Fall $2024$ MBA $-$ Management Accounting

Case Unit $5-$ due September $29$

Charms, Inc.

Charms produces $4$ products in three operating divisions. The Yellow Division produces Stars and

Moons, the Green Division produces Clovers, and the Pink Division produces Hearts. The manager of

each division is evaluated based on total operating income and receives a bonus equal to $10\%$ of the

total operating income for the division.

The sales of each product are shown below. Each of the products has direct costs of materials, labor,

and unit overhead, also shown below. In addition to these costs, each product is allocated a portion of

the $$1,800,000$ in fixed corporate overhead based on direct labor dollars.

At the first meeting of the division managers the following year, the Yellow Division manager

announces his plan to discontinue the Moons product, suggesting that the allocated fixed costs are

killing the line, making it unprofitable. The Moons labor force will be let go $-$ cutting a significant cost for

the company. As no replacement product is planned, other direct costs will be saved as well.

Provide a case analysis in professional form to determine whether, or not, the Yellow

Division manager is on the right track.

Required to be addressed in your analysis:

a$.$ Is this the best decision for the company?

b$.$ Is it the best decision for the Yellow Division manager?

Support your answers with computations. Compute the company profit and the division managers'

bonuses with and without the Moon line.

c$.$ Is there a problem with the current evaluation$/$incentive system? If so$,$ what changes would you

suggest?