Understanding costs and their impact on managers Magdelinna Corporation manufac- tures pharmaceuticals, medical products, and medical delivery systems for certain types of commonly used drugs manufactured by the company. Recently Magdelinna was acquired by Rogers Medical, Inc., a larger medical industry company. The takeover, although not hostile, has not gone as smoothly as expected. Several meetings between management of the acquiring company and Magdelinna management have ended with shouting, unresolved problems, and hard feelings.

After a recent meeting several Magdelinna managers were talking about how the meeting went. "This takeover was a big mistake," said Brenda. "Rogers doesn't have any idea how we operate. Did you hear them say twenty percent of their corporate office expenses would be allocated to production departments here at Magdelinna?" "Yes I heard," commented Ted, "but that's not all. They also said we had to sell all of our products through their marketing network. What about our sales and distribution network? It has worked well for years. We have a lot of customers loyal to our products and to our salespeople. I bet they haven't thought about that." Dan noted the thing that most disturbed him about the meeting, "was the constant references by Rogers management to the high unit production cost data for last year. Last year we experienced low production and sales because of the three month strike at the plant. Although we planned for the strike by building higher than normal inventory levels, overall sales were still down. Unfor- tunately our sales, distribution, and administrative costs did not decline for the year."

At the offices of Rogers Medical, Inc., management was doing its own review of the recent meeting. Christy commented, "The Magdelinna people are just going to have to think more like a big corporation. After all, we have been in this market longer and in a bigger way than they have been. They will learn to appreciate our experience." Dwight noted that he had just done a market survey of selected Magdelinna customers and had found complaints about recent increases in product costs. "Exactly my point," chimed in Mark, "Remember at the meeting this morning I reported the higher unit costs for manufacturing last year? Your customer survey results prove my point." "I know we are all disappointed in how this new venture is going," said Christy, "But it is my job to make it work. This acquisition took a lot of time, work, and money and we must make it work. Starting today I want suggestions for developing a solid working relationship rather than a lot of moaning and complaining about our new partners at Magdelinna. Now let's get started."

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REQUIRED You are a consultant hired by Christy to help make this merger work. As part of your work you were able to attend the two meetings described above as well as the original meeting that both are talking about. Based on the information you gathered and your knowledge of costs and manage- rial accounting, what suggestions do you have? Be specific and feel free to provide illustrations.