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Management Accounting Case: West Island Products
(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.)
Academic Submissions and Evaluations
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:
Academic Submissions and Evaluattion
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.
Grading:
Grades for this assignment will be based on answer quality, logic/organization of the paper, and
language and writing skills, using the following rubric:
Assignment Points Percentage Grade
90 – 100 90% – 100% A
80 – 89 80% – 89% B
70 – 79 70% – 79% C
0 – 69 0% – 69% F
Points: 100 Assignment 3: Management Accounting Case: West Island Products
Criteria
Unacceptable
0-69% F
Fair
70-79% C
Proficient
80-89% B
Exemplary
90-100% A
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.
Weight: 50%
Did not submit or
incompletely
analyzed the
transfer (selling)
price.
Partially analyzed
the transfer
(selling) price.
Satisfactorily
analyzed the
transfer (selling)
price.
Thoroughly
analyzed the
transfer (selling)
price.
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.
Weight: 20%
Did not submit or
incompletely
analyzed the pro’s
and con’s of each
option.
Partially analyzed
the pro’s and con’s
of each option.
Satisfactorily
analyzed the pro’s
and con’s of each
option.
Thoroughly
analyzed the pro’s
and con’s of each
option.
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 your
Did not submit or
incompletely
analyzed
recommendations
Partially analyzed
recommendations
for handling the
transfer pricing
Satisfactorily
analyzed
recommendations
for handling the
Thoroughly
analyzed
recommendations
for handling the
recommendations and include financial
policies around setting a transfer price
range. Support your suggestion by
examining the advantages and
disadvantages of its adoption.
Weight: 20%
for handling the
transfer pricing
process.
process. transfer pricing
process.
transfer pricing
process.
4. Clarity, writing mechanics, and
formatting requirements.
Weight: 10%
Multiple
mechanics errors
or much of the text
is difficult to
understand and
fails to follow
formatting
instructions. The
text does not flow.
Several
mechanics errors
make parts of the
text difficult to
understand; the
text does not flow
or the discussion
fails to justify
conclusions and
assertions.
More than a few
mechanics errors
or text flows but
lacks conciseness
or clarity;
assertions and
conclusions are
generally justified
and explained.
Few mechanics
errors; text flows
and concisely and
clearly expresses
the student’s
position in a
manner that
rationally and
logically develops
the topics.
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