Assignment
Case Study 1: Portable Phones Inc.
Portable Phones Inc. manufactures and sells wireless telephones for residential and commercial use. Portable Phones' plant is organized by product line, with five phone assembly departments in total. Each of these five phone assembly departments is responsible for the complete production of a particular phone line, including manufacturing some parts, purchasing other parts, and assembling the unit.
Each of the five phone assembly department managers reports to a product-line manager who has profit responsibility for his/her product. These five product-line managers have authority over pricing, marketing, distribution, and production of their product. Each of the five phone assembly departments is a cost center within its respective product-line profit center.
A key component of each phone is the circuit board(s) containing the integrated circuit chips. Each phone assembly department purchases from outside vendors the basic boards and chips to be attached to its board(s). The board department of the plant receives the boards and chips in kits from each phone assembly department and assembles them into completed boards ready for assembly into the phones. The board department (with a cost structure that is 80 percent fixed and 20 percent variable) uses a single highly automated assembly line of robotic insertion machines to precisely position each chip on the board and soldering machines to solder the chips onto the board. The board department is a common resource for the plant; all five of the phone assembly departments use the board department to assemble some or all of their boards. Since the board department has a single assembly line, it can only assemble boards for one type of phone at a time. The assembly departments have authority to seek the most competitive supplier for all their parts and services, including circuit board assembly.
The board department's assembly schedule is determined at the beginning of each month. The five assembly departments request a time during the month when they plan delivery of particular kits to the board department and specify the number of boards to be assembled. The manager of the board department then takes these requests and tries to satisfy the assembly departments' requests.
However, the board department manager finds that she has a peak load problem; the assembly departments tend to want their boards assembled at the same time. The only way to satisfy these requests is to work overtime shifts during these peak periods even though the board department has excess capacity at other times of the month.
The total monthly costs of the board department (equipment depreciation, maintenance, direct labor, supervision, and engineering support) are assigned to the phone assembly departments based on an hourly rate. The board department's total monthly costs are divided by the number of hours of capacity in the month (e.g., if a particular month has 22 working days, this is equivalent to 352 hours or 22 days Χ 2 shifts Χ 8 hours per shift) to arrive at a charge per hour. To give the phone assembly departments incentives to have their kits (boards and chips) delivered to the board department in a timely manner, the phone assembly department is charged for the time from when the last job (a batch of boards assembled for a phone assembly department) was finished by the board department until the time when the next job is finished. For example, suppose phone assembly department A's phones were finished at 9:00 a.m. and that department B delivered its kits at 1:00 p.m. and they were completed at 7:00 p.m. the same day. Department B would be charged for 10 hours of the board department's costs even though the board department was idle for 4 of the 10 hours.
When first installed, the board department was expected to be operating at full capacity, two shifts per day, six days per week. But due to increased competition and outsourcing of some models, the board department is now operating at about 70 percent of the initial planned capacity.
Required:
a. If you manage a phone assembly department, when during the month would you tend to request that your phone circuit boards be assembled by the board department (everything else being held constant)? Explain why.
b. Identify various dysfunctional behaviors likely to occur among the phone assembly departments and the board department.
c. What management changes would you suggest? In particular, what changes would you make in the accounting system? Explain why each change should be made.
Case Study 2: Joon
Joon manufactures and sells to retailers a variety of home care and personal care products. Joon has a single plant that produces all four of its product lines: Stick Goods (brooms and mops), Floor Care (strippers, soaps, and waxes), Brushes (hair brushes and shoe brushes), and Aerosols (room deodorizers, bug spray, furniture wax). The following statement summarizes Joon's financial performance for the most recent fiscal year.
Direct labor costs $21 per hour. Fixed manufacturing overhead of $4.433 million is allocated to products based on direct labor hours. Last year, the fixed manufacturing overhead rate was $31 per direct labor hour ($4.433 million/143,000 direct labor hours). Variable manufacturing overhead is $3.50 per direct labor hour. Selling, general, and administrative (SG&A) expenses consist of fixed costs ($1.35 million) and variable costs ($2,951 million). The variable SG&A is 20 percent of revenues.
The Joon plant has considerable excess capacity. Senior management has identified a potential acquisition target, Snuffy, that sells a line of automotive products (car waxes, soaps, brushes, and so forth) that are complementary to Joon's existing products and that can be manufactured in Joon's plant. Snuffy does not have any manufacturing facilities, but rather outsources the production of its products to contract manufacturers. Snuffy can be purchased for $38 million. The following table summarizes Snuffy's current operating data:
Senior management argues that the reason Joon is currently losing money is that volumes have fallen in the plant and that the remaining products are having to carry an increasingly larger share of the overhead. This has caused some Joon product managers to raise prices. Senior managers realize that they must drive more volume into the plant if Joon is to return to profitability. Since organic growth (i.e., growth from existing products) is difficult due to a very competitive marketplace, management proposes to the board of directors the purchase of Snuffy as a way to drive additional volume into the plant. With volume of 60,000 cases and 1.9 direct labor hours per case, Snuffy's car care product line will add 114,000 direct labor hours to the plant and increase volume about 80 percent (114,000/143,000). This additional volume will significantly reduce the overhead the existing products must absorb and allow the product managers to lower prices. To incorporate Snuffy's manufacturing and distribution into Joon's current operations, Joon will have to incur additional fixed manufacturing overhead of $450,000 per year for new equipment and $400,000 per year for additional SG&A expenses.
Required:
a. Prepare a pro forma financial statement that shows Joon's financial performance (net income) for the most recent fiscal year assuming that Joon has already acquired Snuffy's car care products and has incorporated them into Joon's manufacturing and SG&A processes. In preparing your analysis, make the following assumptions:
i. Snuffy's products have the same fixed and variable cost structure as Joon's existing lines (i.e., variable overhead is $3.50 per direct labor hour, and variable SG&A is 20 percent of revenues).
ii. The addition of Snuffy products does not change the demand for Joon's existing products.
iii. There are no positive or negative externalities in manufacturing from having the additional Snuffy volume in the plant.
iv. There is sufficient excess capacity in the plant and the local labor markets to absorb the additional Snuffy volume without causing labor rates or raw material prices to rise.
b. Based on your financial analysis in part (a), should Joon acquire Snuffy?
c. Evaluate management's arguments in favor of acquiring Snuffy.
d. What other advice would you offer Joon's management?
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.
Attachment:- Case-Statement.rar