Arctic Insulation: Teaching Commentary Essay

2094 words - 8 pages

OVERVIEWThis is an excellent short case to cover basic concepts in cost analysis for cost control and managerial decisions. The case always works well for me in class. Perhaps this is because the unusual industry context is intriguing to students who enjoy thinking about business issues in strange settings. Also, the topics covered have high common sense appeal. If students have not thought much about these issues before, this case is seen as very relevant new stuff. If they have studied these issues before, the case is seen as solid review in a "fun" business setting.ASSIGNMENTIn addition to the four questions in the case, I assign the following question:"Suppose bulk paper from scrap dealers is selling for $.015 per pound more than the price being offered at the loading dock for casual paper. Should management be emphasizing bulk purchases or casual purchases? What exactly can management do in the short run to change the product emphasis?"ANSWERS TO ASSIGNMENT QUESTIONSQuestion 1 (and Question 5)I start the discussion of question 1 by asking a student to comment on the division manager's comment that it isn't possible for per-unit costs to be rising for both products when total volume is rising and total cost is falling. Is there a logical impossibility here? The answer is no, but I believe it is useful for students to see why.The division manager is on the "hot seat" because unit costs are rising and the president sees this as poor cost control. If the apparent per-unit cost increases are a logical fallacy, then the division manager is "off the hook" pretty easily.In class, I used the following textbook introductory economics example of a situation where, for two products, total cost is declining, total volume is increasing, but unit costs are rising for both products.Period 1UnitPriceConsumption TotalCostBread $1.00 1,000 Units $1,000Cake $3.00 200 Units 600Total 1,200 Units $1,600Period 2UnitPriceConsumption TotalCostBread $1.10 1,200 Units $1,320Cake $4.00 50 Units 200Total 1,250 Units $1,520This teaching commentary was prepared by Professor John K. Shank of the Amos Tuck School of Business.This illustrates that it is possible to have a situation like that shown in Table 1, contrary to what the division manager's intuition told him. This does not mean, however, that this report is necessarily meaningful for Arctic.Next in class I point out that since depot OH is "joint" for the two products, any allocation scheme can be criticized as arbitrary. There is no "right" answer. The question is whether allocation per labor dollar or per bale is more "useful." To motivate the managerial significance of the choice between the two costing systems in Table 1 versus Exhibit 2, I use the fifth assignment question. I ask a student to answer question 5.The following analysis shows that the existing system would indicate emphasizing purchased bales but the proposed system would indicate emphasizing formed bales.1980Existing System Formed...

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