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Question;Assignment 1;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 $1,900 per;lot of 100 seats.?;Danielson: ?Roberta, I am at;full capacity. By making the cushioned seats for you, I have to cut my;production of deluxe office stools. The labor time freed by not having to;fabricate the frame and assemble the deluxe stool can be shifted to the production;of the economy stool. I?d like to sell the cushioned seats to you at my;variable cost, but I have excess demand for both products. I don?t mind;changing my product mix to the economy model and producing the cushioned seats;for you as long as I don?t change my division?s overall profitability. Here are;my standard costs for the two stools and a schedule of my manufacturing;overhead.? (See Exhibits 1 and 2.);Katz: ?I;guess I see your point, Nathan, but I don?t want to price myself out of the;market. In addition to pricing, I am also concerned about delivery. We?ll need;the counter seats within two weeks of placing our order or we risk losing some;important potential customers. Our outside supplier claims that they can meet;our timing needs.?;Danielson: ?Oh - oh. That;lead-time is a bit short considering the production re -scheduling we need to;do. I can?t promise you a lead-time shorter than four weeks at the moment.?;Katz: ?There?s;quite a few issues that need to be addressed here, Nathan. As we have no;previous experience in transferring goods between our divisions, I think we;should speak with the controller at corporate headquarters before we can agree;on a transfer price.?;Exhibit 1 ? Office;Division Standard Costs and Prices;Deluxe;Economy;Direct materials;Office;Stool;Office Stool;Framing.................................................................................;$;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 ($10.00/DLH).......................................;15.00..........;10.00......................................................................Totalstandardcost;$ 40.00..........;$ 30.00.........................................Sellingprice(including30%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..........................................................Totaloverhead;$ 3,000,000........................Capacityindirectlaborhours(DLH);300,000;Overhead rate per direct labor hour.........................;$;10.00;?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 ? Spring 2014 Page 21 of;33;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.;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;Assignment 2

 

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