Exercise 1-11 The Managerial Process

Each of the following scenarios requires the use of accounting information to carry out one or more managerial accounting objective.

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a.       Laboratory Manager: An HMO approached me recently and offered us its entire range of blood tests. It provided a price list revealing the amount it is willing to pay for each test. In many cases, the prices are below what we normally charge. I need to know the costs of the individual tests to assess the feasibility of accepting its offer and perhaps suggest some price adjustments on some of the tests.

b.       Operating Manager: This report indicates that we have 30% more defects than originally targeted. An investigation into the cause has revealed the problem. We were using a lower- quality material than expected, and the waste has been higher than normal. By switching to the quality level originally specified, we can reduce the defects to the planned level.

c.        Divisional Manager: Our market share has increased because of higher-quality products. Current projections indicate that we should sell 25% more units than last year. I want a pro- jection of the effect that this increase in sales will have on profits. I also want to know our expected cash receipts and cash expenditures on a month-by-month basis. I have a feeling that some short-term borrowing may be necessary.

d.       Plant Manager: Foreign competitors are producing goods with lower costs and delivering them more rapidly than we can to customers in our markets. We need to decrease the cycle time and increase the efficiency of our manufacturing process. There are two proposals that should help us accomplish these goals, both of which involve investing in computer-aided manufacturing. I need to know the future cash flows associated with each system and the effect each system has on unit costs and cycle time.

e.        Manager: At the last board meeting, we established an objective of earning a 25% return on sales. I need to know how many units of our product we need to sell to meet this objective. Once I have the estimated sales in units, we need to outline a promotional campaign that will take us where we want to be. However, in order to compute the targeted sales in units, I need to know the expected unit price and a lot of cost information.

f.        Manager: Perhaps the Harrison Medical Clinic should not offer a full range of medical serv- ices. Some services seem to be having a difficult time showing any kind of profit. I am par- ticularly concerned about the mental health service. It has not shown a profit since the clinic opened. I want to know what costs can be avoided if I drop the service. I also want some assessment of the impact on the other services we offer. Some of our patients may choose this clinic because we offer a full range of services.

Select the managerial accounting objective(s) that are applicable for each scenario: planning, controlling (including performance evaluation), or decision making.