High Street Reproduction Furniture LtdJayne Ducker, Antony Head, Rona OBrien (Sheffield HallamUniversity) and Sue Richardson (University of Bradford ManagementCentre)This is an extract from Ducker, H., Head, A., McDonnell, B., OBrien, R. and Richardson, S.(1998), A Creative Approach to Management Accounting: Case Studies in ManagementAccounting and Control, Sheffield Hallam University Press, ISBN 0 86339 791 3.IntroductionHigh Street Reproduction Furniture is a small, but rather exclusive, producer of reproductionbedroom furniture. Turnover last year was just over 1 million and the business continues toprovide a steady profit margin. It is a private limited company owned by John Carpenter and hiswife Eleanor and it has been trading for 25 years. John, who is a fully qualified cabinet maker,started in the trade immediately after leaving school. He has little formal training inmanagement, but has much hands-on experience gained from running his business.Past and recent history of the companyThe company originally operated from small, cold and draughty premises in the back streets ofSheffield and in the early years its only employee was Fred. Because of the cold workingconditions, John always wore a flat cap (a woven cap with a peak, traditionally worn by the menof Yorkshire) whilst he worked alongside Fred, a habit that seems to have stuck and hasbecome somewhat of a trademark for John. According to John, In those days I had to think onmy feet and we tended to exist from one job to the next, on a wing and a prayer you might say?As a consequence of this, whenever John has a major problem at work which needs resolving,he tends to put his cap on to help him think things through. The employees always know thechips are down when they see John walking about in his cap.The business grew steadily in the early years and about ten years ago John was able to movefrom the original site to a high street location in Sheffield, which provides a small showroomarea, a workshop, staff room and storage. However, the product range has remained fairlyconstant and consists of three pieces of bedroom furniture, namely, a wardrobe, a chest ofdrawers and a dressing table. These are sold directly to customers either as separate items oras a bedroom suite.The furniture is hand-made to a very high standard, authentically reproducing the Baxendalestyle which was popular in the late nineteenth century. This requires a high degree of skill in theconstruction and finishing stages of the production process. Although most of Johns time thesedays is spent in managing the business, he still keeps a watchful eye on activities and likes tohelp out if the men are over-stretched.The furniture is made from mahogany supplied by Sheffield Timber Company, which importshigh quality seasoned timber from South America. Although John could buy mahogany morecheaply elsewhere, he has dealt with this company for a long time and has confidence that thequality will be consistently good. The grain and colour of the wood is extremely important and,because the fronts of the furniture must match in grain and colour for each piece or suite offurniture, the company expects to have a high level of off-cuts and waste.Colin Drury, Cost & Management Accounting: An Introduction High Street Reproduction Furniture LtdThe unique finish to the furniture is produced through a highly-skilled hand-waxing process,using beeswax mixed to a special recipe created especially for High Street ReproductionFurniture by Charlesworth Specialist Waxes, who make and supply this recipe exclusively to thecompany. Mahogany and beeswax are the two main materials used to make the finishedproducts.Twelve people are now employed full time in the production process: ten are highly skilledcabinet makers and two are young apprentices. All the cabinet makers have been with thecompany for a long time and Fred is now the workshop supervisor. Fred is a bit set in his waysbut, according to John, He does a damned good job and he is a very good craftsman.Careful delivery of the furniture to the customer is very important and John is proud of the factthat the company receives very few complaints of furniture damaged in transit. The companysub-contracts this part of its activities to a well established company in the city of Sheffield. Thiscompany has always been reliable and has provided a high class service to customers carefullyprotecting the furniture in transit, setting the piece in its position for the customer and askingthem to check it over. If the customer is not satisfied with the furniture, then it is returned to theworkshop immediately. Of course, High Street Reproduction Furniture pay a premium price forthis service, but it has proved of benefit to both the company and the customer, since problemscan be resolved immediately.The specialised nature of the production process and the specialised delivery service results inhigh product costs. However, John has found that the companys products attract the type ofcustomer who is willing to pay a premium price.In the past year the company has invested 100 000 in the refurbishment of the offices andshowroom and in the extension of the workshop and storage area to meet increasing demandfor the companys products. This was funded by a five year loan from the companys bank. Johnbelieves that the increase in demand is mainly due to the showing of a television documentaryof Sheffield which featured High Street Reproduction Furniture. The company appeared in avery favourable light as part of the new face of Sheffield emerging from the aftermath of theshrinking steel industry and the programme was given prime-time national coverage. In order tocapitalise upon this free publicity, John also launched a national advertising campaign, using thedocumentary as a marketing ploy. However, the increased demand is putting pressure on theworkforce and the lead time (the time between the customer ordering the furniture and theexpected delivery date) is increasing.Iris has been responsible for the paperwork ever since John started the business. Initially sheworked part time whilst her children were young but has worked full time for the last five years.She has had the help of Cecil, who is a qualified accountant, for the last twelve months. Cecilspends two days each month on the company premises, assisting with costings and accounts.Although, according to John, Iris has always done a great job of sorting us out, John feels thatthe company is getting too busy for her to cope. He has asked Cecils advice and Cecil hassuggested that it is probably time to employ a full time management accountant, even thoughthis will mean a reduction in his own services for the company.Colin Drury, Cost & Management Accounting: An Introduction High Street Reproduction Furniture LtdTwo months agoJohn took Cecils advice and contacted Sheffield Hallam University to advertise the post on theundergraduate careers board. He felt that the post would suit a new graduate and that he couldoffer a fair salary whilst not placing too large a burden on the companys overheads. A numberof students expressed an interest and John interviewed three of these. He selected Mary, who isdue to start with the company as soon as her final exams are completed.Last weekMary arrived at High Street Reproduction Furniture and settled in nicely. Wisely, John involvedIris in the selection process and the two seem to be getting on well together.John received a profit statement from Cecil for the previous six months trading which itemisedthe performance of the companys three products. This is attached as Exhibit 1. John wasappalled to see that the dressing tables had made a loss. He has called a meeting for next weekwith Mary, Iris and Fred to discuss the situation. It could not be before then, as John hadimportant appointments for the rest of the week. First, he had to visit the beeswax suppliers whoare located in the Scottish Highlands, in order to renegotiate a contract for beeswax for thecoming year; second, Sheffield Timber had telephoned and asked for an urgent meeting.John warned Mary, Iris and Fred that at next weeks meeting he also wishes to discuss anothermatter with them. This concerns a potential new venture for the company. Much to hisamazement, knowledge of the company has reached the American market through thescreening of the television programme. One particular company has approached John with anenquiry for fifty chests for export to America. High Street Reproduction Furniture has neversupplied bulk orders before and this customer is only willing to pay 70 per cent of the normalselling price.He has briefly discussed the problems with Mary who, being keen and enthusiastic in her firstjob, wishes to anticipate Johns information needs before the meeting takes place. She hasbeen working overtime (after Iris has left for the day) to produce the information which isattached in Exhibit 2. She hopes to impress John at the meeting by being well prepared, but hasonly managed to obtain the raw data by the date of the meeting.Colin Drury, Cost & Management Accounting: An Introduction High Street Reproduction Furniture LtdEXHIBIT 1Cecils Profit Statement for the last six months tradingWardrobes Dressing Chests TotalTables(000) (000) (000)Sales revenue 340 200) 300 840Direct materials 100 96) 90 286Direct labour 63 48) 53 164Variable workshop overheads 17 16) 15 48Apportioned fixed workshop overheads 60 70) 68 198Total manufacturing costs 240 230) 226 696Gross profit (loss) 100 (30) 74 144Selling & distribution costs 80Net profit 64Colin Drury, Cost & Management Accounting: An Introduction High Street Reproduction Furniture LtdEXHIBIT 2Marys Initial Information GatheringProfit statement:Numbers of each product sold in the period covered by the statement:Wardrobes 200Dressing tables 160Chests of drawers 200Selling and distribution costs includes delivery costs to the customerAmount paid to delivery contractor for last six months 19 600Average delivery cost per product 35 eachDressing tables:Six months ago John made the decision to buy in the mirror section of the dressing tables from alocal firm at a cost of 200 each. Mary has found the original estimate of the cost if the companywere to continue making the mirror section in house, which was used for comparison with thesub-contract price. This is shown below:()Direct materials 120Direct labour 40Variable overheads 20Fixed overheads 40Total 220In order to ensure that the timber used to frame the mirror section matched the main body of thedressing table, it was agreed that the supplying firm would buy their timber from the samesupplier, i.e. Sheffield Timber Company. The mirror sections were delivered to High StreetReproduction Furniture in an unfinished state and were hand-waxed by the companys owncraftsmen. Control over the quality of the mirror sections has been problematic.The American EnquiryMary has obtained the following information:Delivery charges(50 chests to the dockside) 3 vans @ 300 eachAverage lead time:for the last six months 12 weeksfor the six months prior to that 8 weeksAverage overtime:last week 6 hours per manfor the last six months 1 hour per man per weekStocks of mahogan 3250 square metresAverage usage of mahogany per product:Wardrobes 10 square metresDressing tables (excluding mirror) 4 square metresMirror section 1 square metreChests of drawers 5 square metresThe meetingIt is obvious to everyone (except Mary) that John is worried. He makes a strange sight in hiscleanly cut business suit and his flat cap! Mary is puzzled but she dares not to comment.The first item on the agenda is the loss-making situation of the dressing tables. John comments,I am appalled to find that the dressing tables are making a loss of 30 000. I cant understand itas it has never happened before. It looks as though we shall have to stop making them andconcentrate on the other products, unless any of you can offer an alternative solution.Iris says that, given Cecils figures, she has to agree with John about the dressing tables. Fredcomments that he hasnt had time to look at the figures as he has been snowed under withwork. Mary decides to keep her data to herself at this stage and offers to go away and work onsome numbers.The second item is the potential new venture. John passes copies of the American enquiry to allthose present. I intimated to you all last week that we might discuss this today. Do you have anyviews on whether we should accept it or not?Iris and Fred have discussed this item before the meeting. Fred tells John that the order is totallyimpossible, given that the workshop is getting very overstretched, and Iris agrees with him,adding, How on earth do they expect us to make a profit at only 70 per cent of the normal sellingprice? Mary interrupts at this stage, having gained a little more confidence, and suggests toJohn that the enquiry might be worth looking into. She promises to provide further information bythe end of the week. John decides that they should meet again on Friday, when Mary will havemore information for them and hopefully Fred will have had time to give the issues greaterconsideration.As they leave the meeting, Fred comments to Iris, Theres something else worrying him besideswhat hes telling us. I wonder what it can be?Question 1Mary has decided to restate Cecils original profit statement by using the additional informationshe has collected and by employing a marginal costing approach.Required:(a) Prepare a new profit statement for Mary which clearly identifies both the contribution madeby each product over the last six months and the overall profit.(b) Prepare a profit statement which shows the potential situation if John stops production ofthe dressing tables and demand for the other products remains the same as that of the pastsix months. Assume that supplies of mahogany are unlimited.(c) What other issues should John consider before making the decision to stop producingdressing tables?(d) Prepare a statement which identifies the contribution which the dressing tables would havemade in the last six months, had the mirror section not been sub-contracted out. Suggestother issues which might affect Johns decision to make the mirror sections in house onceagain.Colin Drury, Cost & Management Accounting: An Introduction High Street Reproduction Furniture LtdQuestion 2Utilising theoretical models and illustrating your answer with reference to the case studymaterials, discuss the decision situation regarding the American enquiry. Your discussion shouldalso be supported by financial information which Mary would be likely to produce.Question 3Mary has suggested to John that the company would benefit from a management informationsystem to aid him in planning and controlling the activities of the business and to assist inorganisational decision making. Join is not sure what Mary means.Required:(a) Illustrate the types of planning and controlling activities that are likely to take place at HighStreet Reproduction Furniture Limited.(b) Describe the types of information which might be useful.(c) Suggest the likely sources of this information.Question 4At the urgent meeting last week, the Sheffield Timber Company informed John that supplies ofmahogany from South America were in jeopardy. There had been a serious forest fire and muchof the seasoned stock ready for export at the premises of the South American exporter hadbeen wiped out. Sheffield Timber envisaged that there would be no more supplies of the typeused by High Street Reproduction Furniture for the next six months. After that date, it seemsthat supplies can be restored to normal.Required:(a) Provide a production schedule which would maximise profits on the stocks of mahoganyheld by High Street Reproduction Furniture Limited and identify the forecast profit figurebased on this production schedule.You should assume that forecast demand from the normal customer base will be 10 percent higher than the last six months figures and that the decision on the American enquiry isstill unresolved. You should also assume that the mirror section of the dressing table willhave to be produced by High Street Reproduction Furniture, since the current supplier doesnot hold any stock of the mahogany.(b) Identify other issues which John would need to take account of, if this production scheduleis undertaken.(c) Compare the predicted profit in (a) above with the profit which John might have expected inthe second half of the year, if the predicted demand for all three products had been met, theAmerican contract had not been taken on and the mirror section of the dressing table hadbeen produced by High Street Reproduction Furniture Limited. Comment on your findings.