ASSIGNMENT 3 - Management Accounting Case: West Island Products
Question # 00017633
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Updated on: 06/15/2014 01:58 PM Due on: 06/30/2014
Management Accounting Case: West Island Products
Assignment 3: Management Accounting Case: West Island Products
Due Week 8, Day 7 (100 points)
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.)
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 ................................ $ 6.50................................ ..............................................................................
Cushioned seat ....................................................................... 6.40 —
Molded seat (purchased) ........................................................ — ................................ 6.00................................ ..............................................................................
Direct Labor:
Frame fabrication (0.5 hrs. @ $7.50/hr.) ................................. 3.75 ................................ 3.75................................ ..............................................................................
Cushion fabrication (0.5 hrs. @ $7.50/hr.) .............................. 3.75 ................................—................................ ..............................................................................
Assembly (0.5 hrs. @ $7.50/hr.) ............................................. 3.75 ................................ 3.75................................ ..............................................................................
Manufacturing overhead ($10.00/DLH) ......................................... 15.00 ................................ 10.00................................ ..............................................................................
Total standard cost ........................................................................ $ 40.00 ................................ $ 30.00................................ ..............................................................................
Selling price (including 30% mark-up) ........................................... $ 52.00 ................................ $ 39.00................................ ..............................................................................
Exhibit 2 – Office Division Manufacturing Overhead Budget
Overhead Item Description Amount
Supplies ..................................... Variable ................................................................................................ $ 370,000 ................................
Indirect labor .............................. Variable ................................................................................................ 375,000 ................................
Supervision ................................ Fixed ................................................................................................ 150,000................................ ....
Power ........................................ Variable ................................................................................................ 180,000 ................................
Heat and light ............................ Fixed ................................................................................................ 120,000................................ ....
Property tax & insurance ........... Fixed ................................................................................................ 130,000................................ ....
Depreciation .............................. Fixed ................................................................................................ 1,100,000................................ ....
Employee benefits ..................... Variable ................................................................................................ 575,000 ................................
Total overhead ................................................................$ 3,000,000 ................................ .....................
Capacity in direct labor hours (DLH) ................................................................ 300,000 ....................
Overhead rate per direct labor hour ................................................................ $ 10.00 .....................
Required:
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.
Assignment 3: Management Accounting Case: West Island Products
Due Week 8, Day 7 (100 points)
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.)
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 ................................ $ 6.50................................ ..............................................................................
Cushioned seat ....................................................................... 6.40 —
Molded seat (purchased) ........................................................ — ................................ 6.00................................ ..............................................................................
Direct Labor:
Frame fabrication (0.5 hrs. @ $7.50/hr.) ................................. 3.75 ................................ 3.75................................ ..............................................................................
Cushion fabrication (0.5 hrs. @ $7.50/hr.) .............................. 3.75 ................................—................................ ..............................................................................
Assembly (0.5 hrs. @ $7.50/hr.) ............................................. 3.75 ................................ 3.75................................ ..............................................................................
Manufacturing overhead ($10.00/DLH) ......................................... 15.00 ................................ 10.00................................ ..............................................................................
Total standard cost ........................................................................ $ 40.00 ................................ $ 30.00................................ ..............................................................................
Selling price (including 30% mark-up) ........................................... $ 52.00 ................................ $ 39.00................................ ..............................................................................
Exhibit 2 – Office Division Manufacturing Overhead Budget
Overhead Item Description Amount
Supplies ..................................... Variable ................................................................................................ $ 370,000 ................................
Indirect labor .............................. Variable ................................................................................................ 375,000 ................................
Supervision ................................ Fixed ................................................................................................ 150,000................................ ....
Power ........................................ Variable ................................................................................................ 180,000 ................................
Heat and light ............................ Fixed ................................................................................................ 120,000................................ ....
Property tax & insurance ........... Fixed ................................................................................................ 130,000................................ ....
Depreciation .............................. Fixed ................................................................................................ 1,100,000................................ ....
Employee benefits ..................... Variable ................................................................................................ 575,000 ................................
Total overhead ................................................................$ 3,000,000 ................................ .....................
Capacity in direct labor hours (DLH) ................................................................ 300,000 ....................
Overhead rate per direct labor hour ................................................................ $ 10.00 .....................
Required:
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.
-
Rating:
/5
Solution: Management Accounting Case: West Island Products