Expert answer:Need accounting help with a Case Study Outline abo
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the case study below. Then, create an outline for the
case study. The outline must contain the thesis statement
which is the last 1 – 3 sentences of the introduction. The outline must
also contain:
An introduction with thesis statement.
At least 5 body paragraphs specifically addressing the case study questions.
A conclusion.
A reference page with a minimum of 3 scholarly references.
The
paper must be formatted according to APA style. You must use at least 2
scholarly resources other than the textbook to support your claims.
Milton Manufacturing Company produces a variety of
textiles for distribution to wholesale manufacturers of clothing products. The
company’s primary operations are located in Long Island City, New York, with
branch factories and warehouses in several surrounding cities. Milton
Manufacturing is a closely held company, and Irv Milton is the president. He
started the business in 2002, and it grew in revenue from $500,000 to $5
million in 10 years. However, the revenues declined to $4.5 million in 2012.
Net cash flows from all activities also were declining. The company was
concerned because it planned to borrow $20 million from the credit markets in
the fourth quarter of 2013.
Irv Milton met with Ann Plotkin, the chief
accounting officer (CAO), on January 15, 2013, to discuss a proposal by Plotkin
to control cash outflows. She was not overly concerned about the recent decline
in net cash flows from operating activities because these amounts were expected
to increase in 2013 as a result of projected higher levels of revenue and cash
collections.
Plotkin knew that if overall capital expenditures
continued to increase at the rate of 26 percent per year, Milton Manufacturing
probably would not be able to borrow the $20 million. Therefore, she suggested
establishing a new policy to be instituted on a temporary basis. Each plant’s
capital expenditures for 2013 would be limited to the level of capital
expenditures in 2011. Irv Milton pointedly asked Plotkin about the possible
negative effects of such a policy, but in the end, he was convinced that it was
necessary to initiate the policy immediately to stem the tide of increases in
capital expenditures. A summary of cash flows appears in Exhibit 1.
Sammie Markowicz is the plant manager at the head-
quarters in Long Island City. He was informed of the new capital expenditure
policy by Ira Sugofsky, the vice president for operations. Markowicz told
Sugofsky that the new policy could negatively affect plant operations because
certain machinery and equipment, essential to the production process, had been
breaking down more frequently during the past two years. The problem was
primarily with the motors. New and better models with more efficient motors had
been developed by an overseas supplier. These were expected to be available by
April 2013. Markowicz planned to order 1,000 of these new motors for the Long
Island City operation, and he expected that other plant managers would do the
same. Sugofsky told Markowicz to delay the acquisition of new motors for one
year, after which time the restrictive capital expenditure policy would be
lifted. Markowicz reluctantly agreed.
Milton Manufacturing operated profitably during
the first six months of 2013. Net cash inflows from investing activities
exceeded outflows by $250,000 during this time period. It was the first time in
three years that there was a positive cash flow from investing activities.
Production operations accelerated during the third quarter as a result of increased
demand for Milton’s textiles. An aggressive advertising campaign initiated in
late 2012 seemed to bear fruit for the company. Unfortunately, the increased
level of production put pressure on the machines, and the degree of breakdown
was increasing. A big problem was that the motors wore out prematurely.
Markowicz was concerned about the machine
breakdown and increasing delays in meeting customer demands for the shipment of
the textile products. He met with the other branch plant managers, who
complained bitterly to him about not being able to spend the money to acquire
new motors. Markowicz was very sensitive to their needs. He informed them that
the company’s regular supplier had recently announced a 25 percent price
increase for the motors. Other suppliers followed suit, and Markowicz saw no
choice but to buy the motors from the overseas supplier. That supplier’s price
was lower, and the quality of the motors would significantly enhance the
machines’ operating efficiency. However, the company’s restrictions on capital
expenditures stood in the way of making the purchase.
Markowicz approached Sugofsky and told him about
the machine breakdowns and the concerns of other plant managers. Sugofsky
seemed indifferent. He reminded Markowicz of the capital expenditure
restrictions in place and that the Long Island City plant was committed to keep
expenditures at the same level as it had in 2011. Markowicz argued that he was
faced with an unusual situation and he had to act now. Sugofsky hurriedly left,
but not before he said to Markowicz: “A policy is a policy.”
Markowicz reflected on the comment and his obligations
to Milton Manufacturing. He was conflicted because he viewed his primary
responsibility and that of the other plant managers to ensure that the
production process operated smoothly. The last thing the workers needed right
now was a stoppage of production because of machine failure.
At this time, Markowicz learned of a 30-day
promotional price offered by the overseas supplier to gain new customers by
lowering the price for all motors by 25 percent. Coupled with the 25 percent
increase in price by the company’s supplier, Markowicz knew he could save the
company $1,500, or 50 percent of cost, on each motor purchased from the over-
seas supplier.
After carefully considering the implications of
his intended action, Markowicz contacted the other plant managers and informed
them that while they were not obligated to follow his lead because of the
capital expenditure policy, he planned to purchase 1,000 motors from the
overseas supplier for the headquarters plant in Long Island City.
Markowicz made the purchase in the fourth quarter
of 2013 without informing Sugofsky. He convinced the plant accountant to record
the $1.5 million expenditure as an operating (not capital) expenditure because
he knew that the higher level of operating cash inflows would mask the effect
of his expenditure. In fact, Markowicz was proud that he had “saved” the
company $1.5 million, and he did what was necessary to ensure that the Long
Island City plant continued to operate.
The acquisitions by Markowicz and the other plant
managers enabled the company to keep up with the growing demand for textiles,
and the company finished the year with record high levels of net cash inflows
from all activities. Markowicz was lauded by his team for his leadership. The
company successfully executed a loan agreement with Second Bankers Hours &
Trust Co. The $20 million borrowed was received on January 3, 2014.
During the course of an internal audit on January
21, 2014, Beverly Wald, the chief internal auditor (and also a CPA), discovered
that there was an unusually high number of motors in inventory. A complete
check of the inventory deter- mined that $1 million worth of motors remained on
hand.
Wald reported her findings to Ann Plotkin, and together
they went to see Irv Milton. After being informed of the situation, Milton
called in Sugofsky. When Wald told him about her findings, Sugofsky’s face
turned beet red. He paced the floor, poured a glass of water, drank it quickly,
and then began his explanation. Sugofsky told them about his encounter with
Markowicz. Sugofsky stated in no uncertain terms that he had told Markowicz not
to increase plant expenditures beyond the 2011 level. “I left the meeting
believing that he understood the company’s policy. I knew nothing about the
purchase,” he stated.
At this point, Wald joined in and explained to
Sugofsky that the $1 million is accounted for as inventory, not as an operating
cash outflow: “What we do in this case is transfer the motors out of inventory
and into the machinery account once they are placed into operation because,
according to the documentation, the motors added significant value to the
asset.” Sugofsky had a perplexed look on his face. Finally, Irv Milton took
control of the accounting lesson by asking: “What’s the difference? Isn’t the
main issue that Markowicz did not follow company policy?” The three officers in
the room shook their head simultaneously, perhaps in gratitude for being saved
the additional lecturing. Milton then said he wanted the three of them to
brainstorm some alternatives on how best to deal with the Markowicz situation
and present the choices to him in one week.
Questions
Use the Integrated Ethical
Decision-Making Process explained in this chapter to help you assess the
following:
1. Identify
the ethical and professional issues of concern to Beverly Wald in this case.
2. Identify
and evaluate the alternative courses of action for Wald, Plotkin, and Sugofsky
to present in their meeting with Milton.
3. How
do virtue considerations influence the alternatives presented?
4. If you were in Milton’s place, which of the
alternatives would you choose and why?
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