Case Study Analysis: Cost Considerations and Decision Making

This case study analysis explores the different types of costs considered in a unit and their relevance to decision making. It also provides recommendations based on cost analysis.

Part A - Case Study Analysis
Answer to Question 1:
The three different types of cost considered in the unit are:
1. Fixed Cost: These are those costs which do not change with the activity
level. An example of such cost in the unit is annual maintenance fees for
the license of $225.
2. Variable Cost: These are those costs which vary with the activity levels. An
example of such cost in the unit is monthly fee of $800 per child. This
varies with the number of child.
3. Sunk Cost: these are those costs which have already been incurred and
are thus irrelevant for any decision making. An example of such cost in the
unit is the renovation cost of the house $79,500.
Answer to Question 2:
Relevant costs are those which are incremental to a particular decision and if the
decision is made these costs are unavoidable and must be incurred and hence
relevant for decision making.
The couple is considering purchasing the appliances which include a washer and
dryer for clothes. There are various costs related to the same. Here, the relevant
costs for the decision to purchase the appliances are:
 Cost of the appliances
 Installation cost of the new appliances
 Delivery charge of the appliances
 Cost of additional accessories required for installation
 Increase in energy costs
The irrelevant information for the decision to purchase the appliances is:
 Cost of the old appliances

Answer to Question 3:
For laundering clothes, the couple has 3 options which includes purchasing the
appliances, taking clothes to the Laundromat and launder themselves or hire
Red Oak Laundry and Dry Cleaning for cleaning.
The cost against each of these is computed as below:
Option 1: Hiring laundry services from Red Oak Laundry and Dry Cleaning at a
cost of $52 per week
Option 1: Availing Laundry Service from Red Oak Laundry
and Dry Cleaning
Monthly cost for pickup/delivery service $52
Number of months of service $12
Total annual cost for pickup/delivery service
$62
4
The total cost under option 1 is $624.
Option 2: Visiting the Laundromat themselves once a week.
Option 2: Self-serve laundry
Cost of Driving
Distance travelled per week (3 miles one way) 6
Mileage Rate $0.56
No. of Weeks in a year 52
Cost of Driving $174.72
Cost of Laundering Clothes
Cost to launder per week $8.00
No. of Weeks in a year 52
Cost of Laundering Clothes $416
Cost of Detergent
Purchase cost from Megamart per quarter
$35.0
0
No. of Quarter in a year 4
Cost of Detergent $140
Total Annual Cost $730.72
The total cost under option 2 is $731.

Option 3: Purchasing the appliances and do the laundry at home
Option 3: Purchase the appliance
Cost of the appliances
Washer
$420.0
0
Dryer
$380.0
0
Cost of the appliances $800.00
Installation cost of accessories $43.72
Delivery charge of the appliance $35.00
Total cost of the appliance $878.72
Expected Life 8
Annual cost of the appliances (A)
$109.8
4
Increase in Energy Cost (B)
$265.0
0
Cost of Detergent
Purchase cost from Megamart per quarter $35.00
No. of Quarter in a year 4
Cost of Detergent (C )
$140.0
0
Total Annual Cost (A+B+C)
$514.8
4
The total cost under option 3 is $514.84
Recommendation:
Based on the above computation it is evident that the couple should purchase
the appliances and do the laundry at home as the cost under this option is the
lowest at $514.84 per annum.
Answer to Question 4:
The couple can hire an employee for 40 hours at $9 per hour for each week. This
will enable them to take 3 more children. To explore this option, we will see the
incremental benefit.
The incremental monthly revenue in fees = $800 per child * 3 children =
$2,400.
Incremental costs:
1. Cost of the employee = $9/hour * 40 hrs/wk * 4.33 wk/month = $1,558.80
2. Cost for food = $3.20/child/day * 3 children * 5 days per week * 4.33
weeks per month = $207.84

Total incremental cost = $207.84 + $1,558.80 = $1,766.64
Net benefit = Incremental revenue – Incremental cost = $2,400 - $1,776.64 =
$633.36 per month.
Recommendation:
Based on the above computation it is evident that the couple should hire an
employee as the incremental revenue of $2,400 is more than the incremental
cost of $1,766.64, resulting into a net benefit of $633.36 per month to the
couple.
Answer to Question 5:
From:
To,
Douglas and Pamela Frank,
14th May, 2019
Subject: Analysis and Recommendation on staying at home or moving to a lage
rented space.
Dear Mr. and Mrs Frank,
You currently have an option to move to a larger rented space in the town that
can accommodate maximum of 14 children. The costs will increase as well. The
recommendation on these can be made only after analysis of the net benefit to
the couple under all the possible scenarios.
The possible scenarios for you to consider are:
1. Remain at the same location and operate with
a. 6 Children
b. 9 Children
2. Move to a large rented space and operate with
a. 12 Children
b. 14 children

The net income analysis for Option 1 with both 6 and 9 children is as below:
Option 1: Remain at the current location
Particulars Formulae Amount Amount
No. of
Children 6 9
Revenues No. of child * Fee/child $4,800.0
0
$7,200.0
0
Less: Expenses
Cost of Meal
No. of child * cost fo
meal/child * 5 days a
week * 4.33 weeks in a
month
$415.68 $623.52
License Fee License Fee/12 months $18.75 $18.75
Insurance Insurance Cost/12 months $320.00 $320.00
Laundry Cost Laundry Cost/12 months $42.90 $42.90
Depreciation (Cost / life)/12 months $265.00 $265.00
Rent Own house – NIL $0.00 $0.00
Utilities Given $50.00 $50.00
Employee Cost As in 4 above $0.00 $1,558.80
Total Expenses $1,112.33 $2,878.97
Net Monthly Income $3,687.6
7
$4,321.0
3
The net income analysis for Option 2 with both 12 and 14 children is as below:
Option 2: Move to the rented space
Particulars Formulae Amount Amount
No. of
Children 12 14
Revenues No. of child * Fee/child $9,600.0
0
$11,200.0
0
Less: Expenses
Cost of Meal
No. of child * cost fo
meal/child * 5 days a
week * 4.33 weeks in a
month
$831.36 $969.92
License Fee License Fee/12 months $18.75 $18.75
Insurance Insurance Cost/12 months $416.67 $416.67
Laundry Cost Laundry Cost/12 months $42.90 $42.90
Depreciation (Cost / life)/12 months $0.00 $0.00
Rent Given $650.00 $650.00
Utilities Given $125.00 $125.00
Employee Cost Refer Working Note 1 $3,117.60 $4,676.40
Total Expenses $5,202.28 $6,899.64

Net Monthly Income $4,397.7
2 $4,300.36

Workings: The employee cost is computed as below:
Working Note 1: Employee Cost
Particulars Formulae Amount Amount
No. of
Children 12 14
Employees
Needed 1 per 3 child 4 5
Additional
Hiring Required - 2 2 3
Cost per hour Given $9.00 $9.00
No. of
hours/week Given $40.00 $40.00
No. of week in a
month 52 Weeks / 12 months $4.33 $4.33
Total
Employee
Cost
Required * Weeks*
rate* hours 3117.60 4676.40
Summary
The Net income under all scenarios is as under:
1. Remain at the same location and operate with
a. 6 Children: $3,687.67
b. 9 Children: $4,321.03
2. Move to a large rented space and operate with
a. 12 Children: $4,397.72
b. 14 children: $4,300.36
Recommendation:
Based on the above analysis, we clearly see that the net income rises
significantly when the couple enrols more than 6 children. The net income after
that changes marginally between 9, 12 and 14 children
However, going clearly based on net income, the couple should move to a
large rented space and enrol 12 children as the net income is the
highest at $4,397.72.
To answer your specific questions:
 You should rent the space.
 You should accept 12 children at the new space.
 For this, you will need to hire 2 employees.

Regards
Part B – Journal Article Critique
Answer to Question 1:
Management accounting system is a system of accounting that supports the
management of the company with their internal information needs on decision
making. The information generated by the management accounting system
helps the company in running the business more efficiently and effectively.
Components of management accounting system includes a robust costing
system, budgeting system including forecasting and planning, performance
management system and cost management system focusing on optimizing cost
and maximizing cost benefit for the company.
For Canon Inc.
The component of management accounting system prevalent in Canon Inc. as in
the given case study is:
Cost Management System: The team at Canon created a task force to
revolutionize Mini Copier or MC. The task force consisted of two broad groups
namely Quality Assessment and Cost Assessment groups. The formation of cost
assessment group within the task force is relevant as producing a unique product
with awesome feature is not viable if it is not profitable. Thus Canon included a
cost assessment group to simultaneously study the financial viability of the MC
so as to ensure the efforts are not a waste for the company.
E.g. Formation of Cost Assessment group is the Cost Management Component of
Management Accounting System at Canon.
For Apple Computer, Inc
The component of management accounting system prevalent in Apple Computer
Inc. as in the given case study is:
Budgeting system: The team at Apple Computer Inc. was a small team, closely
knit working hand in hand to build computers that were inexpensive. Jobs was
there “Product Champion” and he was constantly studying the design with the
manufacturing team to understand the product financial viability simultaneously.
He knew that because Apple was planning to build a large automated factory

their cost of production per machine would be cheaper and hence he set a lower
target price for the produced products. Thus, the internal information and
accounting system helps job lower the cost of the product thus making the
product more viable and feasible for the public while being profitable to the
company.
E.g. Setting of lower target price is the Budgeting Component of Management
Accounting System at Apple Computer Inc.
Answer to Question 2:
Innovation is the foundation stone of growth for any business. Companies
innovate their offering to remain abreast of the development and maintain and
expand the customer base through latest offerings.
Every innovation starts with an idea, an idea to improve, and an idea to create
something better, to create something unique, and to create offerings that help
mankind progress and grow. This idea comes from interaction with peers,
colleagues, public and society. This idea comes from observation, they come
from Information.
Innovation is indeed “a process of Information Creation”. Team with members
from varied backgrounds discuss on the identified problem and brainstorm on
improving the situation through their offerings which leads to innovation. Any
innovation is feasible for the company only when it beings in profit as in reality
all business exists for making profits. It is here that management accounting
systems comes handy. The management accounting system helps the manger or
the team with critical information on costs, benefit and volume which helps the
team analysis the cost benefit relationship among the offerings suggested.
Management accounting system helps the team forecast sales, estimate costs,
estimate profit, prepare budget for cash flow and other critical internal report
enabling them to take effective decisions.
As in Canon Inc. we see that the innovation of MC or the Mini Copier was only
possible because the team kept in mind the constraints placed before them
which included:
 The developed MC should have 0 or little maintenance so as to ensure that
the product is within the reach of the general public.

 The target price of the MC should be less than $1,000 for it to become
affordable.
a. The above constraints were results of management accounting system
prevent in the organization. The management accounting team helped
them with information on financial viability in terms of target price and
cost.
b. Another example, indicating that innovation is a process of Information
Creation is the structure of the team created to work on the MC. The team
consisted of 14 members who had eight people from R&D, three from
production, two from marketing, and one from product design. This varied
team ensures that decision regarding the product was studied from all
possible angles and no area was comprised while making some other the
core. That is the production team ensured that the design team plans
were viable to produce. The entire team was bound by the “Cost-
Reliability Improvement” concept which envisages that a reliable product
within the affordable range.
This constraint put up a lot of burden on the team as the cost and
reliability are often inversely related. Thus, striking the right balance
between the two was of key importance for the team. This “Cost-Reliability
Improvement” was possible due to the availability of information from the
Management accounting team.
Similarly when Apple Computer Inc. was working on inexpensive affordable PC,
the leader of the team Mr. Jobs was the person controlling the team in terms of
ensuring that the right cost is reached based on the target price set. The target
price was the result of the management accounting information available
internally. Another example would be inclusion of hackers, engineers and
marketing people in the team to ensure that the product is optimized at an
overall level.
Answer to Question 3:
Four specific outcomes or lessons that I have learned from the research finding
of the article “Towards a new theory of innovation management: A case study
comparing Canon, Inc. and Apple Computer, Inc.” that would be useful for me
are:

1. “Cost-Reliability Improvement” from Canon Inc. This is indeed true that
no innovation is useful unless it is bringing in cash for the company. Thus,
making a highly reliable product at an extremely high cost is not the best
alternative for sure. The Canon team ensured that the MC was reliable,
compact and affordable all at the same time.
2. The approach to innovation by Canon Inc. Canon Inc. was very calm
and composed in their approach toward developing MC. The team was
structured, stable and task oriented. There was no chaos and information
flew smoothly within the team.
3. Coherence and cohesiveness in the Mac team in Apple Computer Inc.
The team at Apple was a small team with trained people including
hackers, engineers, design, marketing etc. The small team made them
have useful intense discussion ensuring optimization of each aspect of the
product including both hardware and software.
4. The next important learning was accepting the role of a great leader in
a team. A team can only succeed if it has a leader that is motivating,
supportive and spear headed. It was Jobs who made the interaction
between the team going, set the target price and cost for the team to
optimize the offerings and innovation.
All in all, the case study is an excellent article on how innovation in these two
companies led to the same result but by using two different paths. Management
accounting supported them in their information needs and thus both were able
to produce offering that were not only unique and great but also affordable.

References:
Landry, L. (2017). THE INNOVATION PROCESS: A STEP-BY-STEP GUIDE. [Blog] Retrieved
from https://www.northeastern.edu/graduate/blog/innovation-process/ on 15 May 2019.
Nonala, I. and Kenney, M. (1991). Towards a new theory of innovation management: A case study
comparing Canon, Inc. and Apple Computer, Inc. Journal of Engineering and Technology
Management, 8(1), pp.67-83.