Part A: 4 tasks
Task 1: (approximately 500 words)
Blake Romney became Chief Executive Officer of Peters Inc. two years ago. At the time, thecompany was reporting lagging profits, and Blake was brought in to "stir things up." The companyhas three divisions, electronics, fibre optics, and plumbing supplies. Blake has no interest inplumbing supplies, and one of the first things he did was to put pressure on his accountants toreallocate some of the company's fixed costs away from the other two divisions to the plumbingdivision. This had the effect of causing the plumbing division to report losses during the last twoyears; in the past it had always reported low, but acceptable, net income.
Blake felt that this reallocation would shine a favourable light on him in front of the board of directorsbecause it meant that the electronics and fibre optics divisions would look like they were improving.Given that these are "businesses of the future," he believed that the stock market would reactfavourably to these increases, while not penalizing the poor results of the plumbing division. Withoutthis shift in the allocation of fixed costs, the profits of the electronics and fibre optics divisions would not have improved.
But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for
Peters their whole lives, would lose their jobs.
Required
1. If a division is reporting losses, does that necessarily mean that it should be closed?
2. Was the reallocation of fixed costs across divisions unethical?
3. What should Blake do?
Task 2 (approximately 500 words)
Easton Corporation makes two different boat anchors-a traditional fishing anchor and a high-endyacht anchor-using the same production machinery. The contribution margin of the yacht anchor isthree times as high as that of the other product. The company is currently operating at full capacityand has been doing so for nearly two years. Bjorn Borg, the company's CEO, wants to cut back onproduction of the fishing anchor so that the company can make more yacht anchors. He says thatthis is a "no-brainer" because the contribution margin of the yacht anchor is so much higher.
Required
Write a short memo to Bjorn Borg describing the analysis that the company should do before itmakes this decision and any other considerations that would affect the decision.
Task 3
Twyla Company operates a small factory in which it manufactures two products: C and D.
Production and sales results for last year were as follows.
|
|
Product D
|
Product D
|
|
Units sold
|
9,000
|
20,000
|
|
Selling price per unit
|
$95
|
$75
|
|
Variable cost per unit
|
$50
|
$40
|
|
Fixed cost per unit
|
$22
|
$22
|
For purposes of simplicity, the firm averages total fixed costs over the total number of units of C andD produced and sold.
The research department has developed a new product (E) as a replacement for product D. Marketstudies show that Twyla Company could sell 10,000 units of E next year at a price of $115; thevariable cost per unit of E is $40. The introduction of product E will lead to a 10% increase indemand for product C and discontinuation of product D. If the company does not introduce the newproduct, it expects next year's results to be the same as last year's.
Required
Should Twyla Company introduce product E next year? Explain why or why not. Show calculationsto support your decision.
Task 4
Crede Inc. has two divisions: Division A makes and sells student desks and Division manufactures and sells reading lamps.
Each desk has a reading lamp as one of its components. Division A can purchase reading lamps ata cost of $10 from an outside vendor. Division A needs 10,000 lamps for the coming year.Division B has the capacity to manufacture 50,000 lamps annually. Sales to outside customers areestimated at 40,000 lamps for the next year. Reading lamps are sold at $12 each. Variable costsare $7 per lamp and include $1 of variable sales costs that are not incurred if lamps are soldinternally to Division A. The total amount of fixed costs for Division B is $80,000.
Required: Consider the following independent situations:
1. What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? Justify your answer.
2. Suppose Division B could use the excess capacity to produce and sell externally 15,000 units of a new product at a price of $7 per unit. The variable cost for this new product is $5 per unit. What should be the minimum transfer price accepted by Division B for the 10,000 lamps and the maximum transfer price paid by Division A? Justify your answer.
3. If Division A needs 15,000 lamps instead of 10,000 during the next year, what should be the minimum transfer price accepted by Division B and the maximum transfer price paid by Division A? Justify your answer.
Part B: Critical reflection (approximately 1,000 words)
You had to practically apply the decision making models and tools you have learned about throughout the subject. Reflect on your experience in completing the various assessments in this course. What major learning on measurement and decision making can you apply in practice as a manager in your organisation?
The list below provides some questions you may wish to consider in your critical reflection.
These are suggestions only. You may address issues that are not on this list.
1. Has what you have learned in this subject created an increased awareness of the importance of decision making as a management activity? Why or why not?
2. Which model or tool most influenced you as you worked your way through the subject? Why?
3. How critical do you believe the quality of decision making is to an organisation? Why?
4. Which of the models and tools would you use as a manager? Why?