Air-to-ground radio communication units special-order basis

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Reference no: EM131145981

Susan Tanks, manager of a division that produces air-to-ground radio communication units on a special-order basis, was excited about an order received from a nearby military base for 10,000 radio units. The military agreed to pay full manufacturing cost plus 25 percent. The order was timely since business was sluggish, and Susan had some concerns about her division’s ability to meet its targeted profits. Even with the order, the division would likely fall short in meeting the target by around $50,000. After examining the cost summary for the order, however, Susan thought she saw a way to increase the profitability of the job. Accordingly, she called Larry Flyright, the controller of the division. Susan: “Larry, the cost summary you gave me for the new military order reflects an allocation of maintenance costs to the Assembly Department based on maintenance hours used. Currently, 60% of our maintenance costs are allocated to Assembly on that basis. Can you tell me what the allocation ratio would be if we used machine hours instead of maintenance hours?” Larry: “Sure. Based on machine hours, the allocation ratio would increase from 60% to 80%.” Susan: “Excellent. Now, tell me what would happen to the unit cost of the military job if we used machine hours to allocate maintenance costs.” Larry: “Hold on. That’ll take a few minutes to calculate. … The cost would increase by $10 per unit.” Susan: “And with the 25% markup, the revenues on that job would jump by $12.50 per unit. That would increase profitability of the division by $125,000. Larry, I want you to change the allocation base from maintenance hours worked to machine hours.” Larry: “Are you sure? After all, if you recall, we spent some time assessing the causal relationships, and we found that maintenance hours reflect the consumption of maintenance cost much better than machine hours. I’m not sure that would be a fair cost assignment. We’ve used maintenance hours as the allocation base for years now.” Susan: “Listen, Larry, allocations are arbitrary anyway. It’s not like there’s a rule that says we have to use maintenance hours as an allocation base. Changing the allocation base for this military order will increase its profitability and allow us to meet our targeted profit goals for the year. If we meet or beat those goals, we’ll be more likely to get the capital we need to acquire some new equipment. Furthermore, by beating the targeted profit, we’ll get our share of the bonus pool. Besides, the U.S. military can easily afford to pay somewhat more for this order.” After some thought, Larry decided that he couldn’t comply with Susan’s request to change the allocation scheme. Appeals to higher-level managers within the company were in vain. Everyone seemed to agree with Susan that her request represented good business sense and that Larry should do as Susan had requested. Angered, Larry submitted his resignation and called the military department that had placed the special radio unit order. In his phone conversation, Larry revealed Susan’s plan to increase the job’s costs in order to improve her division’s profits. The military officer in charge of the purchase expressed his gratitude to Larry and promptly canceled the order for 10,000 radio units. Required – Follow the Ethics Assignment Guidelines and prepare an essay that addresses the following: • Identify the dilemma(s). What exactly is the decision(s) that must be made? (In your answer, please feel free to show your knowledge of management accounting and/or what you have learned this semester!) • Identify the primary stakeholders and consider their viewpoints. Who has a stake in the decision? • What additional alternatives did Larry have other than resigning? Analyze the alternatives and consequences. Clarify the main alternatives available to Larry and predict how each alternative would affect the primary stakeholders. If appropriate, address Susan’s reasoning. • Defend the position and action(s) you would have taken. Be clear. Tell why your course of action would be better than that chosen by Larry. Show your knowledge of what we have learned thus far in the course.

Reference no: EM131145981

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