Chapter 1, Problem 6E

Each of the following scenarios requires the use of accounting information to carry out one or more of the following managerial activities: (1) planning, (2) control and evaluation, (3) continuous improvement, or (4) decision making.

1. a. MANAGER: At the last board meeting, we established an objective of earning an after-tax profit equal to 20 percent of sales. I need to know the revenue that we need to earn in order to meet this objective, given that we have $250,000 to spend on the promotional campaign. Once I have estimated sales in units, we then need to outline a promotional campaign that conforms to our budget and that will take us where we want to be. However, to compute the targeted sales revenue, I need to know the unit sales price, the unit variable cost, and the associated fixed production and support costs. I also need to know the tax rate.
2. b. MANAGER: We have problems with our procurement process. Our accounts payable department is spending 80 percent of its time resolving discrepancies between the purchase order, receiving order, and supplier’s invoice. Incorrect part numbers on the purchase orders, incorrect quantities ordered, and wrong parts sent (or the incorrect quantity) are just a few examples of sources of discrepancies. A complete redesign of the process has been suggested, which will allow us to eliminate virtually all of the errors and, at the same time, significantly reduce the number of clerks needed in purchasing, receiving, and accounts payable. This redesign promises to significantly reduce costs, decrease lead time, and increase customer satisfaction.
3. c. MANAGER: This overhead cost report indicates that we have spent significantly more on inspection, purchasing, and production than was budgeted. An investigation has revealed that the source of the problem is faulty components from suppliers. A supplier evaluation has revealed that by selecting five suppliers with the best quality records (out of 15 currently used), the number of defective components will be dramatically reduced, thus producing significant overhead savings by reducing the demand for inspections, reordering, and rework.
4. d. MANAGER: A large local firm has approached me and has offered to sell us one of the components used in our small engines—a component that we are currently producing internally. I need to know costs that we would avoid if this component is purchased so that I can assess the economic merits of this offer.
5. e. MANAGER: Currently, our deluxe lawn mower is losing money. We need to increase profits. I would like to know how much our profits would be if we reduce our variable costs by $50 per mower while maintaining our current sales volume. Also, marketing claims that if we increase advertising expenditures by $1,000,000 and cut prices by 15 percent, we can increase the number of mowers sold by 25 percent. I would like to know which approach offers the most profit, or if a combination of the approaches may be best.
6. f. MANAGER: We are implementing a major quality improvement program. We will be increasing the investment in prevention and detection activities with the expectation of driving down both internal and external failure costs. I expect to see trend reports for all categories of quality costs. I want to see if improving quality really does reduce costs and improve profitability.
7. g. MANAGER: Our engineering design department has proposed a new design for our product. The new design promises to reduce post-purchase costs and, as a consequence, increase market share. I need to know the cost of producing this new design because it uses some new components and requires some different manufacturing processes. I would then like to have a projected income statement based on the new market share and new production costs. The planned selling price will be the same, or maybe even 10 percent lower. Projections based on the two price scenarios would be needed.
8. h. MANAGER: My engineers have said that by redesigning our two main production processes, we can reduce move time by 90 percent and wait time by 85 percent. This would decrease cycle time and virtually eliminate the need to carry finished goods inventories. On-time deliveries would also increase dramatically. This would produce cost savings of nearly $20,000,000 per year. Market share and revenues would also increase.

Required:

1. 1. Describe each of the four managerial responsibilities.
2. 2. Identify the managerial activity or activities applicable for each scenario, and indicate the role of accounting information in the activity.