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Case Study: White Hills Children'S Museum
Case Study: White Hills Children'S Museum
CASE BACKGROUND:
White Hills Children's Museum was a nationally recognized non-profit museum that focused
its programmes and exhibits on the community. It had a large audience and would draw
frequent travellers as well as tourists visiting northern California.
The cost-allocation methodology has been reworked under new leadership, and the
departments are broken into expense and benefit centres. Income from these facilities can be
used to give bonuses to managers and their teams. Two departments are at odds due to this
rule as the price quoted by an internal department is higher than the quote given by an
external construction company. Mike Sampson, the new chief, indicates the department in
need of service to go with the D&E Department instead of hiring an outside company to build
the exhibit.
CRITICAL FINANCIAL PROBLEMS:
The departments had been split into multiple profit centres under new leadership, which
decided the annual salaries of the respective managers. Managers are allowed, but not
necessary, to make purchases within the company.
Ms. Jan Sweeney allows the Architecture and Engineering Department to design and
construct an exhibit of an underground expressway as part of the Cities and Streets project
(the aim was to demonstrate the environmental effects of such a project). Because of the
efforts made by the Mr. John Herp, the manager of the D&E Department, had quoted a value
of $27,000. Ms. Jan, on the other hand this amount seemed exorbitantly high to her,
particularly given that she had received a quote of just $20,000 from a local construction
company, and the gap of $7,000 could have an effect on the final cost a bonus is being
offered.
Mr. John contends that the time he spent constructing the display should be valued as well,
even if the construction company did not have to charge for it. Ms. Jan claims that accepting
the D&E Department's quote would damage her department's bottom line. Mr. Sampson is
concerned with the overall surplus of the museum rather than particular departments. As a
result, it was suggested to Jan that she consider the quote given by the D&E Department
because it maximises the proceeds for the museum.
1. Allow Ms. Sweeney to accept the quote from the local construction company and thereby
outsource the exhibit's construction rather than give it to D&E.
2. Request that Mr. Harp, the head of the D&E Department, revise the quote to a lower value,
giving Ms. Sweeney an opportunity to keep the project internal.
3. Demand that Ms. Sweeney consider the D&E Department's quote, thus putting a hole in
the exhibition department. This can be further subdivided into two distinct alternatives:
RECOMMENDATION:
The most optimal solution as per our analysis will be to request Mr. Harper to reconsider the
cost of exhibits as it will satisfy both the criteria, i.e satisfaction of departmental heads and
surplus for the museum. The costing method used by him to arrive at the exhibits cost can be
modified in an optimal way such that it benefits both the departments and surplus does not
get hamper too. The current costing method is as follows:
ITEM AMOUNT
Materials $ 7,000
In the methodology used above direct labor is involved, the constituents of which are a sunk
expense for the company. As a result, it can be omitted when measuring the exhibit's building
costs. This will result in a $10,000 cost savings. The D&E department has an opportunity as
well because they can charge an additional $3000 mark-up.
Markup $ 6,000