Question

Playten Ltd is a manufacturer of various pet accessories.  They carry many lines of products that

are produced in their main factory in Arthur.   On October 5, 2021 the CFO, Cecily Jones called a

meeting of the Feline Products Division (FPDiv).  At this meeting were Finn, Brenda and

Michael, three product line managers and the financial accounting team.  The agenda of the

meeting consisted of three items:

1)

Review the results of the last quarter

2)

Discuss cost allocations

3)

Discuss the gross margin target for the FPDiv

Background:

In Playten’s FPDiv, the assembly line process uses a joint input of a common rubber compound

to create a grooming brush (Brenda’s product), a treat dispensing toy in the shape of a fish

(Finn’s product) and up until December 31, 2020, scrap rubber worth nothing.  Back in

September 2020 Michael pitched an idea to Cecily the CFO that, with a small investment, some

unused equipment from another department could be refurbished and added to the end of the

production process to take the scrap rubber and create toy mice.  This would add an extra

$1,500 to the assembly line and labour costs incurred each month.  The competition had a

similar rubber toy mouse that was selling for $1.50.  The idea was approved, modifications to

the equipment made, advertising and promotions were done and in January 2021, the new

product line of toy mice was launched.  Michael received a promotion and is now the product

line manager for mice.

At the meeting:

The accounting team presented the summary results from the last quarter.  Gross margin % for

the FPDiv is 28.41%.  Sales have remained consistent for the last quarter with a steady 500 kg of

rubber compound per month being used.  All products that are being produced are sold by the

end of the quarter.  The lean production process implemented last year is working great with

no inventory being held.  The forecast is to continue producing the same level of product per

month for the remainder of the year.  From a month’s production 3,500 brushes are produced,

each one using 100 g of rubber.  The brushes have a selling price of $4.00 per brush.  Each

month, 5,500 fish are produced and they have a selling price of $5.00 per fish.  The left over

12.50 kg of rubber that used to be scrap is now used to create the mice with each mouse using

5 g of rubber and selling for $1.00 per mouse.  The cost of the rubber compound used in the

production process is $25 per kg.  The current cost to run the assembly line machinery and

labour is $19,000 per month.

ACCT3170

Group Presentation Case

Before Michael’s product was launched, the product line managers were receiving a yearly

bonus based on the gross profit margin % of their product lines.  The gross margin % was

calculated using a joint cost allocation based on the number of products produced by each line.

Michael has done some preliminary calculations and based on the current production levels, he

has suggested in this meeting that the accounting department change the joint cost allocation

to use the weight of the products produced instead.  He explained that previoulsy when there

was scrap rubber the had no value, it made sense to allocate the costs based on the number of

products but now that the scrap rubber is being used, it makes more sense to use the physical

weight of each product for the allocation.  Finn is in complete agreement with Michael’s

proposal and Brenda is not quite sure if it is a good idea or not.

The CFO stated that the gross margin target for the entire company was increasing to 30%.  He

is looking for ideas from the product line managers and the accounting team on how the

division could achieve this.  He mentioned that a new supplier of the rubber compound used in

the production process has come to him with an offer to purchase scrap rubber from FPDiv at a

price of $.06 per gram.  Previously, before the launch of the toy mice product, the scrap rubber

was not worth anything and was thrown out.  The CFO asked if it still made sense to spend

more money each month to create the mice or if they should stop the production of the mice

and sell the scrap instead.  He wondered if this would help the division achieve the new gross

margin target.

At the end of the meeting, Cecily asked the accounting team to do some analysis and create a

report and presentation addressing the following questions raised at the meeting:

1)

What cost allocation method should be used?

2)

Should FPDiv continue with the toy mouse product line?

3)

How can the division achieve the 30% gross margin targ