PS5003ACC Management Accounting Case Study Brief | SUSS

Case Study

Collins Industries is a decentralised organization with five divisions. The company’s Electrical Division produces a variety of electrical items, including an A21 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $7.50 each; the fitting has a variable manufacturing cost of $4.25. The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of A21 fittings for only $5 each.

The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer. The cost of the brake unit being built by the Brake Division follows:

• Purchased parts (from outside vendors): $22.50
• Electrical fitting A21: $5.00
• Other variable costs: $14.00
• Fixed overhead and administration: $8.00
• Total cost per brake unit: $49.50

Although the $5 price for the A21 fitting represents a substantial discount from the regular $7.50 price, the manager of the Brake Division believes that the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard ‘through the grapevine’ that the airplane manufacturer plans to reject his bid if it is more than $50 per brake unit. Thus, if the Brake Division is forced to pay the regular $7.50 price for the A21 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Collins Industries uses return on investment (ROI) and profits to measure divisional performance.

Required

1. Assume that you are the manager of the Electrical Division. Write a report to the Managing Director to:

• Provide your recommendation on whether your division should supply the A21 fitting to the Brake Division for $5 each as requested. Justify your recommendation with reasons and full computations.
• Discuss if it is to the economic advantage of the company as a whole for the Electrical Division to supply the fittings to the Brake Division if the airplane brakes can be sold for $50. Provide full computations to support your arguments.
• Appraise the possibility of the two managers coming to an agreement on a transfer price in this situation. If so, what is the recommended range for the transfer price?
• Discuss the organisational and managerial behaviour problems inherent in this situation. What would you advise your Managing Director to do in this situation?

2. The board of directors are also considering a change to the information systems at Collins Industries. The existing systems are based on individual functions (production, sales, maintenance, finance and human resources). The board is considering the implementation of a new system based on an integrated, single database that would be accessible at any of the company’s sites. The company network would be upgraded to allow real-time input and update of the database. The database would support a detailed management information system and allow non-financial input and comparisons as well as financial.

• Discuss THREE types of external non-financial information that the new system should seek to capture and provide specific examples. Explain how this information may benefit the company.

Sources

You should review literature from various sources, including:

• Relevant chapters in the prescribed textbook
• Academic and professional journals
• Various books sourced via the library catalogue

Before starting the essay report, you should read over the marking rubric (i.e., the marking criteria sheet).