Part 1:

Steve Morgan, controller for Newton Industries, was reviewing production cost reports for the year. One amount in these reports continued in to bother him - advertising. During the year the company had instituted an expensive advertisement campaign to sell some of its slower-moving products. It was still too early to tell whether the advertising campaign was successful.

There had been much internal debate as how to report advertising cost. The vice president of finance argued that advertising costs should be reported as cost of production, just like direct material and direct labor. He therefore recommended that this cost be identified as manufacturing overhead and reported as part of inventory costs until sold. Others disagreed. Morgan believed that this cost should be reported as an expense of the current period, so as not to overstate net income. Others argued that it should be reported as prepaid advertising and reported as a current asset.

The president finally had to decide the issue. He argued that these costs should be reported as inventory. His argument were practical ones. He notes that the company was experiencing financial difficulty and expensing this amount in the current period might jeopardize a planned bond offering. Also, by reporting the advertising costs as inventory rather than as prepaid advertising, less attention would be directed to it by the financial community.

Instructions

Who are the stakeholders in this situation?

What are the ethical issues involved in this situation?

What would you do if you were Steve Morgan?

Part 2:

In a recent year, an oil refinery in Texas City, Texas, on the Houston Ship Channel exploded. The explosion killed 14 people and sent a plume of smoke hundreds of feet into the air. The blast started as a fire in the section of the plant that increased the octane of gasoline that was produced at the refinery. The Houston Ship Channel is the main waterway that allows commerce to flow from the Gulf of Mexico into Houston.

The Texas Commission on Environmental Quality express concern about the release of nitrogen oxides, benzene, and other known carcinogens as a result of blast. Neighbors of the plant complained that the plant had been emitting carcinogens for years and that the regulators had ignored their complaints about emissions and unsafe working conditions.

Instructions

Answer the following Questions

Outline the costs that the company now faces as a result of the accident.

How could the company have reduced the cost associated with the accident?

Part 3:

The Coca-Cola Company hardly needs an introduction. A line taken from the cover of a recent annual report says it all: If you measured time in servings of Coca-Cola, "a billion Coca-Cola's ago was yesterday morning." On average, every U.S. citizen drinks 363 8-ounce servings of Coca-Cola products each year. Coca-Cola's primary line of business is the making and selling of syrup to bottlers. These bottlers sell the finished bottles and cans of Coca-Cola to the consumer.

In the annual report to Coca-Cola, the information shown below was provided.

The Coca-Cola Company

Management Discussion

Our gross margin declined to 61 percent this year from 62 percent in the prior year; primarily due to costs for materials such as sweeteners and packaging.

The increase [in selling expenses] in the last two years were primarily due to higher marketing expenditures in support of our Company's volume growth.

We measure our sales volume in two ways: (1) gallon shipments of concentrates and syrups and (2) units cases of furnished product (bottles and cans of Coke sold by bottlers).

Instructions

Answer the following questions

Are the sweeteners and the packaging a variable cost of a fixed cost? What is the impact on the contribution margin of an increase in the per unit cost of sweeteners or packaging? What are the implications for profitability?

In your opinion, are marketing expenditures a fixed cost, variable cost, or mixed cost to The Coca-Cola Company? Give justification for your answer.

Which of the two measures cited for measuring volume represents the activity index as defined in this chapter? Why might Coca-Cola use two different measures?

Part 4:

MiniTek manufactures private-label small electronic products, such as alarm clocks, calculators, kitchen timers, stop watches, and automatic pencil sharpeners. Some of the products are sold as a set, and others are sold individually. Products are studied as to their sales potential, and then cost estimates are made. The engineering Department develops production plans, and then cost estimates are made. The Engineering Department develops product introductions. Only two products introduced by the company have been discontinued.

One of the products currently sold is a mini-alarm clock. The clock has four alarms and can be programmed to sound at various times and for varying lengths of time. The company has experienced a great deal of difficulty in making circuit boards for the clocks. The production process has never operated smoothly. The production is unprofitable at the present time, primarily because of warranty repairs and product recalls. Two models of the clocks were recalled, for example, because they sometimes cause an electrical shock when the alarms were being shut off. The Engineering Department is attempting to revise the manufacturing process, but the revision will take another 6 months at least.

The clocks were very popular when they were introduced, and since they are private label, the company has not suffered much from the recalls. Presently, the company has a very large order for several items from Kmart Stores. The order includes 5,000 of the multi-alarm clocks. When the company suggested that Kmart purchase the clock from another manufacturer, Kmart threatened to rescind the entire order unless the clock were included.

The company has therefore investigated the possibility of having another company make the clocks for them. The clocks were bid for the Kmart order based on an estimated $6.90 cost to manufacture:

Circuit Board, 1 each @ $2.00 $2.00

Plastic Case, 1 each @ $0.80 0.08

Alarms, 4 @ $0.15 each 0.60

Labor, 15minutes @ 12/hour 3.00

Overhead, $2.00 per labor hour 0.50

MiniTek could purchase the clocks to fill the Kmart order at $10 from Trans-Tech Asia, a Korean manufacturer with a very good quality record, Trans-Tech has offered to reduce the price to $7.50 after MiniTek has been a customer for 6 months, placing an order of at least 1,000 units per month. If MiniTek becomes a "preferred customer" by purchasing 15,000 units per year, the price would be reduced still further to $4.50.

Omega Products, a local manufacturing, has also offered to make clocks for MiniTek. They have offered to sell $5,000 clocks for $5 each. However, Omega Products has been in business for only 6 months. They have experienced significant turnover in their labor force, and the local press has reported that the owner may face tax evasion charges soon. The owner of Omega Products is an electronic engineer, however, and the quality of the clocks is likely to be good.

If MiniTek decides to purchase the clocks from either Trans-Tech or Omega, all the costs to manufacture could be avoided, except a total of $5,000 in overhead costs for machine depreciation. The machinery is fairly new and has no alternative use.

Instructions

Answer the following questions

What is the difference in profit under each of the alternatives if the clocks are to be sold for $14.50 each to Kmart?

What are the most important nonfinancial factors that MiniTek should consider when making this decision?

What do you think MiniTek should do in regard to the Kmart order? What should it do in regard to continuing to manufacture the multi-alarm clocks? Be prepared to defend your answer.

Part 5:

Elliot & Hesse Inc. Manufactures ergonomic devices for computer users. Some of its more popular products include glare screens (for computer monitor), keyboard stands with wrist rests, and carousels that allow easy access to discs. Over the past 5 years, it experienced rapid growth, with sales of products increasing 20% to 50% each year.

Last year, some of the primary manufacturers of computers began introducing new products with some of the ergonomic designs, such as glare screens and wrist rest, already built in. As a result, sales of Elliot & Hesse's accessory devices have declined somewhat. The company believes that the disc carousels will probably continue to decline. When the next year's budget was prepared, increases were built into research and development so that replacement products could be developed, or the company could expand into some other product line. Some Product lines being considered are general-purpose ergonomic devises including back supports, footrest, and sloped writing pads.

The most recent results have shown that sales decreased more than was expected for the glare screens. As a result, the company may have a shortage of funds. Top management has therefore asked that all expenses be reduced by 10% to compensate for these reduces in sales. Summary Budget information is as follows.

Direct Material $240,000

Direct Labor 110,000

Insurance 50,000

Depreciation 90,000

Machine Repairs 30,000

Sales Salaries 50,000

Office Salaries 80,000

Factory Salaries (indirect labor) 50,000

Total $700,000

Instructions

Using the information above, answer the following questions.

What are the implications of reducing each of the cost? For example, if the company reduces direct materials cost, it may have to do so by purchase lower-quality materials. This may affect sales in the long run.

Based on your analysis in (a), what do you think is the best way to obtain the $70,000 in cost savings request? Be specific. Are there any costs that cannot or should be reduced? Why?