Read the case titled Mayflower Manufacturing Company below and answer the following questions relating to the case study.

Mayflower Manufacturing Company In February 2015, Eugene Hayes was appointed general manager of the Mayflower Manufacturing Company by Derrick Wilson, president. Hayes, 56, had wide executive experience in manufacturing products like those of Mayflower. The appointment of Hayes resulted from management problems arising from the death of Edgar Wilson, founder and, until his death in early 2014, president of Mayflower. Derrick Wilson had only four years experience with the company, and in early 2015 was 34 years old. His father had hoped to train him over a 10-year period, but his untimely death had cut this seasoning period short. The younger Wilson became president when his father died and had exercised full control until he hired Hayes. New Management Derrick Wilson knew that during 2014 he had made several poor decisions and noted that the morale of the organization had suffered, apparently through lack of confidence in him. When he received the income statement for 2014 (see Exhibit 1) showing a net loss of $688,000 during a good business year, he knew he needed help. He attracted Hayes from a competitor by offering a stock option incentive in addition to salary, knowing that Hayes wanted to acquire a financial competence for his retirement.

The two men came to a clear understanding that Hayes, as general manager, had full authority to execute any changes he desired. In addition, Hayes would explain the reasons for his decisions to Wilson and thereby train him for successful leadership upon Hayes retirement. Upon taking office in February 2015, Hayes decided against immediate major changes. Rather, he chose to analyze 2014 operations and to wait to see results for the first half of 2015. He instructed the accounting department to provide detailed expenses and earnings statements byproducts and departments for 2014 (see Exhibit 2). In addition, he requested an explanation of the nature of the companys costs including their expected future behavior (see Exhibit 3). Company and Industry The Mayflower Manufacturing Company made only three industrial products: 101, 102, and 103. They were sold by the companys sales force for use in the processes of other manufacturers. All of the sales force, on a salary basis, sold the three products but in varying proportions. Mayflower sold throughout New England and was one of eight companies with similar products. Several of its competitors were larger and manufactured a larger variety of products than did Mayflower. The dominant company was the Samra Company, which operated a branch plant in the companys market area. Customarily, the Samra Company announced prices annually, and the other producers followed suit.

Price cutting was rare, and the only variance from quoted selling prices took the form of cash discounts. In the past, attempts at price cutting had followed a consistent pattern: all competitors met the price reduction, and the industry as a whole sold about the same quantity but at lower prices. This continued until the Samra Company, with its strong financial position, again stabilized the situation following a general recognition of the failure of price cutting. Furthermore, because sales were to industrial buyers and because the products of different manufacturers were very similar, Hayes was convinced Mayflower could not individually raise prices without suffering substantial volume declines. During 2014, Mayflowers share of industry sales was 12% for type 101, 8% for 102, and 10% for 103. The industrywide quoted selling prices were $24.50, $25.80, and $27.50 per 100 pounds of product, respectively. Manufacturing Strategy Mayflowers manufacturing strategy was based on the dedicated factory concept. That is, each of the three products was produced in its own factory within the total factory complex. The three product factories were referred to as 101 Factory, 102 Factory, and 103 Factory. Each of these product factories was horizontally integrated beginning with receiving and extending through raw material storage, production-process facilities, finished-product inventory, and shipping. In addition, each product factory had a dedicated direct labor force, which for accounting purposes included hourly workers, shift managers, and other manufacturing-related personnel assigned to each product factory. Indirect labor floated between product factories as needed. Typically, the Mayflower manufacturing facilities operated below capacity.

Cost System The Mayflower Manufacturing Company maintained a simple cost system. It was used for strategic planning, product-line decisions, identifying manufacturing process-improvement opportunities, profitability analysis, performance evaluation, cost control, and inventory valuation purposes. Managements goal was to assign all of the companys costs to each of the three products in a way that would lead to the most useful product costs for the cost systems various managerial purposes. The cost system identified two categories of costs. The first category consisted of costs, such as material costs, that could be tied directly to the manufacture of specific products. All other costs were placed in the second category and referred to as indirect costs (see Exhibit 2). The cost system accumulated direct and indirect costs at the product-factory level before determining the individual product costs on a per-unit basis. Since each of the three products was sold in 100-pound bags, per unit costs were expressed in terms of 100 pounds of the finished product. The per-unit cost was calculated by dividing the unit output into the respective product factorys total cost. Total cost was the sum of the product factorys direct costs plus allocated indirect costs less an allocated other-income amount. Allocated indirect costs included the companys interest cost related to bank loans. Costs designated as direct costs were assigned directly to the product factory in which they were incurred. For example, the cost of materials used to manufacture product 101 in 101 Factory was charged directly to the 101 Factory account.

This material cost could be traced directly to 101 Factory through material purchase and requisition orders. Indirect costs were allocated to the product factories using a variety of allocation methods (see Exhibit 2). For example, the total company rent expense ($5,324,000) was allocated to each product factory based on its enclosed cubic space. Cubic space was selected as the allocation basis to capture the fact that the production process for each of the three products included enclosed scrubber towers that varied in height depending on the product produced. Using the cubic space as the allocation base, the total company rent was charged as shown in Figure A to each product factory. The allocated per 100-pound rent cost of each product was derived by dividing the unit output of each product factory into the respective product factorys allocated rent. A standard cost system was introduced in early 2015. It was used to value inventories, prepare budgets, and analyze performance (see Exhibit 4). Next years standard costs were last years actual per-unit costs adjusted for anticipated cost changes. Since Mayflowers three products were each sold in 100-pound bags, per unit standards were expressed in terms of 100 pounds of the finished product. Drop 103? To familiarize Derrick Wilson with his methods, Hayes sent copies of Exhibits 2 and 3 to Wilson, and they discussed them. Wilson stated that he thought product 103 should be dropped immediately, as it would be impossible to lower expenses on product 103 as much as $2.16 per 100 pounds. In addition, he stressed the need for economies on product 102.

Hayes relied on the authority arrangement Wilson had agreed to earlier and continued production of the three products. Midyear Results In the first week of July 2015, Hayes received from the accounting department the six months statement of cumulative standard costs including variances of total company actual costs from standard (see Exhibit 4). It showed that the first half of 2015 had been a successful period. In order to expedite the availability of interim-period results, Mayflower did not determine actual product-line revenues, costs, and profits. Rather, product-line data was prepared using standard per unit data and actual unit sales. Reduce 101 Price? During the latter half of 2015, the sales of the entire industry weakened. Even though Mayflower retained its share of the market, its profit for the last six months was expected to be small. In November 2015, the Samra Company announced a price reduction as of January 1, 2006, on product 101 from $24.50 to $22.50 per 100 pounds. This created a pricing problem for all its competitors. Hayes forecast that if Mayflower held to the $24.50 price during the first six months of 2006, the companys unit sales would be 750,000. He felt that if it dropped its price to $22.50, the six months unit volume would be 1 million. Hayes knew that competing managements anticipated a further decline in activity. He thought a general decline in prices of all products was quite probable. The accounting department reported that the standard costs in use would probably apply during 2006, with two exceptions: materials and supplies would be about 5% below the 2015 standard. Hayes and Wilson discussed the pricing problem. Wilson observed that even with the anticipated decline in material and supply costs, a sales price of $22.50 would be below cost.

Wilson, therefore, wanted the $24.50 price to be continued, since he felt the company could not be profitable while selling a key product below cost.

1. Based on the 2014 statement of profit and loss data (Exhibits 1 and 2), do you agree with Hayes decision to keep product 103? 2. Should Mayflower lower as of January 1, 2006, its price of product 101? To what price? 3. Why did Mayflower improve profitability during the period January 1 to June 30, 2015? How useful was the data in Exhibit 4 for the purpose of this analysis? 4. Why is it important that Mayflower has an effective cost system? What is your overall appraisal of the companys cost system and its use in reports to management? List the strengths and weaknesses of this system and its related reports for the purposes management uses the systems output. What recommendations, if any, would you make to Hayes regarding the companys cost accounting system and its related reports?

Figure A Total Company Rent Actual Rent Expense ($5,324,000) Allocation Basis (cubic space) Allocated Rent 101Factory($1,872,000)102Factory($1,570,000)103Factory($1,882,000)