21  Case Studies

Author

Stijn Masschelein

21.1 When to Drop a Customer?

Before you start answering the questions, it’s always going to be a good idea to identify the important parties in the case study. As an example, I give you the most important parties for this case study. You should do this yourself for the other case studies.

  • Tommy Bamford, director of Egan & Sons. He is in favour of dropping a major but unprofitable customer, Westmid.
  • Jane Oldenburg, regional sales manager of Egan & Sons. Westmid is her customer and she is trying to keep Westmid as a customer.
  • Steve Houghton, purchasing executive of Westmid.

The specific questions for this case study are as follows.

  1. The decision to drop the customer is based on

    1. objective, general information and
    2. subjective, specific information.

    Give the most important example of both types of information. See the section on general and specific knowledge for definitions.

  2. Egan & Sons has invested time and resources on developing an Activity Based Costing system.

    1. Which events triggered the decision to invest in Activity Based Costing?
    2. What is the important transaction cost in implementing the Activity Based Costing system? In other words, what is the most important investment of time and resources?

  3. In the section “Experts Respond”, Timothy Jahnke argues that it is possible to repair the relation with an unprofitable customer.

    1. Which approach does he recommend?
    2. Which objective, general information and which specific, subjective information can be used to repair the relation according to Jahnke?

  4. Based on your answers to the questions 1-3 on specific knowledge, transaction costs, and repairing a relation with a customer, what should Tommy Bamford do with the Westmid customer account?

21.2 Research and Engineering at Whirlpool

For these questions, I want you to focus on the major decisions about how the budget should be allocated in the R&E Division. The starting point is the $7 million for the R&E Division.

  1. The budget process consists of two stages (or two separate decisions) to allocate the $7 million in the R&E Division at Whirlpool. For each stage answer the following questions:
    1. What is the allocation decision?
    2. What is the information and knowledge that is being used to make this decision?
  2. The second stage of the budget process creates competition between employees within Whirlpool.
    1. Who is competing?
    2. What are they competing for?
    3. Who determines who wins the competition?
  3. In the case study, the directors say that there are certain problems and difficulties with allocating the budget in the R&E Division.
    1. What are those problems and difficulties?
    2. What is the underlying, common cause for those problems and difficulties?
  4. Finally, we want to evaluate the budgeting process as a whole for the R&E division.
    1. How does the two-stage process from question 1 address the underlying cause for the problems and difficulties you have identified in the previous question?
    2. How does the competition from question 2 address the underlying cause for the problems and difficulties you have identified in the previous question?
    3. Do the benefits outweigh the costs for the existing budgeting process?1

21.3 Charley’s Family Steak House (A and B)

21.3.1 Variance Analysis

Recall that the flexible budget is the same as the original budget with one difference: you have to adjust the number of units sold. If the restaurant has sold more units than expected, other budget items should be adjusted. If the restaurant has sold less units than expected, other budget items should be adjusted. Be aware of the difference between fixed and variable costs.

  1. Use the planned and actual data in Case B Exhibit 2 to prepare the flexible budget for 2008. You have to adapt the planned budget using the actual customer count. You can assume that there are exactly 52 weeks in a year. You will have to use Case A and other exhibits to fully understand the numbers in the Case B Exhibit 2.

  2. Use the flexible budget that you have calculated in the previous question to calculate the flexible-budget and sales-volume variances. Use these calculations to explain which decisions had the largest impact on the difference between the planned profit and the actual profit.

  3. In a follow-up to Case Study A and B it is revealed that Pearson received a bonus of $5 000.

    1. Use your answer for the previous question to explain whether Pearson deserved this bonus or not
    2. Should he have received a larger bonus or a lower bonus?
    3. Are there other factors, unrelated to the budget and actual outcomes, that you would take into account?

21.3.2 The Budget Process

  1. In case study A, we learn that Turner discovers in 2006 that the restaurants that are no longer directly under his management perform below his expectations. Give at least two unrelated reasons, why a hired manager would be performing less well than Turner as a restaurant manager.

  2. For the two (or more) reasons you have identified in the previous question, explain whether and how the budget at Charley’s Steak House can improve the hired manager’s performance and bring it closer to what Turner would be able to do. Think about what the goal of the budget is for this question.

  3. Pearson can earn a bonus as a manager. Is the bonus determined by objective, general information, by subjective, specific knowledge or both? Explain your answer.

  4. In a follow-up to Case Study A and B it is revealed that Pearson received a bonus of $5 000.

    1. Use your answers for the previous questions to explain whether Pearson deserved this bonus or not
    2. Should he have received a larger bonus or a lower bonus?
    3. Are there other factors, unrelated to your previous answers, that you would take into account?

21.4 Lehigh Steel

Lehigh Steel has identified 5 example products in Exhibits 4 and 5. In the questions, I want you to do the ABC and ToC calculations for those 5 products. For simplicity, I only need the calculation for one unit of each product, not the total cost for all units of each product. The information in Exhibits 4 and 5 is not sufficient to do all the calculations.

21.4.1 Activity Based Costing

  1. Calculate the cost per unit for the 5 example products following the Activity Based Costing method. You will have to

    • Identify the activities
    • Identify how much it costs to perform one unit of those activities
    • Identify how much each product uses each activity

  2. Compare your results in the previous question to the standard costs in Exhibit 4. What are the most important factors that explain the difference between the standard costs per unit and your calculations?

  3. In this question, I want you to evaluate whether Activity Based Costing is an appropriate costing method for Lehigh Steel.

    1. Describe the strategy of Lehigh Steel. That implies that you have to explain the investments that give Lehigh a competitive advantage.
    2. What are the underlying assumptions of which costs can be influenced (“variable”) in your calculations in question 1.
    3. Use your answers for the previous questions to explain why Activity Based Costing is or is not a good fit for Lehigh Steel.

  4. How would you combine the Theory of Constraints approach and the Activity Based Costing approach to calculate the profitability of the products? If you cannot find a way to do the actual calculations, describe in words what your approach would be.

21.4.2 Theory of Constraints

  1. Calculate the throughput per unit of the constraint under the Theory of Constraints approach for the 5 example products. We have not discussed the Theory of Constraints in the lectures. The calculations are explicitly explained on page 8 of the case study.

  2. Compare your results in the previous question to the standard costs in Exhibit 4. What are the most important factors that explain the difference between the standard costs per unit and your calculations?

  3. In this question, I want you to evaluate whether Theory of Constraints is an appropriate costing method for Lehigh Steel.

    1. Describe the strategy of Lehigh Steel. That implies that you have to explain the investments that give Lehigh a competitive advantage.
    2. What are the underlying assumptions of which costs can be influenced (“variable”) in your calculations in question 1.
    3. Use your answers for the previous questions to explain why Theory of Constraints is or is not a good fit for Lehigh Steel.

  4. How would you combine the Theory of Constraints approach and the Activity Based Costing approach to calculate the profitability of the products? If you cannot find a way to do the actual calculations, describe in words what your approach would be.

21.5 Virginia Mason and Owens & Minor

21.6 Converse Health System

  1. This question is in effect asking you whether in your judgement the transaction costs of the budgeting process are worth the benefits of reducing the problems and difficulties in allocating the budget.↩︎