Blackheath Manufacturing Company

Blackheath Manufacturing Company

Prepared by

jorgeadain

Table of Contents

Issues3

Facts3

Analysis……………………………. ……………………………………………………………..7

Issues

1. What is an appropriate set of decision rules for pricing the Great Heath?

2. Do you agree or disagree with Ladywell’s decision?

Facts

Blackheath Manufacturing Company manufactures a product called Great Heath. The company hired a new cost accountant, Lee High, who intends to conduct a new cost analysis over a period of three production weeks. Lee wanted to better identify the fixed, variable, and semi-variable costs associated with production of Great Heath. Once these costs were categorized Lee could determine how this would affect the cost of goods sold. Lee could then develop what the break- even volume that could be generated from a changing volume of sales. The case shows the assumptions that Lee High made with respect to variable as versus fixed costs in determining the cost of goods sold per unit.   Lee High was able to develop decision rules for use by the company’s owner for management decision-making purposes. Based upon Lee High’s data, Charlton Blackheath, the owner, dictated a management decision that sales could not be less than a $7.00 per unit order.  

The case then introduces a series of sales possibilities that are accepted or declined based essentially on these decision rules.   However, a young file clerk decided to take an under-bid proposal at $5.50 for an order of 100 units of Great Heath based upon her own assumption that such a volume order would be profitable. A subsequent sales-cost report was developed by Lee High showing   cost per unit based upon his predetermined analysis of costs and including profit per unit. Data showed the file clerk’s order generated a subsequent loss because the price per unit was so low.   Based upon this data, Blackheath then fired the clerk for this error and readjusted the per unit...