Assume you are the department B manager for Marley's Manufacturing. Marley's operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only to department B (they have no outside sales). After calculating the operating income in dollars and operating income in percentage, analyze the following financial information to determine costs that may need further investigation. The cost that needs further investigation is cost allocated from corporate. In Department A the percentage of cost allocated based on sales is 10% where as in Department B this is 29.41% based on sales. This needs further investigation beacuse of this cost there is operating loss in Department B. Marley's Manufacturing Income Statement Month ending August 31, 2018 Dept. A % Dept. B % Sales $22,000 100 $51,000 100 Cost of Goods Sold 10,560 48 26,520 52 Gross profit $11,440 52 $24,480 48 Utility expenses 1,000 4.55 3,200 6.27 Wages expense 5,500 25 10,200 20 Costs allocated from Corporate 2,200 10 15,000 29.41 Total expenses $8,700 39.55 $28,400 55.68 Operating Income/(loss) $ 2740 (3920) Operating income/(loss) % 12.45% (7.86)% Based on the research of the market in the above information, you have determined the market price for the items your department purchases is 15% below what you are being charged by department A of Marley's Manufacturing. a. How would you view this as a manager?
Assume you are the department B manager for Marley's Manufacturing. Marley's operates under a cost-based transfer structure. Assume you receive the majority of your raw materials from department A, which sells only to department B (they have no outside sales). After calculating the operating income in dollars and operating income in percentage, analyze the following financial information to determine costs that may need further investigation.
The cost that needs further investigation is cost allocated from corporate. In Department A the percentage of cost allocated based on sales is 10% where as in Department B this is 29.41% based on sales. This needs further investigation beacuse of this cost there is operating loss in Department B.
Marley's Manufacturing
Income Statement
Month ending August 31, 2018
| Dept. A | % | Dept. B | % | |
| Sales | $22,000 | 100 | $51,000 | 100 |
| Cost of Goods Sold | 10,560 | 48 | 26,520 | 52 |
| Gross profit | $11,440 | 52 | $24,480 | 48 |
| Utility expenses | 1,000 | 4.55 | 3,200 | 6.27 |
| Wages expense | 5,500 | 25 | 10,200 | 20 |
| Costs allocated from Corporate | 2,200 | 10 | 15,000 | 29.41 |
| Total expenses | $8,700 | 39.55 | $28,400 | 55.68 |
| Operating Income/(loss) $ | 2740 | (3920) | ||
| Operating income/(loss) % | 12.45% | (7.86)% |
Based on the research of the market in the above information, you have determined the market price for the items your department purchases is 15% below what you are being charged by department A of Marley's Manufacturing.
a. How would you view this as a manager?
b. What steps could you take to solve this discrepancy?
c. What alternatives would you consider, assuming you had control over purchasing decisions?
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