. .3..9….0..0.. ……………………………………………………………………………………………..
 
Exhibit 2 – Office Division Manufacturing Overhead Budget
 
Overhead Item Description Amount
 
Supplies ………………………………. Variable …………………………………………………………………..$.. .3..7..0..,.0..0..0.. ……………………………..
 
Indirect labor ………………………… Variable ……………………………………………………………………..3..7..5..,.0..0..0.. ……………………………..
 
Supervision ………………………….. Fixed …………………………………………………………………………1..5..0..,.0..0..0.. ……………………………..
 
Power …………………………………. Variable ……………………………………………………………………..1..8..0..,.0..0..0.. ……………………………..
 
Heat and light ………………………. Fixed …………………………………………………………………………1..2..0..,.0..0..0.. ……………………………..
 
Property tax & insurance ……….. Fixed …………………………………………………………………………1..3..0..,.0..0..0.. ……………………………..
 
Depreciation ………………………… Fixed ………………………………………………………………………1..,.1..0..0..,.0..0..0.. ……………………………..
 
Employee benefits ………………… Variable ……………………………………………………………………..5..7..5..,.0..0..0.. ……………………………..
 
Total overhead ………………………………………………………$.. .3..,.0..0..0..,.0..0..0.. ……………………………..
 
Capacity in direct labor hours (DLH) ………………………………3..0..0..,.0..0..0.. ……………………………..
 
Overhead rate per direct labor hour ………………………………..$.. .1..0….0..0.. ……………………………..
 
Required:
 
JWI 530: Financial Management I
 
Academic Submissions and Evaluations
 
©2014 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary
 
information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written
 
permission of Strayer University.
 
JWMI 530 – Spring 2014
 
Your goal is to examine this situation and recommend a course of action for Roberta Katz and
 
Nathan Danielson.
 
1. Re-examine Nathan Danielson’s calculation of a transfer (selling) price for the cushioned
 
seats to the Commercial Division. Based on the information provided, determine/confirm
 
the transfer price that would meet Danielson’s objective regarding the profitability of the
 
Office Division.
 
2. Discuss the pros and cons of each option (i.e., in-sourcing and out-sourcing). Include in
 
your analysis what you believe the corporate controller is likely to recommend and why.
 
3. How would you suggest that the company handles such transfer disputes in the future
 
(i.e., what policies would you suggest putting in place)? Make sure your recommendation
 
includes financial policies around setting a transfer price range. Support your suggestion
 
by examining the advantages and disadvantages of its adoption.
 

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