GoodWishes Inc. [B]

Adapted from

Thomas L. Zeller, Loyola University Chicago, and Paul D. Kimmel, University of Wisconsin-Milwaukee

The Business Situation

GoodWishes Inc. has operated for many years as a nationally recognized retailer of greeting cards and small gift items. It has 1,500 stores throughout the United States located in high-traffic malls.

As the stock price of many other companies soared, GoodWishes's stock price remained flat. As a result of a heated 2013 shareholders' meeting, the president of GoodWishes, Phyllis Smythette, came under pressure from shareholders to grow GoodWishes's stock value. As a consequence of this pressure, in 2014 Ms. Smythette called for a formal analysis of the company's options with regard to business opportunities.

Location was the first issue considered in the analysis. GoodWishes stores are located in high-traffic malls where rental costs are high. The additional rental cost was justified, however, by the revenue that resulted from these highly visible locations. In recent years, though, the intense competition from other stores in the mall selling similar merchandise has become a disadvantage of the mall locations.

Ms. Smythette felt that to increase revenue in the mall locations, GoodWishes would need to attract new customers and sell more goods to repeat customers. In order for this to work, the company would need to add a new product line. However, to keep costs down, the product line should be one that would not require much additional store space. In order to improve earnings, rather than just increase revenues, GoodWishes would have to carefully manage the costs of this new product line.

After careful consideration of many possible products, the company's management found a product that seemed to be a very good strategic fit for its existing products: high-quality unframed and framed prints. The critical element of this plan was that customers would pick out prints by viewing them on wide-screen computer monitors in each store. Orders would be processed and shipped from a central location. Thus, store size would not have to increase at all. To offer these products, GoodWishes established a new e-business unit called Room PicsDcor.

Room PicsDcor is a "profit center"; that is, the manager of the new business unit is responsible for decisions affecting both revenues and costs.

Room PicsDcor was designed to distribute unframed and framed print items to each GoodWishes store on a just-in-time (JIT) basis. The system works as follows: The Room PicsDcor website allows customers to choose from several hundred prints. The print can be purchased in various forms: unframed, framed with a steel frame and no matting, or framed with a wood frame and matting. When a customer purchases an unframed print, it is packaged and shipped the same day from Room PicsDcor. When a customer purchases a framed print, the print is framed at Room PicsDcor and shipped within 48 hours.

Each GoodWishes store has a computer linked to Room PicsDcor's Web server so GoodWishes's customers can browse the many options to make a selection. Once a selection is made, the customer can complete the order immediately. Store employees are trained to help customers use the website to shop and to complete their purchases. The advantage to this approach is that each GoodWishes store, through the Room PicsDcor website, can offer a wide variety of prints, yet the individual GoodWishes stores do not have to hold any inventory of prints or framing materials. About the only cost to the individual store is the computer and high-speed line connection to Room PicsDcor. The advantage to the customer is the wide variety of unframed and framed print items that can be conveniently purchased and delivered to the home or business, or to a third party as a gift.

Room PicsDcor uses a traditional job order costing system. Operation of Room PicsDcor would be substantially less complicated, and overhead costs would be substantially less, if it sold only unframed prints. Unframed prints require no additional processing, and they can be easily shipped in simple protective tubes. Framing and matting requires the company to have multiple matting colors and frame styles, which requires considerable warehouse space. It also requires skilled employees to assemble the products and more expensive packaging procedures.

Manufacturing overhead is allocated to each unframed or framed print, based on the cost of the print. This overhead allocation approach is based on the assumption that more expensive prints will usually be framed and therefore more overhead costs should be assigned to these items. The predetermined manufacturing overhead rate (PMOR) is the total expected manufacturing overhead divided by the total expected cost of prints. This method of allocation appeared reasonable to the accounting team and distribution floor manager. Direct labor costs for unframed prints consist of picking the prints off the shelf and packaging them for shipment. For framed prints, direct labor costs consist of picking the prints, framing, matting, and packaging.

The information in Illustration CA 1-1 for unframed and framed prints was collected by the accounting and production teams. The manufacturing overhead budget is presented in Illustration CA 1-2.

Illustration CA 1-1 Information about prints and framed items for Room PicsDcor

Unframed Steel-Framed Print, Wood-Framed Print,

Print No Matting with Matting

Volumeexpected units 40,000 20,0006,000

Sold

Cost Elements

Direct materials

Print (expected average $12 $16 $20

cost for each of the

three categories)

Frame and glass $4 $6

Matting $4

Direct labor

Picking time 10 minutes 10 minutes 10 minutes

Picking labor rate/hour $12$12 $12

Matting and framing time 20 minutes30 minutes

Matting and framing rate/hour$24 $24

Illustration CA 1-2 Manufacturing overhead budget for Room PicsDcor

Manufacturing Overhead Budget

Supervisory salaries $100,000

Factory rent 130,200

Equipment rent (framing and matting equipment) 10,000

Utilities20,000

Insurance10,000

Information technology 50,000

Building maintenance 11,000

Equipment maintenance4,000

Budgeted total manufacturing overhead costs$425,200

Instructions

Use the information in the case and your reading from Chapters 1 and 2 to answer the following questions

1. Define and explain (1) the meaning of a predetermined manufacturing overhead rate that is applied

in a job order costing system and (2) discuss why there is a need for this rate.BE SPECIFIC

2. Are there any advantages and disadvantages of using the cost of each print as a manufacturing

overhead cost driver has is done by Wal Decor?

3. Using the information in Illustrations CA 1-1 and CA 1-2, compute and interpret the

Predetermined Manufacturing Overhead Rate (PMOR) for Room PicsDcor.

4. Do you support the PMOR used for Room PicsDcor?Why or why not.

5. Based on the PMOR used by Room PicsDcor, compute the product cost for the following three items.

(a) Lance Armstrong unframed print (base cost of print $12).

(b) John Elway print in steel frame, no mat (base cost of print $16).

(c) Lambeau Field print in wood frame with mat (base cost of print $20).

6. (a) How much of the total overhead cost is expected to be allocated to unframed prints?

(b) How much of the total overhead cost is expected to be allocated to steel-framed prints?

(c) How much of the total overhead cost is expected to be allocated to wood-framedprints?

(d) What percentage of the total overhead cost is expected to be allocated to unframed prints?

7. Do you think the amount of overhead allocated to the three product categories is reasonable?

Relate your response to this question to your findings in previous questions.

8. If you were asked to develop a PMOR for Room PicsDcor, what would be your rate?Be

specific and specify all computations, etc.

9.Re-do question #5 using your rate given in #8.

10.Re-do questions #6 using your rate given in #8.

11. Anticipate and discuss business problems that may result from allocating manufacturing overhead

based on the (1) the method now used by Room PicsDcor and (2) your new suggested PMOR.