Reference no: EM131956054

Assignment

Part 1: The Paint Shop

The Rookery Company, a large financial services organization, owns and occupies many facilities including a property that is listed on the National Register of Historic Places. Rookery maintains a Paint Shop. The Paint Shop employs a dozen people including painters who are especially skilled.

Department executives in the various divisions of Rookery have the decision rights regarding the choice of painters they engage. At Rookery, it has never been the case that all painting is done by the in-house Paint Shop. Over the years outside painting contractors have been hired in various circumstances. For example, outside contractors were brought in for some major projects and when the Paint Shop was overwhelmed or not equipped to tackle jobs.

The Paint Shop is organized as a profit center as are all of the units of Rookery that would engage the Paint Shop to provide painting services. When a department needs painting work, they can contact the paint shop for an estimate. If the Paint Shop contracts to do the work, Rookery's accounting department charges an expense against the profit of the department requesting the work and credits the revenue of the Paint Shop. The Paint Shop is a captive supplier, that is, the paint shop does not do work for any customers outside of the Rookery Company.

Department heads have not always been pleased with the turn-around times of the in-house Paint Shop. Also, some in-house customers have been displeased with the price charged and the attitude of some of the staff members in the Paint Shop. As a result, department heads have increasingly been turning to outside painters instead of using the Paint Shop.

The CFO noticed the falling revenues and the resulting fall in profits of the Paint Shop. They are a high fixed cost unit. In response the CFO sent memos to the department executives who have decision rights over painting contracts to strongly urge them to always give the Paint Shop the "rightof-first-refusal" whenever painting work needs to be done.

The CFO is a strong supporter of the Paint Shop and believes that Rookery needs to maintain the inhouse paint shop. However, his repeated requests to the department executives to use the Paint Shop have not succeeded in creating work. To be candid, many jobs are being out-sourced to independent contractors and it appears that the CFO's memos are being ignored. In fact, the Paint Shop's revised pricing structure necessitated by the need to raise prices to improve their bottom line has only aggravated their situation.

The CFO is angry. At best he feels ignored, at worst he regards the decision of Rookery units to use outside painters as a disloyal act. But, the CFO lacks authority to require the departmental executives to use the Paint Shop. If he had the authority, he would require every department within the company to use the Paint Shop unless he decides that for some reason the Print Shop is not able to do the work.

To put an end to the practice of Rookery units selecting outside painting contractors, the CFO has recently communicated to the outside painting contractors who have been doing most of the work for Rookery units. He indicated that he does not want the outside contractors to accept painting work from any Rookery department that he has not authorized. Of course, the CFO will not authorize any work to go to outside contractors unless the Paint Shop is unable to complete the work.

The consequence to an independent contractor of performing work not authorized by the CFO as outlined by the CFO is that when Rookery does need to employ an outside contractor for a major project the CFO will remember those who are his friends and those who did cooperate with his wishes. Of course, the CFO has access to all invoices making it a simple task to identify any who do not comply with his wishes.

Required:

1. Speculate on why the department heads are ignoring the CFO's wishes with regards to using the services of the Print Shop.

2. When the volume of work declined at the Paint Shop, to maintain profitability the Paint Shop increased bid prices. The increase in bid prices resulted in further decreasing the number of jobs the Paint Shop was winning and the spiral continued downwards. This is an illustration of what some refer to as the "death spiral." What other responses could the Paint Shop in collaboration with the CFO have made to feedback received within the management control system when the Paint Shop was no longer competitive with outside contractors? Also, speculate on why it seems to be the case that the leadership of the Paint Shop did not initiate any of the responses you discussed. Be certain to give a comprehensive response.