Question 1
Adam has decided to purchase a sewing machine. He has two choices: Poppy and Iris. The sewing machines sold by Poppy and Iris offer the same features (work space, stitch quality and quietness, automatic end-of-stich features, easy to learn, lightning, and so on). Both are mail-order companies with good reputations. Both sewing machines sell for the same price. To help him make a decision, Adam gets more information on the two machines from the respective company websites. He discovers that the cost of operating and maintaining Poppy over a two-year period is estimated to be $400. For Iris, the operating and maintenance cost is $650. The sales information for Poppy emphasized the lower operating and maintenance costs. While the website for Iris, however, emphasized the service reputation of the product and the faster delivery time (Iris can be purchased and delivered one week sooner than Poppy). Based on all the available information, Adam has decided to buy Iris.
Required:
1.What are the strategic positions of the two companies (Poppy and Iris) and how do they differ?
2.When asked why he decided to buy Iris, Adam responded, “I think that Iris offers more value than Poppy”. What are possible sources of this value?
3.Suppose that Adam’s decision was prompted mostly by the desire to receive the machine quickly. Informed that it was losing sales because of the longer time to produce and deliver its products, the management of Poppy decided to improve delivery performance by improving its internal processes. These improvements decreased the number of defective units and the time required to produce its product. Consequently, delivery time and costs both decreased, and the company was able to lower its prices on Poppy machines.
Explain how these actions translate into strengthening the competitive position of the Poppy machine relative to the Iris machine. Also discuss the implications for the management accounting information system (i.e. what sort of information should be collected and reported?).
Question Two
Universal Power Machinery (MUP) designs and manufactures specialized equipment for a wide range of industries. For a number of years the company’s maintenance division, which has been organized as a cost centre, has provided services free of charge to the company’s user departments (production, distribution, research, marketing, and so forth).
During the last three years, requests for maintenance have increased considerably and as a result of that, quality and timeliness of services provided are becoming a significant issue. In response to that issue, the top management established a task force to review the maintenance division operations. The task force recommended the maintenance division to be converted from a cost center to a profit center and the use of a charge-back system for the maintenance services (i.e. users to be billed for services performed).
Required:
1. How should the manager of the maintenance division be evaluated (i.e. as a cost centre)?
2. If the company switches the maintenance department from a cost centre to a profit centre:
A. What will likely happen to the number of user service requests? Why?
B. How should MUP evaluate the manager of the maintenance division?
Question three
Since budgets affect many people in an organization, they can have significant behavioural implications. Allowing people to participate in setting their own budget targets may improve commitment those targets but create the incentive to build budgetary slack into budget estimates.
Required:
Explain three disadvantages of budgetary slack from the point of view of
A.The business unit managers who must achieve the budget Corporate management
