Comparing the costs associated with each of Corte Madera Toy

Cost Accounting: A managerial Emphasis
3rd Canadian Edition

You will prepare the appropriate analysis of the data and prepare a written report to support your conclusions, along with supporting schedules. The paper will be typed, using single spacing. The length of the paper is left to your determination, yet I would expect 3-5 pages, not including support data. The case will graded based upon the application of proper managerial concepts, logic of the presentation, and writing style, including grammar and spelling.

Corte Madera Toy Company manufactures and distributes toy action figures from popular TV shows. The figures are partially handmade. The toy industry is a seasonal business; most sales occur in late summer and fall.

The projected sales in units for 2005 are shown in the following schedule. With a sales price of $10 per unit, the total sales revenue for 2005 is projected at $1.2 million. Management schedules production so that finished-goods inventory at the end of each month, exclusive of a safety stock of 4,000 units, equals the next month’s sales. One-half hour of direct labor time normally is required to produce each unit. Using the production schedule followed in the past, the total direct labor hours by month required to meet the 2005 sales estimate are also shown in the schedule.

Corte Madera Toy Company
Projected Sales and Planned Production
For the Year Ending December 31, 2005

Projected Sales Direct Labor
(in units)___ Hours Required*
January 8,000 4,000
February 8,000 4,000
March 8,000 4,000
April 8,000 4,000
May 8,000 4,000
June 10,000 5,000
July 12,000 6,000
August 12,000 6,000
September 13,000 6,500
October 13,000 6,500
November 12,000 6,000
December 8,000 4,000â?
Total 120,000 60,000

*This schedule does not incorporate any additional direct labor hours resulting from inefficiencies.
â? Sales for January, 2006 are projected to be 8,000 units.

The production schedule followed in the past requires scheduling overtime hours for any production over 8,000 units (4,000 direct labor hours) in one month. While the use of overtime is feasible, management has decided to consider two other possible alternatives: (1) hire temporary help from an agency during peak months, or (2) expand its labor force and adopt a level production schedule.

Factory employees are paid $12.00 per hour for regular time; the fringe benefits average 20 percent of regular pay. For hours worked in excess of 4,000 per month, employees receive time and one-half; however, fringe benefits average only 10 percent on these additional wages. Past experience has shown that labor inefficiencies occur during overtime at the rate of 5 percent of overtime hours; this 5 percent inefficiency was not included in the direct-labor estimates presented in the schedule.

Rather than pay overtime to its regular labor force, the company could hire temporary employees when production exceeds 8,000 units per month. The temporary workers could be hired at the same labor rate of $12.00 per hour, but there would be non fringe-benefit costs. Management estimates that the temporary workers would require 25 percent more time than the regular employees (on regular daytime hours) to produce the action figures.

If Corte Madera Toy Company adopts a level production schedule, the labor force would be expanded. However, no overtime would be required. The same labor rate of $12.00 per hour and fringe-benefit rate of 20 percent would apply.

The manufacturing facilities have the capacity to produce 18,000 units per month. On-site storage facilities for completed units are adequate. The estimated annual cost of carrying inventory is $1 per unit. The company is subject to a 40 percent income-tax rate.

1. Prepare an analysis comparing the costs associated with each of Corte Madera Toy
Company’s three alternatives:
a. Schedule overtime hours
b. Hire temporary workers
c. Expand the labor force and schedule level production

2. Identify and discuss briefly the non-cost factors and the factors that are difficult to
estimate, which management should consider in conjunction with the cost analysis
prepared in requirements (1).

3. Independent of your answer to requirement (1), suppose Corte Madera Toy Company’s
controller, Caroline White, has finished an analysis showing that using overtime is the
most costly of the three alternatives. Before presenting her analysis to top management,
White got a phone call from Bob Davies, who is the production manager and a close
Friend. “Caroline, according to the grapevine, you’re going to recommend against
Overtime as a way of meeting next year’s production requirements.”
“That’s the way the figures line up, Bob,” responded White.
“Caroline, the people on the production line need that overtime. They’re counting
on it. It’s been a rough year for many of them. Couldn’t you slant things just a bit so
that the top brass will stick to the overtime plan like we’ve always done in the past?”
Discuss the ethical issues in this situation. What should the controller do? What
should the production manager do?

4. The HR manager, after talking to Bob Davies, has suggested that if overtime is rejected, then base pay should be raised by $1.25 per hour to compensate and maintain
employee morale. Would this change your recommendations? Why?

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