carolyn williams a management accountant has recently been employed as controller in 572499

Carolyn Williams, a management accountant, has recently been employed as controller in the Fashions Division of Deluxe Products, Inc. The company is organized on a divisional basis with considerable vertical integration Fashions Division makes several luggage products, including a slim leather portfolio. Sales of the portfolio have been steady, and the marketing department expects continued strong demand. Carolyn is looking for ways the Fashions Division can contain its costs and thus boost its earnings from future sales. She discovered that the Fashions Division has always purchased its supply of high quality tanned leather from another division of Deluxe Products, the Leather Works Division. Leather Works Division has been providing the three square feet of tanned leather needed for each portfolio for $9 per square foot. Carolyn wondered whether it might be possible to purchase Fashions’ leather needs from a supplier other than Leather Works at a lower price for comparable quality. Top management at Deluxe Products reluctantly agreed to allow the Fashions Division to consider purchasing outside the company. The Fashions Division will need leather for 100,000 portfolios during the coming year. Fashions management has requested bids from several leather suppliers. The two best bids are $8 and $7 per square foot from Koenig and Thompson, respectively. Carolyn has been informed that another subsidiary of Deluxe Products, Ridley Chemical, supplies Thompson with chemicals that have been an essential ingredient of the tanning process for Thompson. Ridley Chemical charges Thompson $2 for enough chemicals to prepare three square feet of leather. Ridley’s profit margin is 30 percent. The Leather Works Division wants to continue supplying Fashions’ leather needs at the same price per square foot as in the past. Tom Reed, Leather Works’ controller, has made it clear that he believes Fashions should continue to purchase all its needs from Leather Works to preserve Leather Works’ healthy profit margin of 40 percent of sales. You, as Deluxe Products’ vice president of finance, have called a meeting of the controllers of Fashions and Leather Works. Carolyn is eager to accept Thompson’s bid of $7. She points out that Fashions’ earnings will show a significant increase if the division can buy from Thompson. Tom Reed, however, wants Deluxe Products to keep the business within the company and suggests that you require Fashions to purchase its needs from Leather Works. He emphasizes that Leather Works’ profit margin should not be lost to the company. From whom should the Fashions Division buy the leather? Consider both Fashions’ desire to minimize its costs and Deluxe Products’ corporate goal of maximizing profit on a companywide basis. (IMA adapted)