Caselets

Problem 1: Northern Distributors (20 points)

Northern Distributors Plc. sells bottled water to corporate clients. The cost it pays for each bottle of water is £1.50. Its normal (list) selling price is £1.99 per bottle. Northern has decided to analyse the profitability of each of its five customers (101, 102, 103, 104 and 105). The following table details information about each of the five customers:

	101	102	103	104	105
Number of Bottles Sold	50,000	75,000	35,000	90,000	10,000
Price Discount	5%	10%	10%	5%	0%
Number of Orders	50	50	35	100	25
Number of Sales Visits	5	8	3	10	4
Number of Deliveries	25	30	35	50	25
Distance to Customer	10 km	5 km	30 km	15 km	10 km

Using an activity based costing system, Northern has adopted the following four activities and related cost per activity driver:

-          Order Taking (£60/order);

-          Sales Visit (£300/visit);

-          Delivery (£6/km);

-          Product Handling (£0.10 per unit).

Required:

a. (20 points) Determine the profitability of each of the five customers.

Problem 2: Met Towels (20 points)

Met Towels plc. produces and sells standard bath towels. The company uses a standard costing system; the standards in use for the latest month of production (January 2005) are as follows:

Direct Material Usage	1.5 m2 of material per towel
Direct Material Cost	£2 / m2
Direct Labour Usage	0.1 hour per towel
Direct Labour Cost	£7.50 / hour
Machine Hours Usage	3 minutes per towel

For the month of January 2005, the company expected to produce 100,000 towels and use £240,000 in variable overhead and £155,000 in fixed overhead. The costing system applies VOH using machine hours and FOH using direct labour hours.

At the end of January 2005, the company actually produced 100,000 towels. Additional actual information is as follows:

Direct Material Used	135,000 m2 (amount used = amount purchased)
Direct Material Cost	£276,750
Direct Labour Hours	11,500 hours
Direct Labour Cost	£94,990
Machine Hours Used	290,000 minutes
Variable Overhead	£249,400
Fixed Overhead	£140,000

Required: Prepare a full cost variance analysis for Met Towels in January 2005.

Required:

a. (10 points) Prepare a cost variance analysis for each variable cost component for Met Towels in January 2005.

b. (10 points) Prepare a fixed overhead variance analysis for Met Towels in January 2005.

Problem 3: Solar Sparks Corporation (20 points)

Hamid Jones is a regional manager of Solar Sparks Corporation, an alternative energy firm developing, manufacturing, and exploiting photovoltaic technologies.  Hamid is in charge of the European unit of Solar Sparks.  His unit’s sole activity is to manufacture and sell Wafers.  The unit manufactures 270,000 Wafers and is operating at 90 percent of theoretical capacity.  The European unit currently sells these Wafers to outside customers at £100 per Wafer.  The European unit incurs £25 in variable manufacturing costs per Wafer and £5 in variable selling costs when selling to outside buyers.  The unit also incurs £1,350,000 in total fixed costs.  The European unit could produce at up to 95 percent of its theoretical capacity without disruptions to current production or the need of additional investment.  Hamid does not plan (nor have the resources) to make any investments in additional capacity in the foreseeable future.

Jacob Kane, another regional manager of Solar Sparks, is in charge of the North American unit of Solar Sparks.  Jacob has asked the Hamid to supply 50,000 Wafers from the European unit to the North American unit.  The North American unit manufactures and sells Modules, and Wafers are a key input.  The North American unit is currently operating at 50 percent of practical capacity due to a low supply of Wafers.  The unit utilizes 100,000 Wafers to manufacture 400,000 Modules.  Jacob has offered to pay Hamid's unit £60 per Wafer for the 50,000 Wafers (expected to yield 200,000 new Modules).

At the North American unit, the full-absorption cost to manufacture and sell a Module currently consists of £40 for parts in addition to the cost of the Wafers, £30 for other variable costs per unit, and an allocation of £10 in fixed costs.  The production of additional Modules would not alter the variable costs per unit and would not require any changes to fixed costs (the North American unit would be able to utilize currently idle capacity).Based on target costing, the manager of the North American unit has decided that a price higher than £60 per Wafer would be infeasible based on the expected selling price of the additional Modules.

Solar Sparks evaluates managers on the basis of pretax ROI of the manager's unit (ignore taxes).

Required:

a. (5 points) What is the estimated target selling price per Module of the additional Modules if the production and sale of the new Modules are expected to generate £2,000,000 in additional pretax profits to the North American unit given the proposed transfer price?

b. (5 points) What is the minimum transfer price at which Hamid Jones would supply Wafers to the North American unit without adversely affecting his performance evaluation?  Considering Hamid's performance evaluation system, would he supply Wafers to the North American unit at £60 per Wafer?

c. (5 points) Would it be in the economic interests of Solar Sparks for the European unit to supply the North American unit with 50,000 Wafers?

d. (5 points) Briefly discuss the organizational and behavioural difficulties, if any, inherent in this situation.  As Hamid Jones, what would you advise the CEO of Solar Sparks to do in this situation?

Problem 4: Barrel Products (20 points)

Barrel Products Plc (BP) is an international energy company, providing its customers with fuel for transportation, energy for heat and light, and petrochemical products for everyday items.  In the recent years, safety and environmental sustainability have become key strategic priorities for BP and its competitors.  Consistent with these objectives, BP’s current values read (from www.bp.com):

BP wants to be recognized as a great organization – competitively successful and a force for progress. We have a fundamental belief that we can make a difference in the world.

We help the world meet its growing need for heat, light and mobility. We strive to do that by producing energy that is affordable, secure and doesn’t damage the environment.

BP is progressive, responsible, innovative and performance driven.

In response to the evolving competitive environment, the Board of Directors of BP has initiated the process to design a new performance evaluation system for the company’s top executives.  In particular, the board believes that BP’s CEO, Tim Holmes, should be evaluated on BP’s financial performance as well as its social and environmental responsibility, all three objectives weighted equally.  The performance system should also incorporate measures of how “progressive, responsible, innovative and performance driven” the company is.

You have been hired as a consultant to advise BP’s board on the design of a triple-bottom-line balance scorecard to evaluate Tim Holmes.

Required:

1.              (10 points) Describe the balanced scorecard you would recommend to BP’s board.  Clearly outline the target objectives and multiple measures of each objective, including leading and lagging indicators (provide objectives and measures in the form of a table).  Justify the use of the identified objectives and measures.

2.              (10 points) List and describe two potential challenges that BP could face in implementing the recommended balanced scorecard?