R.C. Blake Company

ISBN 0-538-87513-5

Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.

Length
This case is 6 pages in length and its case teaching package is 4 pages.

Abstract

The case is set in the medical products industry in 1976. It deals with a capital expenditure proposal in a factory which manufactures adhesive tapes and bandages. The issue is cost analysis for the proposal. The case provides practice in overhead cost allocation, in relevant cost analysis, and in cost analysis for manufacturing decisions.

Although this little case is now twenty years old, the issues it raises are still very timely in 1996. It is an excellent vehicle to see if students understand the basic ideas of overhead absorption and of incremental cost analysis. Although the "solution" to the case is straight forward, if one "sees" the problem clearly, my experience is that no more than half the students "crack the case" on their own.

Linkages to Textbooks or Journal Articles/Fit Within a Course

No specific pre-reading is necessary. The case should be assigned in conjunction with textbook chapters dealing with overhead allocation and relevant cost analysis.

The case is also good for a two hour mid-term or final examination in a managerial accounting course.

Study Questions

1. Analyze the proposed cost savings in Exhibit 1. What is the most likely "real saving" from using the "release paper approach" to run vinyl finger bandages on the east line versus the current approach on the west line?
2. Present the economic analysis for the $40,000 capital expenditure?
3. Would you recommend the $40,000 expenditure? Yes or no and why?
4. The cost accounting system first splits overhead for the Solvent Spread Department between the east and west lines. The system then charges the overhead for each line to products based on machine hours on that line. The result currently is $25/machine hour for the east line and $27/machine hour for the west line. Is this system reasonable? Given Mullen's proposal, how might you change the system, if at all?
5. Summarize your overall recommendations to management regarding the Solvent Spread Department. What should Fred Cathcart do?