Mercury, Incorporated, produces cell phones at its plant in Texas. In recent years, the company's market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market. A year ago, the company's cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury's president, initiated an intense effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success.
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- Lisa currently manages the polished chrome division of Whispering Broadway, a business that specializes in ceiling light fixtures. Its performance has been stable for the past few years. However, the crystal division has been losing market share, while the rustic iron and chrome divisions have been growing. For the most part, executives feel that these changes are a result of customer preferences and current trends versus the quality or prices of their products. While they expect preferences to return to the crystal product line in the next five years, a short-term decision must be made now. Budgeted financial information for Whispering Broadway's upcoming fiscal year is presented below for each division Sales Variable costs Contribution margin Fixed costs Operating income Chrome $1,230,000 753,000 477,000 236.000 Crystal $424.000 298.000 126.000 236,000 $241.000 $(110,000) Iron $752,000 313,000 All foxed costs are currently assigned evenly to all divisions. 439,000 236,000 $203.000Mercury, Incorporated, produces cell phones at its plant in Texas. In recent years, the company's market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market. A year ago, the company's cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury's president, initiated an intense effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success. After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of…Maxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several years, competition has intensified. In order to maintainand perhaps increaseits market share, Maxwells management decided that the overall quality of its products had to be increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some investigation, Maxwell concluded that many of its problems could be traced to the unreliability of the parts that were purchased from outside suppliers. Many of these components failed to work as intended, causing performance problems. Over the years, the company had increased its inspection activity of the final products. If a problem could be detected internally, then it was usually possible to rework the appliance so that the desired performance was achieved. Management also had increased its warranty coverage; warranty work had been increasing over the years. David Haight, president of Maxwell Company, called a meeting with his executive committee. Lee Linsenmeyer, chief engineer; Kit Applegate, controller; and Jeannie Mitchell, purchasing manager, were all in attendance. How to improve the companys competitive position was the meetings topic. The conversation of the meeting was recorded as seen on the following page: DAVID: We need to find a way to improve the quality of our products and at the same time reduce costs. Lee, you said that you have done some research in this area. Would you share your findings? LEE: As you know, a major source of our quality problems relates to the poor quality of the parts we acquire from the outside. We have a lot of different parts, and this adds to the complexity of the problem. What I thought would be helpful would be to redesign our products so that they can use as many interchangeable parts as possible. This will cut down the number of different parts, make it easier to inspect, and cheaper to repair when it comes to warranty work. My engineering staff has already come up with some new designs that will do this for us. JEANNIE: I like this idea. It will simplify the purchasing activity significantly. With fewer parts, I can envision some significant savings for my area. Lee has shown me the designs so I know exactly what parts would be needed. I also have a suggestion. We need to embark on a supplier evaluation program. We have too many suppliers. By reducing the number of different parts, we will need fewer suppliers. And we really dont need to use all the suppliers that produce the parts demanded by the new designs. We should pick suppliers that will work with us and provide the quality of parts that we need. I have done some preliminary research and have identified five suppliers that seem willing to work with us and assure us of the quality we need. Lee may need to send some of his engineers into their plants to make sure that they can do what they are claiming. DAVID: This sounds promising. Kit, can you look over the proposals and their estimates and give us some idea if this approach will save us any money? And if so, how much can we expect to save? KIT: Actually, I am ahead of the game here. Lee and Jeannie have both been in contact with me and have provided me with some estimates on how these actions would affect different activities. I have prepared a handout that includes an activity table revealing what I think are the key activities affected. I have also assembled some tentative information about activity costs. The table gives the current demand and the expected demand after the changes are implemented. With this information, we should be able to assess the expected cost savings. Additionally, the following activity cost data are provided: Purchasing parts: Variable activity cost: 30 per part number; 20 salaried clerks, each earning a 45,000 annual salary. Each clerk is capable of processing orders associated with 100 part numbers. Inspecting parts: Twenty-five inspectors, each earning a salary of 40,000 per year. Each inspector is capable of 2,000 hours of inspection. Reworking products: Variable activity cost: 25 per unit reworked (labor and parts). Warranty: Twenty repair agents, each paid a salary of 35,000 per year. Each repair agent is capable of repairing 500 units per year. Variable activity costs: 15 per product repaired. Required: 1. Compute the total savings possible as reflected by Kits handout. Assume that resource spending is reduced where possible. 2. Explain how redesign and supplier evaluation are linked to the savings computed in Requirement 1. Discuss the importance of recognizing and exploiting internal and external linkages. 3. Identify the organizational and operational activities involved in the strategy being considered by Maxwell Company. What is the relationship between organizational and operational activities?
- At the beginning of the last quarter of 20x1, Youngston, Inc., a consumer products firm, hired Maria Carrillo to take over one of its divisions. The division manufactured small home appliances and was struggling to survive in a very competitive market. Maria immediately requested a projected income statement for 20x1. In response, the controller provided the following statement: After some investigation, Maria soon realized that the products being produced had a serious problem with quality. She once again requested a special study by the controllers office to supply a report on the level of quality costs. By the middle of November, Maria received the following report from the controller: Maria was surprised at the level of quality costs. They represented 30 percent of sales, which was certainly excessive. She knew that the division had to produce high-quality products to survive. The number of defective units produced needed to be reduced dramatically. Thus, Maria decided to pursue a quality-driven turnaround strategy. Revenue growth and cost reduction could both be achieved if quality could be improved. By growing revenues and decreasing costs, profitability could be increased. After meeting with the managers of production, marketing, purchasing, and human resources, Maria made the following decisions, effective immediately (end of November 20x1): a. More will be invested in employee training. Workers will be trained to detect quality problems and empowered to make improvements. Workers will be allowed a bonus of 10 percent of any cost savings produced by their suggested improvements. b. Two design engineers will be hired immediately, with expectations of hiring one or two more within a year. These engineers will be in charge of redesigning processes and products with the objective of improving quality. They will also be given the responsibility of working with selected suppliers to help improve the quality of their products and processes. Design engineers were considered a strategic necessity. c. Implement a new process: evaluation and selection of suppliers. This new process has the objective of selecting a group of suppliers that are willing and capable of providing nondefective components. d. Effective immediately, the division will begin inspecting purchased components. According to production, many of the quality problems are caused by defective components purchased from outside suppliers. Incoming inspection is viewed as a transitional activity. Once the division has developed a group of suppliers capable of delivering nondefective components, this activity will be eliminated. e. Within three years, the goal is to produce products with a defect rate less than 0.10 percent. By reducing the defect rate to this level, marketing is confident that market share will increase by at least 50 percent (as a consequence of increased customer satisfaction). Products with better quality will help establish an improved product image and reputation, allowing the division to capture new customers and increase market share. f. Accounting will be given the charge to install a quality information reporting system. Daily reports on operational quality data (e.g., percentage of defective units), weekly updates of trend graphs (posted throughout the division), and quarterly cost reports are the types of information required. g. To help direct the improvements in quality activities, kaizen costing is to be implemented. For example, for the year 20x1, a kaizen standard of 6 percent of the selling price per unit was set for rework costs, a 25 percent reduction from the current actual cost. To ensure that the quality improvements were directed and translated into concrete financial outcomes, Maria also began to implement a Balanced Scorecard for the division. By the end of 20x2, progress was being made. Sales had increased to 26,000,000, and the kaizen improvements were meeting or beating expectations. For example, rework costs had dropped to 1,500,000. At the end of 20x3, two years after the turnaround quality strategy was implemented, Maria received the following quality cost report: Maria also received an income statement for 20x3: Maria was pleased with the outcomes. Revenues had grown, and costs had been reduced by at least as much as she had projected for the two-year period. Growth next year should be even greater as she was beginning to observe a favorable effect from the higher-quality products. Also, further quality cost reductions should materialize as incoming inspections were showing much higher-quality purchased components. Required: 1. Identify the strategic objectives, classified by the Balanced Scorecard perspective. Next, suggest measures for each objective. 2. Using the results from Requirement 1, describe Marias strategy using a series of if-then statements. Next, prepare a strategy map. 3. Explain how you would evaluate the success of the quality-driven turnaround strategy. What additional information would you like to have for this evaluation? 4. Explain why Maria felt that the Balanced Scorecard would increase the likelihood that the turnaround strategy would actually produce good financial outcomes. 5. Advise Maria on how to encourage her employees to align their actions and behavior with the turnaround strategy.Posavek is a wholesale supplier of building supplies building contractors, hardware stores, and home-improvement centers in the Boston metropolitan area. Over the years, Posavek has expanded its operations to serve customers across the nation and now employs over 200 people as technical representatives, buyers, warehouse workers, and sales and office staff. Most recently, Posavek has experienced fierce competition from the large online discount stores. In addition, the company is suffering from operational inefficiencies related to its archaic information system. Posavek revenue cycle procedures are described in the following paragraphs. Revenue Cycle Posaveks sales department representatives receive orders via traditional mail, e-mail, telephone, and the occasional walk-in customer. Because Posavek is a wholesaler, the vast majority of its business is conducted on a credit basis. The process begins in the sales department, where the sales clerk enters the customers order into the centralized computer sales order system. The computer and file server are housed in Posaveks small data processing department. If the customer has done business with Posavek in the past, his or her data are already on file. If the customer is a first-time buyer, however, the clerk creates a new record in the customer account file. The system then creates a record of the transaction in the open sales order file. When the order is entered, an electronic copy of it is sent to the customers e-mail address as confirmation. A clerk in the warehouse department periodically reviews the open sales order file from a terminal and prints two copies of a stock release document for each new sale, which he uses to pick the items sold from the shelves. The warehouse clerk sends one copy of the stock release to the sales department and the second copy, along with the goods, to the shipping department. The warehouse clerk then updates the inventory subsidiary file to reflect the items and quantities shipped. Upon receipt of the stock release document, the sales clerk accesses the open sales order file from a terminal, closes the sales order, and files the stock release document in the sales department. The sales order system automatically posts these transactions to the sales, inventory control, and cost-of-goods-sold accounts in the general ledger file. Upon receipt of the goods and the stock release, the shipping department clerk prepares the goods for shipment to the customer. The clerk prepares three copies of the bill of lading. Two of these go with the goods to the carrier and the third, along with the stock release document, is filed in the shipping department. The billing department clerk reviews the closed sales orders from a terminal and prepares two copies of the sales invoice. One copy is mailed to the customer, and the other is filed in the billing department. The clerk then creates a new record in the accounts receivable subsidiary file. The sales order system automatically updates the accounts receivable control account in the general ledger file. CASH RECEIPTS PROCEDURES Mail room clerks open customer cash receipts, reviews the check and remittance advices for completeness, and prepares two copies of a remittance list. One copy is sent with the checks to the cash receipts department. The second copy of the remittance advices are sent to the billing department. When the cash receipts clerk receives the checks and remittance list, he verifies the checks received against those on the remittance list and signs the checks For Deposit Only. Once the checks are endorsed, he records the receipts in the cash receipts journal from his terminal. The clerk then fills out a deposit slip and deposits the checks in the bank. Upon receipt of the remittances, the billing department clerk records the amounts in the accounts receivable subsidiary ledger from the department terminal. The system automatically updates the AR control account in the general ledger Posavek has hired your public accounting firm to review its sales order procedures for internal control compliance and to make recommendations for changes. Required a. Create a data flow diagram of the current system. b. Create a system flowchart of the existing system. c. Analyze the physical internal control weaknesses in the system. d. (Optional) Prepare a system flowchart of a redesigned computer-based system that resolves the control weaknesses that you identified. Explain your solution.The Chromosome Manufacturing Company produces two products, X and Y. The company president, Gene Mutation, is concerned about the fierce competition in the market for product X. He notes that competitors are selling X for a price well below Chromosome's price of P12.70. At the same time, he notes that competitors are pricing product Y almost twice as high as Chromosome's price of P12.50. Mr. Mutation has obtained the following data for a recent time period: PRODUCT X PRODUCT Y Number of Units 11,000 3,000 Direct Materials Cost Per Unit 3.23 3.09 Direct Labor Cost Per Unit 2.22 2.10 Direct Labor Hours 10,000 2,500 Machine Hours 2,100 2,800 Inspection Hours 80 100 Purchase Orders 10 10 Mr. Mutation has learned that overhead costs are assigned to products on the basis of direct labor hours. The overhead costs for his time period consisted of the following items: Overhead Cost Item Amount Inspecting Costs…
- Stark and Company is a manufacturer that sells robots predominantly in the Asian market. Times have been tough for the auto industry and Stark and Company is no different. The company is under tremendous pressure to turn a profit. Several years ago, as analysts were predicting a large downturn in the robot industry, Stark decided to purchase a smaller niche robot maker in the hopes of capturing a different segment of the consumer market and to better learn the manufacturing processes of other robot makers. Starks still operates as two separate divisions, Classic and New Age, with each division manager employing a different manufacturing philosophy. The Classic manager is concerned with low input costs and quantity in production in addition to brand recognition and robot power. The New Age manager is concerned with quality and innovation in manufacturing, fuel-efficient and environmentally friendly robots. SAC continued to suffer losses even with the addition of the New Age division.…Tangent Controls Ltd. is a manufacturer of crash-protected event recorders that are used in railway systems around the world to record event data. These data can be retrieved and analyzed to monitor and improve operations, but also to provide diagnostic data in the event of rail crashes. The small Ottawa-based company has customers across the world, but its largest market is North America. The company has been hurt by the U.S. economy, seeing a 12% decline in sales over the prior year. The company is hoping that the latest industry developments, which call for a significant increase in the shipment of oil by railcar, will mean an increase in sales. In the meantime, the company has been seeking new investors and has approached a leading Canadian venture capital firm to see if it might be interested in investing. As part of its approach, Tangent has provided the following financial information for the most recent fiscal year. TANGENT CONTROLS LTD. Statement of Financial Position As at…Tool Industries manufactures large workbenches for industrial use. Sam Hartnet, the Vice President for marketing at Tool Industries, concluded from market analysis that sales were dwindling for Tool's workbenches due to aggressive pricing by competitors. Tool's workbench sells for $1,140 whereas the competition's comparable workbench sells for $1,060. Sam determined that a price drop to $1,060 would be necessary to protect its market share and maintain an annual sales level of 13,000 workbenches.Cost data based on sales of 13,000 workbenches: Budgeted Quantity Actual Quantity Actual Cost Direct materials (pounds) 175,000 168,000 $ 3,450,000 Direct labor (hours) 72,800 71,500 825,000 Machine setups (number of setups) 900 880 250,000 Mechanical assembly (machine hours) 273,000 281,250 3,750,000 If the profit per unit is maintained, the target cost per unit is (rounded to the nearest whole dollar): Multiple Choice $489. $557. $516. $424.…
- Quality Industries manufactures large workbenches for industrial use. Yewell Hartnet, the Vice President for marketing at Quality Industries, concluded from market analysis that sales were dwindling for Quality's workbenches due to aggressive pricing by competitors. Quality's workbench sells for $1,690 whereas the competition's comparable workbench sells for $1,500. Yewell determined that a price drop to $1,500 would be necessary to protect its market share and maintain an annual sales level of 14,100 workbenches. Cost data based on sales of 14,100 workbenches: Budgeted Quantity Actual Quantity Actual Cost Direct materials (pounds) 180,500 173,500 $ 3,455,500 Direct labor (hours) 75,000 74,250 827,750 Machine setups (no. of setups) 1,450 1,100 255,500 Mechanical assembly (machine hours) 31,150 284,000 3,761,000 If the profit per unit is maintained, the target cost per unit is (rounded to the nearest whole dollar):Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, “How do we get Rockness Bottling back on track?” Meeting in Rockness’s spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, “We made money when we were a smaller, simpler company. We have grown, added…Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, “How do we get Rockness Bottling back on track?” Meeting in Rockness’s spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, “We made money when we were a smaller, simpler company. We have grown,…