Description
Faculty of Business Environment and Society (BES)
PS5003ACC MANAGEMENT ACCOUNTING T3 2024 (Singapore)
Main Coursework [Contributes 25% to total module mark]
Issue date: N.A Due date: 9 February 2025
Submission
This individual assignment must be submitted electronically via TURNITIN on the PS5003ACC Moodle page by 23.59 hours (11.59pm) on the above date. A hard copy together with the marking rubric and Turnitin report must also be submitted to the Lecturer on or before due date.
Please note:
- Penalty for late submission is 100% of the mark
- Extensions will be in accordance with University and Faculty policy.
Submission Checklist:
Word limit of written (essay) sections
Maximum length: 2,000 words (inclusive of in-text citations)
Style & Format
Style: Essay/Computations
Font size: 12 pt (Arial)
Line spacing: 1.5 lines
References: APA style
There should be at least EIGHT (8) references which includes reference texts and journal articles.
Case Study
Collins Industries is a decentralised organization with five divisions. The company’s Electrical Division produces a variety of electrical items, including an A21 electrical fitting. The Electrical Division (which is operating at capacity) sells this fitting to its regular customers for $7.50 each; the fitting has a variable manufacturing cost of $4.25.
The company’s Brake Division has asked the Electrical Division to supply it with a large quantity of A21 fittings for only $5 each. The Brake Division, which is operating at 50% of capacity, will put the fitting into a brake unit that it will produce and sell to a large commercial airline manufacturer.
The cost of the brake unit being built by the Brake Division follows:
Purchased parts (from outside vendors) $22.50
Electrical fitting A21 $5.00
Other variable costs $14.00
Fixed overhead and administration $8.00
Total cost per brake unit $49.50
Although the $5 price for the A21 fitting represents a substantial discount from the regular $7.50 price, the manager of the Brake Division believes that the price concession is necessary if his division is to get the contract for the airplane brake units. He has heard ‘through the grapevine’ that the airplane manufacturer plans to reject his bid if it is more than $50 per brake unit.
Thus, if the Brake Division is forced to pay the regular $7.50 price for the A21 fitting, it will either not get the contract or it will suffer a substantial loss at a time when it is already operating at only 50% of capacity. The manager of the Brake Division argues that the price concession is imperative to the well-being of both his division and the company as a whole.
Collins Industries uses return on investment (ROI) and profits in measuring divisional performance.
Required: Assume that you are the manager of the Electrical Division. Write a report to the Managing Director to:
a) Provide your recommendation on whether your division should supply the A21 fitting to the Brake Division for $5 each as request. Justify your recommendation with reasons and full computations.
b) Discuss if it is to the economic advantage of the company as a whole for the Electrical Division to supply the fittings to the Brake Division if the airplane brakes can be sold for $50. Provide full computations to support your arguments.
c) Appraise the possibility for the two managers to come to an agreement on a transfer price in this situation? If so, what is the recommended range for the transfer price to be?
d) Discuss the organisational and managerial behaviour problems inherent in this situation. What would you advise your Managing Director to do in this situation?
The board of directors are also considering a change to the information systems at Collins Industries. The existing systems are based in the individual functions (production, sales, maintenance, finance and human resources). The board is considering the implementation of a new system based on an integrated, single database that would be accessible at any of the company’s sites. The company network would be upgraded to allow real-time input and update of the database. The database would support a detailed management information system and allow non-financial input and comparisons as well as financial.
e) Discuss THREE types of external non-financial information which the new system should seek to capture and provide specific examples. Explain how these information may benefit the company. You should review literature from various sources, including:
Relevant chapters in the prescribed textbook;
Academic and professional journals
Various books sourced via the library catalogue. Before starting the essay report, you should read over the marking rubric i.e. the marking criteria sheet.
Solution
- a) Provide your recommendation on whether your division should supply the A21 fitting to the Brake Division for $5 each as request. Justify your recommendation with reasons and full computations.
The Electrical Division is presently operating at capacity; therefore, any sales of A21 electrical fitting to the Brake Division will require that the Electrical Division give up an equal number of sales to outside customers. Using the transfer pricing formula, we get a minimum transfer price of:
Transfer price ≥ Variable cost per unit +Total contribution margin on lost sales
Number of units transferred.
Transfer price ≥ $4.25 + ($7.50 − $4.25)
Transfer price ≥ $4.25 + $3.25
Transfer price ≥ $7.50
Thus, the Electrical Division should not supply the fitting to the Brake Division for $5 each. The Electrical Division must give up revenues of $7.50 on each fitting that it sells internally. Because management performance in the Electrical Division is measured by ROI, selling the fittings to the Brake Division for $5 would adversely affect these performance measurements.
- b) Discuss if it is to the economic advantage of the company as a whole for the Electrical Division to supply the fittings to the Brake Division if the airplane brakes can be sold for $50. Provide full computations to support your arguments.
The key is to realize that the $8.00 in fixed overhead and administrative costs contained in the Brake Division’s $49.50 “cost” per brake unit is not relevant. There is no indication that winning this contract would actually affect any of the fixed costs………………………………………….
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