CASE REPORT
Management Accounting Page 1
Having impressed the Board of Directors with the analysis that you prepared for Maureen Pistana,
the Chief Financial Officer at Greenwood Industries, you have been invited to be present at the next
senior managers’ meeting. Before you attended the meeting, Maureen spoke to you. “Be careful
with what you promise them in the meeting as you will be held accountable for that. Don’t go
promising to do things that you cannot, otherwise I won’t be able to back you up. Trust me, your
first analysis is not going to save you if you take on too much and stuff-up here!”
All the divisional managers were present at the meeting and these included Michael Fowler
(Birchtree: electronic medical products), Gordon Stapleton (Pinetree: video cameras), Shirley Robson
(Oaktree: large screen TVs), Alice Nguyen (Cedartree: kitchen accessories) and Vijay Chandra
(Gumtree: sound systems). Additionally, the CEO, Charles Kim, was present along with Maureen. This
made for a very large and noisy meeting.
“Thank you everyone for being here today,” began Charles. “I know all of us are very busy, so we will
try to keep this meeting short and sharp. First off, thanks to Maureen and your team for producing
the last analysis for us. It was extremely helpful and concise. I am glad that you brought the person
responsible for the analysis along for this meeting and hopefully you’ll be able to contribute more to
this group,” Charles said as he addressed you. “Now, I note that you have helped Michael here with
his planning schedules. Michael tells me that he is very impressed with your work and you have
made interpreting the information that he has, so much simpler. Michael thinks that you have done
a fantastic job and highly recommends your work. So Maureen, we should be proud to have
someone of this calibre working in your team. So let’s move along here with another issue that
Michael has. Your floor, Michael.”
Michael: “Thank you Charles. As you know, we produce electronic medical equipment and
one of these is the Heartpump 5000, a defibrillator analyser. The Heartpump 5000
uses a part called QoN67 and we need 10 units of part QoN67 each month in the
production of Heartpump 5000. Each unit of part QoN67 that we produce costs us
$63,600. How we got that information is provided here:
Direct material ……………………………………………………………………………………….. $3,000
Material Handling (20% of direct material cost) ……………………..…………….. 600
Direct labour ……………………………………………………………………………..…………… 24,000
Manufacturing overhead (150% of direct labour cost) ………..……..…………. 36,000
Total manufacturing cost ………………………………………………………..…………. $63,600
CASE REPORT
Management Accounting Page 2
Michael: “Now, also note that Material Handling is a separate charge from manufacturing
overhead and is an additional charge. How did we get this charge? Well, it’s the
direct variable cost of the Receiving Department that is applied to not only direct
materials, but also on any purchased components that comes in. This application is
typically based on the cost of the direct materials being received or on the
components being received. Our annual manufacturing overhead budget is onethird
variable and two-thirds fixed.”
Charles: “So what’s the issue then?”
Michael: “Well, we received an offer from one of our reliable vendors, Chivas Walker, to
supply the QoN67 that we need for $45,000 apiece. The price looks fantastic and we
know that Chivas Walker produces some excellent stuff. Furthermore, if we do
decide to buy from Chivas Walker, then we could use the space freed up to produce
Eyescan 1000, a new product that we have developed. My team and I have worked
out that Eyescan 1000 will make us a contribution of $156,000. So the question
becomes, should we just buy QoN67 from Chivas Walker and use the space to
produce Eyescan 1000 or should we continue producing QoN67 ourselves and forget
about Eyescan 1000?”
Charles, addressing you: “So, how about you prepare a report on the two options that
Michael has just stated and tell us what we should do? Off the top of my head now,
it seems like the Chivas Walker deal is a great deal and we can use the space for
Eyescan 1000. But I want to see a detailed report on the two options. Tell us which
option is better financially, and tell us of any benefits and/or costs that we have to
bear with your recommended option.”
As you nodded your assent and was thinking about how you were going to structure your report,
Charles carried on: “Now, Alice, I believe you have a problem in Cedartree that needs sorting as
well?”
Alice: “I have some preliminary budget information for next year here about our three
blenders: Café series, Professional series, and Masterpiece series. We have had
CASE REPORT
Management Accounting Page 3
significant variations in sales and variable costs over the last few years and I think we
need to carefully evaluate these data, especially in terms of breaking even.”
Café Professional Masterpiece
Unit sales ………………………………………………………. 50,000 50,000 100,000
Unit selling price …………………………………………… $84 $108 $144
Variable manufacturing cost per unit …………… 39 36 75
Variable selling cost per unit …………………………. 15 12 18
Charles: “Yes, we need to know more about the breakeven, considering how your division
don’t seem to be able to do it!”
Alice: “I understand your concern Charles, but let me finish please. We have budgeted
fixed manufacturing overhead at $6,000,000 and fixed selling and administrative
expenses at $1,800,000. Now, what we need to know is how many of each of the
Café, Professional and Masterpiece series do we need to sell to break even?”
Maureen: “That is easy enough; we’ll get right on that and give you a report.”
Alice: “That’s not all. Those preliminary estimates were completed last month. However,
we have just found out that the variable manufacturing cost of Masterpiece would
be expected to increase by 20 percent and the variable selling cost of Professional
could be expected to increase by $3 per unit. Even with these possible increases, I
think that keeping prices at the current level makes sense. Otherwise, we would not
be able to compete with our competitors. I have also learnt that the Masterpiece is
seen as the best value in the market, and we can expect to sell three times as many
of the Masterpiece as each of the other blenders. So, if these circumstances
eventuate, how many of each of the blenders do I need to sell to break even?”
Maureen: “Well, that complicates matters a bit, but I see no reason why we can’t get you all
the numbers you need.” (throwing you a glance).
Charles: “Good! Moving along…… Gordon…..something from Pinetree?”
CASE REPORT
Management Accounting Page 4
Gordon: “Yes, we have just received an order from SHC for a batch of 5,000 units of
microscopic lenses for their video cameras. However, they are only willing to pay
$35 for each and they want it next month. We are currently selling them for $45
each and I don’t see how we can accept the price they have offered.”
Maureen: “Before you get too worked up Gordon, tell us more about these lenses.”
Gordon: “Well, these are the costs of producing the lenses:
Direct materials…………………………………… $9
Direct labour ………………………………………. 8
Manufacturing overhead …………………. 10
Total manufacturing cost…………… 27
“The unit manufacturing overhead is based on a $4 variable cost per unit and
$120,000 fixed costs. The nonmanufacturing costs, which are all variable, are $8 per
unit. SHC has indicated that they will share the nonmanufacturing cost equally with
us. Our monthly production capacity is 20,000 units, but we are currently producing
16,000 units. And as I have mentioned already, we are currently selling these lenses
for $45 each but they want it at $35 each.”
Charles: “SHC is a reputable company and getting this order would be good for us, but I
cannot see how this can be profitable for us. Maureen, get to work on this and show
me the calculations and tell me what we should do. Now, Vijay, I know you have
been waiting patiently for this, so tell us what Gumtree requires.”
Vijay: “Well, my people have produced a sales budget for next quarter, but I am not sure
about it. They seem to have just taken last year’s figures and increased it slightly.
How is this possible? Aren’t there other factors we need to consider in order to get a
realistic sales estimate? If all I have to do is use last year’s numbers, then I can do it
myself. Do I really need them to work it out for me? Come on, there has to be other
things that we need to look at!”
Charles: “I agree. Maybe Maureen and her team can come up with something that tells us
what other factors need to be considered. Is that it?”
CASE REPORT
Management Accounting Page 5
Vijay: “Not really, no. My people have also compiled some data (Appendix A) regarding the
housings that we use for our speakers for the next quarter. I would appreciate some
information on how much we need to produce and how much we need to spend.
Have a look at the data.”
Charles: “Well, if that is all you need, I am sure Maureen and her team can have a look at the
data in their own time. We don’t need to all be here for that. Maureen, make sure
you get us all that we have asked for by the next meeting.”
With that, Charles stood up and the meeting was adjourned.
REQUIRED:
Prepare a report (no more than 10-pages) for Maureen Pistana and Charles Kim that addresses the
following:
a) Whether Birchtree should accept the offer from Chivas Walker to supply QoN67 (remember
that if we do accept the offer, we can use the freed up resources to produce Eyescan 1000);
and whether there are any qualitative factors that Michael Fowler needs to consider;
b) Determine for Alice Nguyen the unit sales for each of the blenders based on the original data
provided in order to breakeven; and then, the new unit sales based on the costs increases
that Alice have informed you about in order to breakeven;
c) Are there any other factors apart from price that is preventing Pinetree from accepting the
SHC order? If price is the main issue, what is the minimum price that we could charge SHC
for its order?
d) Discuss the factors to be considered for sales forecasting; determine how many units of
small and large housings will be produced in the next quarter; determine the quantity of
sheet metal, bar stock and base to be purchased; determine the direct-labour budget and
manufacturing overhead budget for the next quarter; and determine the cost of the
budgeted finished goods inventory at the end of the next quarter.
**Note that Appendix A is to be used only for Gumtree division’s requirements.
CASE REPORT
Management Accounting Page 6
APPENDIX A
? Sales forecast for next quarter:
? Raw materials prices and inventory levels:
Raw materials
Expected inventories,
beginning of quarter
Desired inventories,
end of quarter
Anticipated
purchase price
Sheet metal ……………….. 32,000 kg 36,000 kg $8
Bar stock ……………………. 29,000 kg 32,000 kg 5
Base …………………………… 6,000 units 7,000 units 3
? Use of raw materials:
? Direct labour requirements and rates:
Product Hours per unit Rate per hour
Small housing ………………………………….. 2 $15
Large housing …………………………………… 3 20
? Finished goods inventory (in units):
Product
Expected inventories,
beginning of quarter
Desired inventories,
end of quarter
Small housing ………………………………….. 20,000 25,000
Large housing …………………………………… 8,000 9,000
? Manufacturing overhead:
Overhead cost item Activity-based budget rate
Purchasing and material handling …………… $0.25 per kg of sheet metal and bar stock purchased
Depreciation, utilities and inspection ……… $4 per housing produced (either type)
Shipping ………………………………………………….. $1 per housing shipped (either type)
Product Units Price
Small housing ………………………………….. 60,000 $65
Large housing …………………………………… 40,000 95
Amount used per unit
Raw materials Small Housing Large Housing
Sheet metal ……………………………….. 4 kg 5 kg
Bar stock ……………………………………. 2 kg 3 kg
Base …………………………………………… 1 unit
CASE REPORT
Management Accounting Page 7
General manufacturing overhead …………… $3 per direct labour hour
