Karsten Mills Managerial Accounting Problem

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P8-22: Karsten Mills Managerial Accounting Problem

Karsten Mills is one of the premier carpet manufacturers in the world. It manufactures carpeting for both residential and commercial applications. Home sales and commercial sales each account for about 50 percent of total revenue. The firm is organized into three departments: manufacturing, residential sales, and commercial sales. Manufacturing is a cost center and the two sales departments are profit centers. The full cost of each roll of carpeting produced (including fully absorbed overhead) is transferred to the sales department ordering the carpet. The sales departments are evaluated as profit centers; the full cost of each roll is the transfer price. The current manufacturing plant is at capacity. A new plant is being built that will more than double the capacity. Within two years, management believes that it can grow Karsten's businesses such that most of the excess capacity will be eliminated. When the new plant comes on line, one plant will produce exclusively commercial carpeting and the other will produce exclusively residential carpeting. This change will simplify scheduling, ordering, and inventory control in both plants and will create some economies of scale through longer mill runs. Nevertheless, it will take a couple ...