• Apply key techniques and concepts in measuring the cost of producing goods and services.
• Apply management accounting concepts to identify and process relevant financial information for
• Use technology and information resources to research issues in financial management.
• Write clearly and concisely about financial management using proper writing mechanics.
West Island Products (WIP) is a divisionalized furniture manufacturer. The divisions are autonomous
segments with each division responsible for its own sales, cost of operations, and equipment acquisition.
Divisional performance is evaluated annually based on ROI. Each division serves a different market in the
furniture industry. Because the markets and products of the divisions are so different, there have never
been any transfers between divisions.
The Commercial Division of WIP, manufacturers furniture for the restaurant industry. The Commercial
Division plans to introduce a new line of counter chair units featuring a cushioned seat. Roberta Katz, the
Commercial Division manager, has discussed the manufacturing of the cushioned seats with Nathan
Danielson of the Office Division. They both believe a cushioned seat currently made by the Office Division
for use on its deluxe office stool could be modified for use on the new counter chair. Consequently, Katz
asked Danielson for a price for 100-unit lots of the cushioned seats. The following conversation took
place about the price to be charged for the cushioned seats.
Danielson: “Roberta, we can make the necessary modifications to the cushioned seat easily. The
raw materials used in the new counter chair seat are slightly different and should cost
about 10 percent more than those used in our deluxe office stool. However, the labor
time should be the same because the seat fabrication process is the same. I would price
the cushioned seat at our regular rate: full cost plus a 30 percent mark-up. According to
my calculations, that would be $2,053 per lot of 100 seats.”
Katz: “That’s higher than I expected, Nathan. I was thinking that a good price would be your
variable manufacturing cost. After all, your fixed costs will be incurred regardless of this
job. In addition, I have received a quote from one of the Commercial Division’s regular
suppliers to provide us with the counter seats at $1,900 per lot of 100 seats.”
Danielson: “Roberta, I am at full capacity. By making the cushioned seats for you, I have to cut my
production of deluxe office stools. Thankfully, the labor time freed by not having to
fabricate the frame and assemble the deluxe stool can be shifted to the production of an
economy stool. I would like to sell the cushioned seats to you at my variable cost, but I
have excess demand for both products. I don’t mind changing my product mix to the
economy model and producing the cushioned seats for you as long as I don’t change my
division’s overall profitability. Here are my standard costs for the two stools and a
schedule of my manufacturing overhead.” (See Exhibits 1 and 2.)
Exhibit 1 – Office Division Standard Costs and Prices