Q

Gantry Manufacturing is a medium- sized organization with manufacturing facilities in seven locations around the southwestern United States. Of these facilities, Galveston and Amarillo are treated as profit centers, with local management costs, certain nonmanufacturing costs (e.g. advertising at local minor league baseball stadiums, sponsoring local charity events), and sales revenue. The segment income statements that follow were prepared by facility-level accountants and were provided to the corporate office in Denver, Colorado, shortly after the end of this years second quarter. Note that the statements are shown in parallel for convenience and are not intended to be combined or analysis purposes.

Segment income statements

Galveston and Amarillo Facilities

For the Quarter ending June 30th, 2012

Galveston Amarillo

Sales $22,500,000 $18,450,000

Variable expense $19,850,000 $17,640,000

Contribution margin $2,650,000 $ 810,000

Divisional fixed expenses $1,400,000 1,030,000

Segment margin 1,250,000 $ (220,000)

The Managers of these two facilities are former classmates at the University of Texas at Austin and routinely stay in touch with each other. Shortly after receiving the quarterly results from his accountant, the Amarillo manager, Jim Lowell, called his friend in Galveston to talk about the surprising loss shown on his facility's income statement. After a short conversation with the Galveston manager, Jim met with is accountant. He learned the following:

A recent memo sent from the corporate controller to all facility controllers indicated that new manufacturing overhead rates should be used beginning May 1st, 2012. The old rate was $2.80 per direct labor hour and the new rate is $3.25 per direct labor hour. The memo had a new policy statement attached to it asserting that individual manufacturing facilities could not longer establish individual overhead rates.

An average of 210 employees worked 40 hours per week during the quarter. There was 13 weeks in the second quarter.

Each division was required to record onetime expense associated with ethics training for all new and current employees. The Amarillo facility received an expense allocation of $58,000. Sixty-five percent of the allocation is related to manufacturing employees, and the remainder is related to administrative employees.

The corporate office also implemented a new policy related to certain divisional employee's retirement, insurance, and other benefits. In past years, all benefits were paid by the corporate office and were not allocated to local facilities. However, the company's new president believes that hose coast more are properly reflected in the expenses of the individual facilities because they are incurred by local employees. In total, additional retirement and insurance expenses of $46,500 were incurred for each month during the quarter end June 30th, 2012. Thirty percent of the monthly expenses are related to manufacturing employees, and the remainder is reacted to administrative employees.

Jim was immediately frustrated by all that he learned from the accountant. Because his and other manager's bonuses depend on quarterly financial performance, he feels that the corporate memos unfairly reduce his divisions profits. He asked his controller to prepare a revised income statement without the changes implemented by the corporate office during the quarter. Amarillo's revised income statement prepared as follows:

Segmented income statement Amarillo Facility

For the Quarter ending June 30th, 2012

Sales $18,450,000

Variable expenses $17,511,310

Contribution margin $ 938,690

Divisional fixed expenses 912,050

Segment margin 26,640

Jim is not particular please with the performance of his facility, preferring to report small profit as opposed to a more significant loss. He now must decide how to communicate with the corporate office about this revised income statement. You should bear in mind that the corporate office only provides administrative services and does not manufacture goods; however, sales activities for five of the company's facilities are handheld in the corporate office.

Required:

A. Assist Jim in identifying reasons that support his desire that the Amarillo facility not be required to implement the changes made by the corporate office.

While it is known that the divisions must price to cover all business expenses, not just their own division, but also a share of the common expenses, such as corporate and selling, allocating these cost to the division will not help the organization. Why? Amarillo cannot control or influence the corporate or selling function and so the performance of the Amarillo manager should be enhanced or decreased because of these common activities.

b. What are the implications of having the corporate office issue memos requiring the facilities to record certain expenses, given the company's bonus structure? How will the corporate office's new policy affect the facility management's motivation?

c. What are some of the possible bases that Gantry manufacturing could use to allocate fixed expenses?

What is the return on investment (ROI) based upon original estimates? What is the ROI if the new operating income projections are used?

During the next upcoming internal meeting for managers and executives, what advice would you provide to the CEO when she must present a report regarding the proposed project and anticipated results? Assume that the organization has plans to "go public" with an initial public stock offering next year. Would your advice change?

What responsibility does the CEO have to other Gentry employees (including Jim), other managers, the board of directors, and potential venture capitalists?

Include a discussion of Biblical principles and how they are applicable to various areas of the Assignment (e.g. Jim's decision regarding the revised income statement, new corporate policies regarding expenses, benefits, a bonus structure, fixed expense allocation, accurate ROI reporting, and performance reporting responsibilities).