Analysis-Milton Manufacturing Company - Case Study Example

?Introduction Milton Manufacturing Company is dedicated to the production of textiles that are distributed to wholesalers of clothing items. The textile industry is a huge business with global trade valued at $18 trillion (Baig). The corporate headquarters of the firm is located in Long Island, New York. The president of the company is Irv Milton. The company’s revenues under the leadership of Milton increased by 20 times from 1999 to 2009. In 2010 the organization’s revenues decreased by 10%. The organization faces other issues that merit the immediate attention of the executive management team of the company. Key stakeholders Irv Milton – President of Milton Manufacturing Company. He is responsible for overseeing the entire operation of the company. Has authoritative command over subordinates. Ann Plokin – Chief Accounting Officer (CAO). She created policy to control capital expenditures of the company. Sammie Markowitz – Plant manager Long Island, New York plant. He gets involved in an ethical dilemma in the case. Ira Sufofsky – Vice president of operations. He informs all plant managers about the new policy. Beverly Wald – Chief Internal Auditor. She performed the audit that revealed an accounting scandal at Milton Manufacturing Company. Second Bankers Hour & Trust Co. – The firm is requesting a $20 million loan from this banking institution. Issues at Milton Manufacturing Company Companies that face issues must identify them in order to evaluate its effects and to find solutions to resolve the problems. The managers of the company are directly responsible for the performance of the employees and the company as a whole. Resolving problems can help improve the productivity, efficiency, and profitability of a company. Milton Manufacturing Company faces three types of problems. The three types of problems present at the firm are accounting, operational, and ethical issues. The accounting department is responsible for recording, tracking, and monitoring the economic activity of a firm (McGuckin). It is of the utmost importance for accountants to comply with the generally accepted accounting principles (GAAP) and to maintain a high level of ethical conduct by the professionals that practice accounting. The first financial problem that the company faces is that its revenues decreased by 10% in comparison with the previous year. Lower sales results hurt the bottom line of the company by lowering its profitability. Another issue with lower sales is that it can deplete the cash reserves of a firm. A second accounting issue was that the capital expenditures of the company were increasing at a rate of 26%. A third accounting issue Milton Manufacturing Company faced was a reduction in its cash flow position. Cash is the most important assets a company holds because it is used to pay for the short and long term obligations of the company which include payments of payroll, utilities, and debt. The cash flow from operating activities of the company decreased from $1,925,000 to $1,722,000. The firm’s cash outflow from investing activities increased from $1,834,000 to $2,244,000. The only positive activity in the statement of cash flows is that cash from investing activities received an inflow of $168,000 instead of the outflow the firm had the previous year of $376,000. The cash position of the company was extremely important due to the fact that the company was in the process of obtaining a $20 million loan from Second Bankers Hour & Trust Co. Ann Plokin determined that if the company keeps spending at its current pace it would not be able to pay for the $20 million loan. In order to remedy the situation she implemented a control measure to limit the capital expenditures of the different plants to the 2009 level of expenditures. Milton Manufacturing Company also faced production problems. One of its plant managers, Sammie Markowitz, identified a major operational deficiency in the machinery and equipment of the firm. He notified the problem to the VP of operations. The problem he identified was that machinery and equipment essential to the production process of the firm had been breaking down more frequently during he last two years. The source of the problem was the motors of the machines. They were inefficient due to their age. New more efficient motors were available in the market for lower prices than the firm’s current supplier. The VP of operations disregarded the concerns of the plant manager and told him about the new policy he and the other plant managers had to follow. During the first half of 2011 the company met its sales targets, but the demand during the second half to the year increased. This placed additional strain on the machinery, thus the degree of breakdown was increasing. Sammie Markowitz decided to take matters into his own hands. He was presented with an opportunity to purchase 1,000 motors from an overseas supplier at a 50% reduction from the price of its old supplier. Sammie thought that the expenditure policy was flawed. He was faced with an ethical dilemma on whether to purchase the motors in order to improve the efficiency of the company or to follow the rules imposed by the CAO of the company. He convinced an accountant at his plant to purchase the motors by recording the transaction as an operational expense in order to bypass the new capital expenditure policy. Mr. Markowitz did not realize that his actions violated the generally accepted accounting principles and that outsiders might visualize what he did as an accounting fraud. Alternative Solutions The president of the company and the CAO must meet with the rest of the members of the executive management team to find alternative solutions to the problem. The company faces the predicament of having released financial statements that had a material error on them. The firm also has to consider what to do about the employment status of Sammie Markowitz. A potential solution to the problem is to revise the financial statements of the company by reversing the original journal entry that recorded the purchase of motors as an operating expense. The acquisition of motors must be correctly recorded as a capital expenditure. A second alternative solution to the problem is to sell the $1 million in motors inventory in order to recover the cash that was mishandled in this transaction. A potential downside of this alternative is that the motors even though they are new might have to be sold at loss in order to recover the money fast. A third alternative solution is for the company to redistribute the inventory of motors across all its plants in order to make the improvements to the machinery of the other locations. A fourth alternative solution is to fire Mr. Markowitz immediately for insubordination. Another potential solution is to suspend Mr. Markowitz for an extended period of time. A final solution is to demote Markowitz from his plant manager position. Optimal solution The optimal solution to the problems at Milton Manufacturing Company is a combination of solutions since there are multiple issues to be addressed. The firm has to immediate reverse the journal entries to reclassify the transaction of the purchase of the motors from an operation expense to a capital expenditure. The company must adjust the financial statements of the company to reflect the changes. The second part of the solution is to utilize as many motors as possible to make the upgrade to the machines in the other plants. The third matter that needs a solution is regarding the employment status of Sammie Markowitz. Sammy violated a direct order from a superior. His actions are grounds for dismissal for insubordination. Unfortunately in the corporate environment there is no room for lone guns that make decisions without the approval of upper management. Sammie will be fired from his position as plant manager of the New York location. Work Cited Page Baig, K. 18 March 2013. “Why the Pakistan textile industry cannot die.” 29 April 2013. McGuckin, F. Business for Beginners. Canada: Eastleigh Publications. 2003. Print. Read More