Assignment 3: management accounting case: west island products

 

Assignment 3: Management Accounting Case: West Island Products

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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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