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. Thankfully, the labor time freed by not having to

 

fabricate the frame and assemble the deluxe stool can be shifted to the production of an

 

economy stool. I would 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.)

 

 

 

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.. ……………………………..

 

 

 

 

 

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 Course Guide – Summer 2014

 

 

 

Page 22 of 31

 

 

 

 

 

Required:

 

 

 

Your goal is to examine this situation and recommend a course of action for Roberta Katz and Nathan

 

 

 

Danielson.

 

 

 

1. In an Excel spreadsheet or neatly hand-written notes uploaded as a PDF file,

 

 

 

a. Demonstrate your calculations of a transfer (selling) price for the cushioned seats to the

 

 

 

Commercial Division. You should re-examine Nathan Danielson’s calculation and also

 

 

 

calculate one that meets Roberta Katz’s request for a price based on variable and net

 

 

 

opportunity costs Based on information provided, determine/confirm a transfer price that

 

 

 

meets Danielson’s objective regarding maintaining the profitability of the Office Division.

 

 

 

2. In a Word document,

 

 

 

a. Discuss pros and cons of each option (i.e., in-sourcing and out-sourcing). Include in your

 

 

 

discussion what you believe the corporate controller is likely to recommend and why.

 

 

 

b. Discuss how you would 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

 

 

 

 

 

 

 

 

 

Note- I need to deliver 2 documents one excel and one word,  Note-the word document  should be in the format – Sample Professional Paper Jan 2014 -attached.

 

if any questions les me know. (The excel format I shall attach in a couple days)

 

Also be noted- i have attatched a PDF that entails in detail what I need for Assignment 3: Management Accounting Case: West Island Products- please search in the PDF only for  items related to Assignment 3: Management Accounting Case: West Island Products

 

 

 

The Dead line is August 8th 2014***