Mark-Wright, Inc. (MWI) is a specialty frozen food processor located in the Midwest. Since its founding in 1982, MWI has enjoyed a loyal clientele that is willing to pay premium prices for the high-quality frozen foods it prepares from specialized recipes. In the past two years, the company has experienced rapid sales growth in its operating region and has had many inquiries about supplying its products on a national basis. To meet this growth, MWI expanded its processing capabilities, which resulted in in-creased production and distribution costs. Furthermore, MWI has been encountering pricing pressure from competitors outside its normal marketing region.
As MWI desires to continue its expansion, Jim Condon, CEO, has engaged a consulting firm to assist MWI in determining its best course of action. The consulting firm concluded that, while premium pricing is sustainable in some areas, if sales growth is to be achieved, MWI must make some price concessions. Also, in order to maintain profit margins, costs must be reduced and controlled. The consulting firm recommended the institution of a standard costing system that would facilitate a flexible budgeting system to better accommodate the changes in demand that can be expected when serving an expanding market area.
Condon met with his management team and explained the recommendations of the consulting firm. Condon then assigned the task of establishing standard costs to his management team. After discussing the situation with their respective staffs, the management team met to review the matter.
Jane Morgan, purchasing manager, advised that meeting expanded production would necessitate obtaining basic food supplies from other than traditional MWI sources. This would entail increased raw materials and shipping costs and could result in lower-quality supplies. Consequently, the increased costs would need to be made up by the processing department if current cost levels were to be maintained or reduced.
Stan Walters, processing manager, countered that the need to accelerate processing cycles to increase production, coupled with the possibility of receiving lower-grade supplies, can be expected to result in a slip in quality and a greater product rejection rate. Under these circumstances, per unit labor utilization might not be maintained or might be reduced, and forecasting future unit labor content would become very difficult.
Tom Lopez, production engineer, advised that if the equipment is not properly maintained and thoroughly cleaned at prescribed intervals, it can be anticipated that the quality and unique taste of the frozen food products would be affected.
Jack Reid, vice president of sales, states that if quality cannot be maintained, MWI cannot expect to increase sales to the levels projected.
When Condon was apprised of the problems encountered by his management team, he advised them that if agreement could not be reached on appropriate standards, he would arrange to have them set by the consulting firm and everyone would have to live with the results.
Required
A. Discuss the major advantages of using standards to control behavior.
B. Identify those who should participate in setting the standards and describe the benefits of their participation in the standard-setting process.
C. What could be the consequences if Jim Condon has the standards set by the outside consulting firm?