WILMONT COMPANY (Variable Costing) Wilmont Companys executive committee was meet
ID: 436774 • Letter: W
Question
WILMONT COMPANY(Variable Costing)
Wilmont Companys executive committee was meeting to select a new vice president of operations. The leading candidate was Howard Kimball, manager of Wilmonts largest division. Howard had been divisional manager for three years. The president of Wilmont, Larry Olsen, was impressed with the significant improvements in the divisions profits since Howard had assumed command. In the first year of operations, divisional profits had increased by 20%. They had shown significant improvement for the following two years as well. To bolster support for Howard, the companys president circulated the following divisional income statements (dollars in thousands):
2004
2005
2006
Sales
$ 30,000
$ 32,000
$ 34,000
Less: Cost of goods sold 1/
26,250
26,400
27,200
Gross margin
$ 3,750
$ 5,600
$ 6,800
Less: Selling and admin 2/
3,000
3,600
3,800
NET INCOME
$ 750
$ 2,000
$ 3,000
1/ ? assumes a LIFO inventory flow
2/ ? all costs are fixed
As you can see, Larry observed at a meeting, Howard has increased profits by a factor of four times since 2004. Thats by far the most impressive performance of any divisional manager. We could certainly use someone with that kind of drive. I definitely believe that Howard should be the new vice president.
Im not quite as convinced that Howards performance is as impressive as it appears, responded Bill Peters, the vice president of finance. I could hardly believe that Howards division could show the magnitude of improvement revealed by the income statements. So I asked the divisional controller to supply some additional information. As the data suggest, the profits realized by Howards division may be attributable to a concerned effort to produce for inventory. In fact, I believe it can be shown that the division is actually showing a loss each year and that real profits have declined as much as 15% since 2004. Peters then showed the following information:
2004
2005
2006
Sales (units)
150,000
160,000
170,000
Production 1/
200,000
250,000
300,000
Actual (and budgeted) fixed overhead
$15,000,000
Fixed overhead rate
$ 75
$ 60
$ 50
Unit variable production costs
$ 100
$ 105
$ 110
1/ ? this represents both expected and actual production.
Fixed overhead rates are computed using expected actual production
REQUIRED:
1. Explain what Bill Peters meant by producing for inventory.
2. Recast the income statements in a variable?costing format. Now, how does the performance of the division appear?
3. Reconcile the differences in the income figures using the two methods for each of the three years.
4. If you were a shareholder, how would you detect income increases that are caused mainly by production for inventory?
Explanation / Answer
Defining Characteristics of Strategic Thinkers Personal traits Managers who think strategically demonstrate specific personal traits, behaviors, attitudes, and thinking skills. You're on your way to becoming a strategic thinker if you exhibit the following personal traits: Curiosity: You're genuinely interested in what's going on in your unit, company, industry, and wider business environment. Flexibility: You're able to adapt approaches and shift ideas when new information suggests the need to do so. Future focus: You constantly consider how the conditions in which your group and company operate may change in the coming months and years. And you keep an eye out for opportunities that may prove valuable in the future—as well as threats that may be looming. Positive outlook: You view challenges as opportunities, and you believe that success is possible. Openness: You welcome new ideas from supervisors, peers, employees, and outside stakeholders such as customers, suppliers, and business partners. You also take criticism well by not reacting in a defensive manner. Breadth: You continually work to broaden your knowledge and experience, so you can see connections and patterns across seemingly unrelated fields of knowledge.
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