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.

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 target?

Answer rating: 100% (QA)

The accounting team at FPDiv should carry out a comprehensive analysis in order to provide answers to the inquiries made during the meeting Below are ... View the full answer