Albrecht 19.pdf - Marriott School

76154_23_ch19_p942-1006.qxd 3/1/07 3:35 PM Page 1003
EOC | Controlling Cost, Profit, and Investment Centers Chapter 19 1003
believes that all the analysis in the world won’t help a company price its products because
that is left to the consumer. He said, “The consumer dictates what prices you will charge. It
is the law of supply and demand. If you have a product that people want but it is priced too
high, they won’t buy it!”
AA 19-72
REAL COMPANY
ANALYSIS
Wal-Mart
In the 2006 Annual Report for Wal-Mart (provided in Appendix A), you will find Segment
Information in Note 11 in the Notes to the Financial Statements.
Notes to Financial Statements continued (in millions)
Segment Information
Year Ended January 31
Wal-Mart
Stores SAM’S CLUB International Other Consolidated
2004
Revenue $170,270 $33,804 $46,762 $1,641 $252,477
Operating profit (loss) 12,916 1,126 2,370 (1,387) 15,025
2005
Revenue $187,511 $36,332 $55,358 $1,757 $280,958
Operating profit (loss) 14,163 1,280 2,988 (1,340) 17,091
2006
Revenue $204,534 $38,955 $61,676 $2,545 $307,710
Operating profit (loss) 15,324 1,385 3,330 (1,509) 18,530
1. As you can see, Wal-Mart has four different segments: Wal-Mart Stores; SAM’S CLUB;
International; and Other (that is, all other segments combined). How do you think Wal-
Mart primarily evaluates these segments—as cost centers, as profit centers, or as investment
centers
2. Compute the profit margin ratio for the four segments for 2004, 2005, and 2006. Which
segment is the most profitable Which is growing the fastest in terms of revenues
AA 19-73
REAL COMPANY
ANALYSIS
Petersen Pottery
Just outside Elkins, West Virginia, Clive Petersen has been making ceramic bathroom fixtures
(sinks, toilets, and bathtubs) since 1960. Petersen’s fixtures had become known over the
years for their distinctive customer features, their high quality, and their long life. Petersen
Pottery started out as a two-man operation. By 1980 it had grown to 20 master potters. By
this time, Clive Petersen felt that he had expanded to a point that he needed to institute a
formal accounting control system. The insistence of his banker that he get a “real” management
accounting system in place was also compelling. As a result, Petersen hired a formally
trained management accountant who began working with his most experienced master potters
to design cost standards. After some research, Petersen’s accountant arrived at the following
cost standards for a toilet (note that manufacturing overhead is allocated based on direct
labor hours):
Direct materials:
Raw clay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 lbs. $0.95 per lb. = $23.75
Glazing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 lbs. $0.75 per lb. = 3.75
Direct labor:
Molding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 hr. $15.00 per hour = 15.00
Glazing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 hr. $15.00 per hour = 7.50
Variable manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . 1.5 hrs. $3.00 per hour = 4.50
Fixed manufacturing overhead* . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 hrs. $4.00 per hour = 8.00
Total per fixture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62.50
*Based on budgeted production of 1,200 toilets.
(continued)