Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Variable and fixed operating costs total $100,000 and $50,000, respectively. In addition, Stanley allocates $20,000 of corporate administrative overhead to Maddox. If Maddox were to use the outside consultant, fixed operating costs would be reduced by 70%. 24. The irrelevant costs in Maddox's outsourcing decision total:

Maddox, a division of Stanley Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Variable and fixed operating costs total $100,000 and $50,000, respectively. In addition, Stanley allocates $20,000 of corporate administrative overhead to Maddox. If Maddox were to use the outside consultant, fixed operating costs would be reduced by 70%. 24. The irrelevant costs in Maddox's outsourcing decision total:

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter10: Evaluating Decentralized Operations

Section: Chapter Questions

Problem 17E: Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside...

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Boston Executive. Inc., produces executive limousines and currently manufactures the mini-bar inset at these costs: The company received an offer from Elite Mini-Bars to produce the insets for $2,100 per Unit and supply 1,000 mini-bars for the coming years estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the companys total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the mini bar production can be used by a different production group that will lease it for $55,000 per year. Should the company make or buy the mini-bar insert?
Renslen, Inc., a truck manufacturing conglomerate, has recently purchased two divisions: Meyers Service Company and Wellington Products, Inc. Meyers provides maintenance service on large truck cabs for 10-wheeler trucks, and Wellington produces air brakes for the 10-wheeler trucks. The employees at Meyers take pride in their work, as Meyers is proclaimed to offer the best maintenance service in the trucking industry. The management of Meyers, as a group, has received additional compensation from a 10 percent bonus pool based on income before income taxes and bonus. Renslen plans to continue to compensate the Meyers management team on this basis as it is the same incentive plan used for all other Renslen divisions, except for the Wellington division. Wellington offers a high-quality product to the trucking industry and is the premium choice even when compared to foreign competition. The management team at Wellington strives for zero defects and minimal scrap costs; current scrap levels are at 2 percent. The incentive compensation plan for Wellington management has been a 1 percent bonus based on gross margin. Renslen plans to continue to compensate the Wellington management team on this basis. The following condensed income statements are for both divisions for the fiscal year ended May 31, 20x1: Renslen, Inc. Divisional Income Statements For the Year Ended May 31, 20x1 Each division has 1,000,000 of management salary expense that is eligible for the bonus pool. Renslen has invited the management teams of all its divisions to an off-site management workshop in July where the bonus checks will be presented. Renslen is concerned that the different bonus plans at the two divisions may cause some heated discussion. Required: 1. Determine the 20x1 bonus pool available for the management team at: a. Meyers Service Company b. Wellington Products, Inc. 2. Identify at least two advantages and disadvantages to Renslen, Inc., of the bonus pool incentive plan at: a. Meyers Service Company b. Wellington Products, Inc. 3. Having two different types of incentive plans for two operating divisions of the same corporation can create problems. a. Discuss the behavioral problems that could arise within management for Meyers Service Company and Wellington Products, Inc., by having different types of incentive plans. b. Present arguments that Renslen, Inc., can give to the management teams of both Meyers and Wellington to justify having two different incentive plans.
Materials used by the Instrument Division of Ziegler Inc. are currently purchased from outside suppliers at a cost of 1,350 per unit. However, the same materials are available from the Components Division. The Components Division has unused capacity and can produce the materials needed by the Instrument Division at a variable cost of 900 per unit. a. If a transfer price of 1,000 per unit is established and 75,000 units of materials are transferred, with no reduction in the Components Divisions current sales, how much would Ziegler Inc.s total operating income increase? b. How much would the Instrument Divisions operating income increase? c. How much would the Components Divisions operating income increase?
Regal Executive, Inc., produces executive motor coaches and currently manufactures the cent awnings that accompany them at these costs: The company received an offer from Saied Tents to produce the awnings for $3,200 per unit and supply 1,000 awnings for the coming years estimated production. If the company accepts this offer and shuts down production of this part of the business, production workers and supervisors will be reassigned to other areas. Assume that for the short-term decision-making process demonstrated in this problem, the companys total labor costs (direct labor and supervisor salaries) will remain the same if the bar inserts are purchased. The specialized equipment cannot be used and has no market value. However, the space occupied by the awning production can be used by a different production group that will lease it for $60,000 per year. Should the company make or buy the awnings?
Boise, a division of Price Enterprises, currently performs computer services for various departments of the firm. One of the services has created a number of operating problems, and management is exploring whether to outsource the service to a consultant. Traceable variable and fixed operating costs total $103,000 and $48,000, respectively, in addition to $41,000 of corporate administrative overhead allocated from Price. If Boise were to use the outside consultant, fixed operating costs would be reduced by 70%. What are the irrelevant costs in Boise’s outsourcing decision?
Hannah Gilpin is the controller ofBlakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields.Her division has been under pressure to improve its divisional operating income. Currently,divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers,the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is includedin cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocatedcorporate overhead. The labor costs in question involve installation labor provided by traineeemployees. Myers argues, “the trainees are not as efficient as regular employees so this is unfairlyinflating our cost of goods sold. This is really a cost of training (administrative labor) not part of cost ofgoods sold.” Gilpin does not see a reason for reclassification of the costs, other than to avoid overheadallocation costs. Describe Gilpin’s…
Hannah Gilpin is the controller ofBlakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields.Her division has been under pressure to improve its divisional operating income. Currently,divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers,the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is includedin cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocatedcorporate overhead. The labor costs in question involve installation labor provided by traineeemployees. Myers argues, “the trainees are not as efficient as regular employees so this is unfairlyinflating our cost of goods sold. This is really a cost of training (administrative labor) not part of cost ofgoods sold.” Gilpin does not see a reason for reclassification of the costs, other than to avoid overheadallocation costs. What should Gilpin…
Gemma Company is a midsize manufacturing company with 120 employees and approximately $45 million in sales. Management has established a set of processes to purchase fixed assets, described in the following paragraphs: When a user department decides to purchase a new fixed asset, the departmental manager prepares an asset request form. When completing the form, the manager must describe the fixed asset, the advantages or efficiencies offered by the asset, and estimates of costs and benefits. The asset request form is forwarded to the director of finance. Personnel in the finance department review estimates of costs and benefits and revise these if necessary. A discounted cash flow analysis is prepared and forwarded to the vice president of operations, who reviews the asset request forms and the discounted cash flow analysis, and then interviews user department managers if he or she feels it is warranted. After this review, she selects assets to purchase until she has exhausted the…
The Hy-Tech Services Corporation employs researchers based in countries around the world. Employee time is the basis upon which charges to many customers are made. The geographically dispersed nature of its operations makes it extremely difficult for the payroll staff to collect time records, so the management team authorizes the design of an in-house, web-based timekeeping system. The project team incurs the following costs: Concept design - 2,500; Evaluation of design alternatives - 3,700; Determination of required technology - 8,100; Final selection of alternatives - 1,400; Software design - 28,000; Software coding - 42,000; Quality assurance testing - 30,000; Data conversion costs - 3,900; Training - 14,000; Overhead allocation - 6,900; General and administrative costs - 11,200; Ongoing maintenance costs - 6,000. Required: Compute the amount of intangible asset recognized from the given transactions
Hobart, Evans, and Nix is a small law firm that contains 10 partners and 12 support persons. The firm employs a job-order costing system to accumulate costs chargeable to each client, and it is organized into two departments - the Research and Documents Department and the Litigation Department. The firm uses predetermined overhead rates to charge the costs of these departments to its clients. At the beginning of the year, the firm's management made the following estimates for the year:Department Research and Documents Litigation Research-hours 31,000 — Direct attorney-hours 11,800 23,400 Legal forms and supplies £ 21,100 £ 6,700 Direct lawyer cost 593,300 1,186,700 Departmental overhead cost 930,000 474,680 The predetermined overhead rate in the Research and Documents Department is based on research-hours, and the rate in the Litigation Department is based on direct lawyer cost.The costs charged to each client are made up of three elements: legal forms and supplies used, direct lawyer…
Best Practices, Inc., is a management consulting firm. Its Corporate Division advises private firms on the adoption and use of cost management systems. Government Division consults with state and local governments. Government Division has a client that is interested in implementing an activity-based costing system in its public works department. The division’s head approached the head of Corporate Division about using one of its associates. Corporate Division charges clients $645 per hour for associate services, the same rate other consulting companies charge. The Government Division head complained that it could hire its own associate at an estimated variable cost of $245 per hour, which is what Corporate pays its associates. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division cannot…
Assume the company could eliminate one production supervisor with a salary of $30,000 if the component is purchased from an outside supplier. Indicate if the company should make or buy the component and the total dollar difference in favor of that alternative.