White Hills Children’s Museum

Case Analysis
Akshay Joshi (B19064)
Antony J Sankoorikal (B19067)
Aayush Rawat (B19072)
Mohammad Saad (B19087)

Executive Summary
White hills Children’s Museum was a non-profit museum of national reputation which
focused its activities and displays towards the environment. It had a very wide following and
would attract regular visitors and tourists that were touring in northern California.
Under new leadership, the methodology to allocate costs has been reworked and the

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departments divided into cost and profit centres. The profits from these centres will be used to

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give bonuses to managers and their departments. Two departments are at loggerheads due to

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this rule as the price quoted by an internal department is more than the quote provided by an

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external construction firm. The new director, Mike Sampson, suggests the department requiring

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service to go with the D&E Department instead of getting an outside firm for the construction of
the exhibit.
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Problems faced:
Under new leadership, the departments had been divided into several profit centres which
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determined the annual bonuses of the respective managers. The managers are encouraged to
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do purchases within the organization, but are not mandated to do so.

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Under the Cities and Streets project, Ms. Jan Sweeney requires the Design and
Engineering Department to design and build an exhibit of an underground expressway (the
objective was to show the environmental impact of such a project). For the efforts put in by the
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D&E Department, it’s manager, Mr. John Herp, had quoted a value of $27,000. However, Ms. Jan
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found this sum to be exorbitantly high, especially considering the fact that she received a quote
of just $20,000 from a local construction firm and the difference of $7,000 might affect the final
bonus being offered.
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Mr. John argues that the time he spent on designing the exhibit should also be of value,
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which the construction firm did not have to bill for. Ms. Jan argues that accepting the quote
given by the D&E Department will hurt the bottom-line of her department. Mr. Sampson is
concerned about the surplus of the entire museum, and not individual departments. He has
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therefore suggested Jan to accept the quote provided by the D&E Department as it maximises
the returns for the museum.

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 Alternatives
The alternatives for Mr. Sampson are as follows:
1. Allow Ms. Sweeney to agree to the quote offered by the local construction firm
and thus outsource the construction of the exhibit instead of giving it to D&E.
2. Ask the D&E Department head, Mr. Harp, to revise the quote he offered to a
lower value, thus giving incentive to Ms. Sweeney to keep the project internal.
3. Ask Ms. Sweeney to accept the quote offered by the D&E Department, thus
taking a hit on the exhibition department. This can be further divided into two
separate alternatives:
a. Compensate Ms. Sweeney for the lost profits
b. Let the exhibition department take the hit
Criteria for Evaluation of the Alternative

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The criteria for evaluation are as follows:

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1. Surplus of the museum
2. Satisfaction of the department heads

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Most Probable Solution rs e
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The best solution as per our analysis is to request Mr. Harp to recalculate his
quote. The method used by him to allocate the costs could be optimised to benefit both
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the departments without hurting the surplus of the museum.

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Sunk costs are an expense that should not be included in his costing method. As
the resources, whose costs have been taken under fixed costs, have already been
purchased and the cost would have been incurred irrespective of the exhibit project, it is
wrong to include it for arriving at a cost for constructing the underground exhibit. This
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method is favourable for all the parties within the organisation. Below is the working of
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the suggested solution:

The current costing methodology used is as following.
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Item Amount
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Materials $ 7,000
Direct Labour $ 10,000
Variable Overhead $ 2,000
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Fixed Overhead $ 5,000

Total Costs $ 24,000
Mark-up $ 3,000
Total bid $ 27,000

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 However, this includes Direct Labour, the constituents of which are a sunk cost for the
organisation. Therefore, it can be excluded while calculating the cost of construction of
the exhibit. This will lead to a reduction of $10,000 in the cost. This is also an
opportunity for the D&E department as they can charge an extra mark-up of $3,000. The
revised costing is as mentioned below.
Item Amount
Materials $ 7,000
Variable Overhead $ 2,000
Fixed Overhead $ 5,000
Total Costs $ 14,000
Markup $ 6,000
Total bid $ 20,000

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The impact on the museum will be as follows:

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Local Construction

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Item D&E Department
Firm

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Materials $ 10,000 $ 10,000
Variable Overhead
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$ 14,000 $ 20,000
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Total bid $ 24,000 $ 30,000
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