The production manager for Towns Ltd., Scott Busby, has received a request for a special order from a new customer. Busby is keen to accept the order as volume has been down due to a slowdown in the economy and he is concerned about meeting performance targets for the year. Furthermore, the customer is a personal friend of the president of Towns Ltd. The customer has agreed to a price of full manufacturing cost plus 20%. Manufacturing cost includes allocation of service department costs, including maintenance and purchasing. Currently maintenance costs are allocated based on maintenance hours and purchasing costs are allocated based on the number of purchase orders.
Since the price is based on cost plus, Busby is wondering if a change in the cost allocation bases for maintenance and purchasing are changed to machine hours and number of line items, if the costs of the job will increase and therefore he would be able to charge more for the job. He contacts the controller, Samantha White for advice.
White indicates that yes, the changes in the allocation base would increase the job costs by approximately 18%, but is opposed to the change, arguing that the current cost allocation bases were selected based on cause and effect and appropriately reflect the costs of the job.
Busby argues that any cost allocation base is arbitrary and instructs the controller to cost this job based on the alternative allocation bases.
Required:
Evaluate the issues raised from the perspectives of Busby, the production manager, White, the controller and from the company as a whole.

Question

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The Answer of The production manager for Towns Ltd., Scott Busby, has received a request for a special order from a new customer. Busby is keen to accept the order as volume has been down due to a slowdown in the economy and he is concerned about meeting performance targets for the year. Furthermore, the customer is a personal friend of the president of Towns Ltd. The customer has agreed to a price of full manufacturing cost plus 20%. Manufacturing cost includes allocation of service department costs, including maintenance and purchasing. Currently maintenance costs are allocated based on maintenance hours and purchasing costs are allocated based on the number of purchase orders.
Since the price is based on cost plus, Busby is wondering if a change in the cost allocation bases for maintenance and purchasing are changed to machine hours and number of line items, if the costs of the job will increase and therefore he would be able to charge more for the job. He contacts the controller, Samantha White for advice.
White indicates that yes, the changes in the allocation base would increase the job costs by approximately 18%, but is opposed to the change, arguing that the current cost allocation bases were selected based on cause and effect and appropriately reflect the costs of the job.
Busby argues that any cost allocation base is arbitrary and instructs the controller to cost this job based on the alternative allocation bases.
Required:
Evaluate the issues raised from the perspectives of Busby, the production manager, White, the controller and from the company as a whole.

The Production Manager for Towns Ltd