The following are specific course learning outcomes associated with this report:
- 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 with proper writing mechanics. This should cover:
a. Need the paper to discuss these 4 topics individually - i.e. each on their own: Insourcing Pros, Insourcing Cons, Outsourcing Pros, and Outsourcing Cons.
§ Each topic should discuss at least two pros or cons. Do not simply say, "There are many advantages to insourcing." and then list 5 or 7 things you found in the textbook and/or internet - it will not be considered as a thorough discussion.
§ Choose two most relevant in your opinion and discuss why you believe this. Strive for exemplary thought-leadership level of coverage .i.e. practical application
§ This should take up a full page....if not having gone well onto the next page.
b. Next is the Transfer Policy
§ This is the real core of the analysis or research - if you work for the most famous CEO, this is your shining moment you are called up on. There is a need for your division's current outdated policy needs to be scrapped and totally re-written.....or that the division does not have one at all and you have been asked to create it! Can you get this done right? Its your policy - own it àwhat would you recommend to maximize the "pros" and minimize the "cons" of insourcing? It's your policy, so feel free to also mention under what circumstances might/should the division allow outsourcing?
Report:
Berk Mart 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 Berk Mart manufactures furniture for the restaurant industry. The Commercial Division plans to introduce a new line of counter-chair units featuring a cushioned seat. Catherine Banks, the Commercial Division manager, has discussed the manufacturing of the cushioned seats with Nick Carter 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, Banks asked Carter 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.
Carter: "Catherine, 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."
Banks: "That's higher than I expected, Nick. 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."
Carter: "Catherine, 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.)
Banks: "I guess I see your point, Nick, but I don't want to price myself out of the market. I understand the need to maintain your division's overall profitability, so let's look at a price that utilizes variable costs, plus any net opportunity costs from the shifted production. In addition to pricing, I am also concerned about delivery. We will 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."
Carter: "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."
Banks: "There are quite a few issues that need to be addressed here, Nick. 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."
Required:
Your goal is to examine this situation and recommend a course of action for Catherine Banks and Nick Carter.
1. In an Excel spreadsheet file
a. Demonstrate your calculations of a transfer (selling) price for the cushioned seats to the Commercial Division.
b. Then re-examine Nick Carter's calculation and also calculate one that meets Catherine Banks's request for a price based on variable and net opportunity costs. Based on information provided, determine/confirm a transfer price that meets Carter's objective regarding maintaining the profitability of the Office Division. Provide your analysis and summary in the word document.
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.
1. Need the paper to discuss these 4 topics individually - i.e. each on their own: Insourcing Pros, Insourcing Cons, Outsourcing Pros, and Outsourcing Cons.
§ Each topic should discuss at least two pros or cons. Do not simply say, "There are many advantages to insourcing." and then list 5 or 7 things you found in the textbook and/or internet - it will not be considered as a thorough discussion.
§ Choose two most relevant in your opinion and discuss why you believe this. Strive for exemplary thought-leadership level of coverage .i.e. practical application
§ This should take up a full page....if not having gone well onto the next page.
2. Next is the Transfer Policy
§ This is the real core of the analysis or research - if you work for the most famous CEO, this is your shining moment you are called up on. There is a need for your division's current outdated policy needs to be scrapped and totally re-written.....or that the division does not have one at all and you have been asked to create it! Can you get this done right? Its your policy - own it à what would you recommend to maximize the "pros" and minimize the "cons" of insourcing? It's your policy, so feel free to also mention under what circumstances might/should the division allow outsourcing? Or a combination of insourcing and outsourcing?
This report is to be completed within 8-10 pages not including the Title Page, Executive summary, Appendix (if any) and Bibliography in APA format. Include all steps for calculation in the MS Excel file.
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Exhibit 1 - Office Division Standard Costs and Prices
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Deluxe Office Stool
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Economy Office Stool
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Direct materials:
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Framing
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$7.35
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$6.50
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Cushioned seat
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$6.40
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-
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Molded seat (purchased)
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-
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$6.00
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Direct Labor:
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Frame fabrication (0.5 hrs. @ $7.50/hr.)
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$3.75
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$3.75
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Cushion fabrication (0.5 hrs. @ $7.50/hr.)
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$3.75
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-
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Assembly (0.5 hrs. @ $7.50/hr.)
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$3.75
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$3.75
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Manufacturing overhead ($10.00/DLH)
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$15.00
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$10.00
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Total standard cost
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$40.00
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$30.00
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Selling price (including 30% mark-up)
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$52.00
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$39.00
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Exhibit 2 - Office Division Manufacturing Overhead Budget
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Overhead Item
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Description
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Amount
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Supplies
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Variable
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$ 370,000.00
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Indirect labor
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Variable
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$ 675,000.00
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Supervision
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Fixed
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$ 150,000.00
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Power
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Variable
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$ 180,000.00
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Heat and light
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Fixed
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$ 120,000.00
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Property tax & insurance
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Fixed
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$ 130,000.00
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Depreciation
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Fixed
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$ 800,000.00
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Employee benefits
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Variable
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$ 575,000.00
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Total Overhead
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$ 3,000,000.00
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Capacity in direct labor hours (DLH)
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$ 300,000.00
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Overhead rate per direct labor hour
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$ 10.00
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