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Apply key techniques and concepts in measuring the cost of producing goods and 


• Apply management accounting concepts to identify and process relevant financial 

information for decision-making purposes. 

• Use technology and information resources to research issues in financial management. 

• Write clearly and concisely about financial management using proper writing mechanics. 




West Island Products (WIP) is a divisionalized furniture manufacturer. The divisions are 

autonomous segments with each division responsible for its own sales, cost of operations, and 

equipment acquisition. Divisional performance is evaluated annually based on ROI. Each division 

serves a different market in the furniture industry. Because the markets and products of the 

divisions are so different, there have never been any transfers between divisions. 


The Commercial Division of WIP, manufacturers furniture for the restaurant industry. The 

Commercial Division plans to introduce a new line of counter chair units featuring a cushioned 

seat. Roberta Katz, the Commercial Division manager, has discussed the manufacturing of the 

cushioned seats with Nathan Danielson of the Office Division. They both believe a cushioned 

seat currently made by the Office Division for use on its deluxe office stool could be modified for 

use on the new counter chair. Consequently, Katz asked Danielson for a price for 100-unit lots of 

the cushioned seats. The following conversation took place about the price to be charged for the 

cushioned seats. 


Danielson: “Roberta, we can make the necessary modifications to the cushioned seat easily. 

The raw materials used in the new counter chair seat are slightly different and 

should cost about 10 percent more than those used in our deluxe office stool. 

However, the labor time should be the same because the seat fabrication 

process is the same. I would price the cushioned seat at our regular rate: full cost 

plus a 30 percent mark-up. According to my calculations, that would be $2,053 

per lot of 100 seats.” 

Katz: “That’s higher than I expected, Nathan. I was thinking that a good price would be 

your variable manufacturing cost. After all, your fixed costs will be incurred 

regardless of this job. In addition, I have received a quote from one of the 

Commercial Division’s regular suppliers to provide us with the counter seats at 

$1,900 per lot of 100 seats.” 

Danielson: “Roberta, I am at full capacity. By making the cushioned seats for you, I have to 

cut my production of deluxe office stools. The labor time freed by not having to 

fabricate the frame and assemble the deluxe stool can be shifted to the 

production of the economy stool. I’d like to sell the cushioned seats to you at my 

variable cost, but I have excess demand for both products. I don’t mind changing 

my product mix to the economy model and producing the cushioned seats for 

you as long as I don’t change my division’s overall profitability. Here are my 

standard costs for the two stools and a schedule of my manufacturing overhead.” 

(See Exhibits 1 and 2.) 

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