ACC 1020 Module 4 Decisions and Responsibility Homework Example

Pinelands Drum Works, Inc.: Make or Buy, a Special Order and Segment Margins for Three Divisions

Student Name

Bachelor of Science in Business Administration, Thomas Edison State University

ACC-1020: Principles of Managerial Accounting

Mentor Name

Month Day, Year

Pinelands Drum Works, Inc.: Make or Buy, a Special Order and Segment Margins for Three Divisions

Managers at Pinelands Drum Works, Inc., the fictional Pine Barrens drum shop used across this course's homework, face three questions this quarter. Should the company keep pressing its own maple drum shells or buy them from the Quebec mill that already supplies plies? Should it accept a retailer's offer to buy 300 Barrens Snares at a discount? And how should it judge the performance of its three divisions? Each question turns on the same principle: a figure matters to a choice only if picking one option over the other would change it, and costs a manager cannot control should not decide how that manager is judged.

Part A: Make or Buy the Shells

The company presses about 4,000 shells a year. The mill offers finished shells at $41 each. The table compares the costs.

On costs alone, making the shells saves $5.50 each, or $22,000 a year, because the $12 of allocated plant overhead would continue even if pressing stopped. Comparing the $41 price with the $47.50 full cost would wrongly suggest buying. But the decision also has an opportunity cost. If the company stops pressing shells, the space could hold a second finishing booth, which the production manager estimates would add $30,000 a year of contribution margin from custom kits now turned away. Spread over 4,000 shells, that is $7.50 a shell, making the effective cost of making $43.00, above the $41 price. With the opportunity cost included, buying is better by $8,000 a year.

Costs are not the only factor. Walker and Weber (1984) studied make-or-buy decisions for components at a large manufacturer and found that, alongside production cost differences, uncertainty about volumes and the availability of competing suppliers influenced whether parts were made in-house. Pinelands relies on a single mill, and shells are the core of its product, so before buying it should secure a second supplier and a contract that fixes the price for at least two years.

Part B: A Special Order

A regional music store chain offers to buy 300 Barrens Snares at $165 each, well below the $240 online price, for a holiday promotion under its own label. The plant has idle capacity in the fourth quarter. The relevant costs are the variable costs of producing and delivering the drums: $140 per drum, less $16 of online shipping and payment fees that the chain will not require, plus $4 for custom labels and palletizing, for $128. The order's incremental contribution is ($165 minus $128) times 300, or $11,100. No fixed costs change.

Accepting is financially attractive, with two cautions. The private-label drums must not undercut online sales; selling them under the chain's brand with a different finish reduces that risk. And if the plant were at full capacity, the drums displaced would be an opportunity cost, which could make the order unprofitable.

Part C: Responsibility Accounting and Segment Margins

For 2027 Pinelands has organized its business into three divisions, each run by a manager, and has budgeted their results; the Barrens figures are the launch forecast from Module 3. Responsibility accounting holds each manager accountable for the revenues and costs they can control.

Each segment's margin shows what it contributes toward the company's common costs, such as the owner's salary and the building, after covering its own traceable costs. All three segments have positive segment margins, so closing any of them would reduce company profit, even though an earlier report that allocated common costs by sales made the schools division appear to lose money. Allocating common costs is useful for pricing and long-run planning, but for judging whether a segment should continue, and for evaluating its manager, the segment margin is the right measure, because the manager cannot influence the common costs.

Giraud et al. (2008) surveyed managers about the controllability principle, which holds that managers should be evaluated only on what they can influence, and found that managers saw it largely as a matter of fairness. A schools division manager charged for the owner's salary would reasonably see that evaluation as unjust. Williams et al. (2023) describe responsibility accounting as matching each report to the authority of the person who receives it, and the segment margin report above does that.

References

Giraud, F., Langevin, P., & Mendoza, C. (2008). Justice as a rationale for the controllability principle: A study of managers' opinions. Management Accounting Research, 19(1), 32-44. https://doi.org/10.1016/j.mar.2007.09.002

Walker, G., & Weber, D. (1984). A transaction cost approach to make-or-buy decisions. Administrative Science Quarterly, 29(3), 373-391. https://doi.org/10.2307/2393030

Williams, J. R., Bettner, M. S., & Smith, K. R. (2023). Financial & managerial accounting: The basis for business decisions (20th ed.). McGraw-Hill Education.