Chapter 12, Problem 47P

Warriner Equipment Company, which is located in Ontario, Canada, manufactures heavy construction equipment. The company’s primary product, an especially powerful bulldozer, is among the best produced in North America. The company operates in a very price-competitive industry, so it has little control over the price of its products. It must meet the market price. To do so, the firm has to keep production costs in check by operating as efficiently as possible. Mathew Basler, the company’s president, has stated that, to be successful, the company must provide a very high-quality product and meet its delivery commitments to customers on time. Warriner Equipment Company is organized as shown below.

There is currently a disagreement between the company’s two vice presidents regarding the responsibility-accounting system. The vice president for manufacturing claims that the 10 plants should be cost centers. He recently expressed the following sentiment: “The plants should be cost centers because the plant managers do not control the sales of our products. Designating the plants as profit centers would result in holding the plant managers responsible for something they can’t control.” A contrary view is held by the vice president for marketing. He recently made the following remarks: “The plants should be profit centers. The plant managers are in the best position to affect the company’s overall profit.”

Required: As the company’s new controller, you have been asked to make a recommendation to Mathew Basler, the company president, regarding the responsibility center issue. Write a memo to the president making a recommendation and explaining the reasoning behind it. In your memo, address the following points.

1. 1. Assuming that Warriner Equipment Company’s overall goal is profitability, what are the company’s critical success factors? A critical success factor is a variable that meets these two criteria: It is largely under the company’s control and the company must succeed in this area in order to reach its overall goal of profitability.
2. 2. Which responsibility-accounting arrangement is most consistent with achieving success on the company’s critical success factors?
3. 3. What responsibility-center designation is most appropriate for the company’s sales districts?
4. 4. As a specific example, consider the rush-order problem illustrated in the chapter. Suppose that Warriner Equipment Company often experiences rush orders from its customers. Which of the two proposed responsibility-accounting arrangements is best suited to making good decisions about accepting or rejecting rush orders? Specifically, should the plants be cost centers or profit centers?