Crinkle Limited Case Study - Activity Based Costing Model - Accounting Assignment Help

Assignment Task :

CRINKLE LTD.

Crinkle limited makes ornament for Christmas trees. The CEO, Jill Nicholas is the 3rd generation to run the family business. Her father and grandfather were content to run the family business for the genuine interest in Christmas and wanted to ensure the handcrafted ornaments met with the highest quality. The company produced Christmas ornaments for the general public and sold it through their store in Ottawa, where they lived. The company vision statement was crafted by her grandfather and reads:

Crinkle is committed to producing the finest hand-crafter Christmas ornaments this side of the North Pole.

Today, however, there is increasing competition from large manufacturers who mass produce ornaments in China and sell them to the North American market through large retail operations. To compete, three-years ago, Jill entered into discussions with a larger manufacturer of Christmas ornaments based out of Jamaica, ‘Ya-man’ Ornaments Ltd. The two companies decided to enter into a joint arrangement where manufacturing would be principally done by Ya-man and then shipped to Crinkle for final finishing touches. 

The relationship between Ya-man and Crinkle has been going well and recently the owner of Ya-man informed Jill that he is looking to retire and asked Jill if she would be willing to buy the operations. Upon reflection, Jill recently agreed to do so at an agreed upon price. Jill visited the island and its staff to start to the do the integration of the two organizations. The following represents the results that Jill has witnessed.

Jill also found that when she visited Ya-man that the machines were set up to do large production runs, but also had the flexibility to provide individual specific orders if needed. This was especially interesting to Jill as many of the traditional customers of Jill’s preferred specialized Christmas ornaments that Jill was happy to produce, but she was thinking of going after the mass production market to compete with the larger companies. 

This ability of the machines to make custom orders would allow her to be in both the mass produced and custom order markets. For example, one group of Jill’s customers was players on the Ottawa Senators hockey team. At one point, the players had asked Jill if she could produce custom orders that players could give out. After doing this for 2 years, the Senators organization learned of her operation and asked her to make a larger order of 5,000 custom units which Jill had to turn down as her operation was too small. Thought of expanding into the specialty advertising market of corporate orders started to dance like sugarplums in her head.

During the transition, Jill met with the management in Jamaica, she was immediately struck with how uptight, rigid and professional the employees were. The owner of Ya-man maintained very strict controls on the workers and ensured that workers met with all dress code, time and discipline restrictions. She was especially taken aback as she spent 3 days at an all-inclusive resort in Jamaica before the meeting and noticed how laid-back the employees at the resort were, a surprising difference to what she saw at the factory. Employees at the factory in Jamaica arrived to work on-time and worked with surprising efficiency. She mused that she wished her own employee’s back in Ottawa were as well as disciplined. The employees at Ottawa, many of them working for the company for many years, were used to Jill’s fathers way of enjoying the work, the company and the family friendly environment that Jill’s father and grandfather had instilled.

To start with the integration, Jill sat down with the plant accountant Jacob Banter at the Jamaican operation and started to put together some figures on specific products that she was interested in. One of the products was the Christmas Bundle X-90, which was one of the mass-produced products. The Christmas Bundle X-90 was a complete tree decorating product which combined 90 different sized Christmas ornaments in one package. The cost structure of the Christmas Bundle X-90 is found in exhibit 2. A similar package, the Night Before Christmas Bundle X-40 was also sold, which was a scaled down version of the X-90, which was popular for those with smaller apartments or smaller Christmas trees, which were popular in the Caribbean and Mexico, but Jill felt there would be a sizeable market in Canada as well, for people who wanted a base coordinated tree and then completed it with specialized Christmas decorations, which she could also supply.

Going Forward:

Jill felt that there were significant synergies that could be created, but worried that Ya-man was also selling to potential competitors of Jill’s. The discussion that Jill has had with Ya-man is that Ya-man would have to scale back their sales to other customers and exclude any sales to other companies in Canada. Currently, Ya-man sells their Christmas decorations throughout the Caribbean and Mexico (30% of sales), U.S. (40% of sales) and Canada (30% of sales). Of the 30% of sales to Canada, 10% was to Crinkle, the other 20% was to a companies operating in Vancouver and Toronto.

The manager at the Ya-man plant felt that this might hurt the company as Ya-man had built up a loyal customer base that not only felt a loyalty to Ya-man but were also prompt to pay the company and had even supported the company in their early years with loans, when the company was having some financial difficulties. Despite the concerns of the management team, Jill was adamant, and the new policy was implemented almost immediately.

Performance Evaluation:

One of the considerations that Jill has had to deal with was a difference in performance measurement systems between the two organizations. The Ya-man management team was evaluated using residual income, while Crinkle used a system based on profit sharing. 

Ya-man provided a bonus structure to senior management which entailed 2.5% of the residual income based on an expected return of 9% of investment. Jill’s grandfather had begun the profit sharing in his third year of operations as he felt that the entire team of employees, which he referred to as an extended family were all responsible for the success of the business. As a result, Jill’s grandfather provided a cash bonus equal to 20% of the profits in excess of a 7% ROI, to all employees split equally amongst each employees as Jill’s grandfather always stated that every employee was equally important and contributed to the success of the organization.

New Initiatives

During the transition period, Jill met regularly with both her management team at Crinkle, and also with the management team at Ya-man. She made a decision that if the organization was to run effectively, they would need to coordinate their efforts more closely. One of the first initiatives Jill did was to introduce a quality initiative. The quality cost report is provided in exhibit 4.

Following the Christmas season of 2011, Jill made a decision to separate the two manufacturing units in terms of output. The Jamaica operations of Ya-man would focus mainly on large-scale production of the X90 and X40 products, while the Ottawa manufacturing would focus on custom operations, but each would also produce limited amounts of all products to reduce any possible supply disruptions. To accommodate this, some of the machines from Jamaica were transported to Canada. 

Operations ran fairly smoothly for a few years. Jill and the management team kept a vigilant watch on the external environment, monitoring peoples changing buying behaviour, updating the company website, monitoring competitive positions of other firms in the industry to see if there were opportunities or threats coming up on the horizon. She compiled information on the yearly sales data, found in exhibit 1.

In early 2013, Jill started to get concerned with the costing systems of overhead allocation. She had noticed that despite the significant amount of sales that were achieved from the X90 and X40 product bundles, the cost of the special production units were significantly higher and wondered if they used a correspondingly different amount of overhead. Traditionally, the company had always charged manufacturing overhead on the basis of direct labour dollars. The product costing is found in exhibit 2. In Exhibit 5, Jill’s management team started to put together information to apply on an activity costing basis. The accounting department pulled two custom orders W57 and W58 that they thought were representative of the typical custom order for Crinkle, as well as a production run of 10,000 Christmas Bundle X90’s.

Final Thought

Jill has always loved the holidays and all that Christmas entails. She wondered however if Santa and his team had it as difficult as she did in trying to run operations. 

Questions: 
 

1. Compute the unit cost of the 10,000 Christmas Bundle X90 using both the traditional costing model based on charging manufacturing overhead on the basis of Direct Labour Dollars and using the Activity Based Costing Model. Comment on your findings.

2. Jill wanted to further analyze the Activity Based Costing system. The accountant at Crinkle looked into the custom orders received to produce the 340 units of the W-57 and 230 units of the W-58 for $38/unit each. It was determined that Crinkle could have completed the 2 orders without giving up any current orders. Further, by examining the accounts, it was determined that 20% of the Machine Maintenance and Depreciation used in its production was variable, and 40% of Other MOH was also variable. Using the Activity Based Costing model, determine if they should accept the order assuming Crinkle wants a 15% profit margin on the order. Comment on your findings. 

3. Analyze the information on the quality report Jill’s management put together and comment on your findings. 

4. Crinkle was approached by the Ottawa Tourism board to put together a Christmas package involving the Brookstreet Hotel and the Ottawa Senators. Visitors would receive 1 night at the Brookstreet Hotel (Reg. Price $160), 2 tickets to the Ottawa Senators ($240) and 1 X90 Christmas Bundle (Reg. Price – Budget $45). The package would be offered at $299. How much should Crinkle argue for receiving in negotiation the split of revenues. Defend your argument. 

5. Compute the transfer price of goods from Ya-man to Crinkle, for the 102,100 units shipped of the Christmas Bundle X90 in 2013. Compute the transfer price using both:

   1. The full-manufacturing costs at Ya-man, and 

   2. Ya-man’s traditional selling price of $45 per unit. 

The tax rate in Jamaica is 38%, while the tax rate in Canada is 35%. Canada charges an import duty of 12%. What would you recommend as a transfer price? 

6. What recommendations would you make to Jill given your analysis? Identify the most important (Primary) and secondary recommendations and a timeline for implementation of those recommendations (immediate, 1-2 years or long term) and defend those.  

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