Part 1: The Paint Shop (20 points)
The Rookery Company, a large financial services organization,owns and occupies many facilities including a property that islisted on the National Register of Historic Places. Rookerymaintains a Paint Shop. The Paint Shop employs a dozen peopleincluding painters who are especially skilled.
Department executives in the various divisions of Rookery havethe decision rights regarding the choice of painters they engage.At Rookery, it has never been the case that all painting is done bythe in-house Paint Shop. Over the years outside paintingcontractors have been hired in various circumstances. For example,outside contractors were brought in for some major projects andwhen the Paint Shop was overwhelmed or not equipped to tacklejobs.
The Paint Shop is organized as a profit center as are all of theunits of Rookery that would engage the Paint Shop to providepainting services. When a department needs painting work, they cancontact the paint shop for an estimate. If the Paint Shop contractsto do the work, Rookeryâs accounting department charges an expenseagainst the profit of the department requesting the work andcredits the revenue of the Paint Shop. The Paint Shop is a captivesupplier, that is, the paint shop does not do work for anycustomers outside of the Rookery Company.
Department heads have not always been pleased with theturn-around times of the in-house Paint Shop. Also, some in-housecustomers have been displeased with the price charged and theattitude of some of the staff members in the Paint Shop. As aresult, department heads have increasingly been turning to outsidepainters instead of using the Paint Shop.
The CFO noticed the falling revenues and the resulting fall inprofits of the Paint Shop. They are a high fixed cost unit. Inresponse the CFO sent memos to the department executives who havedecision rights over painting contracts to strongly urge them toalways give the Paint Shop the ârightof-first-refusalâ wheneverpainting work needs to be done.
The CFO is a strong supporter of the Paint Shop and believesthat Rookery needs to maintain the inhouse paint shop. However, hisrepeated requests to the department executives to use the PaintShop have not succeeded in creating work. To be candid, many jobsare being out-sourced to independent contractors and it appearsthat the CFOâs memos are being ignored. In fact, the Paint Shopâsrevised pricing structure necessitated by the need to raise pricesto improve their bottom line has only aggravated theirsituation.
The CFO is angry. At best he feels ignored, at worst he regardsthe decision of Rookery units to use outside painters as a disloyalact. But, the CFO lacks authority to require the departmentalexecutives to use the Paint Shop. If he had the authority, he wouldrequire every department within the company to use the Paint Shopunless he decides that for some reason the Print Shop is not ableto do the work.
To put an end to the practice of Rookery units selecting outsidepainting contractors, the CFO has recently communicated to theoutside painting contractors who have been doing most of the workfor Rookery units. He indicated that he does not want the outsidecontractors to accept painting work from any Rookery departmentthat he has not authorized. Of course, the CFO will not authorizeany work to go to outside contractors unless the Paint Shop isunable to complete the work.
The consequence to an independent contractor of performing worknot authorized by the CFO as outlined by the CFO is that whenRookery does need to employ an outside contractor for a majorproject the CFO will remember those who are his friends and thosewho did cooperate with his wishes. Of course, the CFO has access toall invoices making it a simple task to identify any who do notcomply with his wishes.
Required:
1. (10 points) Speculate on why the department heads areignoring the CFOâs wishes with regards to using the services of thePrint Shop.
2. (10 points) When the volume of work declined at the PaintShop, to maintain profitability the Paint Shop increased bidprices. The increase in bid prices resulted in further decreasingthe number of jobs the Paint Shop was winning and the spiralcontinued downwards. This is an illustration of what some refer toas the âdeath spiral.â What other responses could the Paint Shop incollaboration with the CFO have made to feedback received withinthe management control system when the Paint Shop was no longercompetitive with outside contractors? Also, speculate on why itseems to be the case that the leadership of the Paint Shop did notinitiate any of the responses you discussed. Be certain to give acomprehensive response.
