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Case Study Assignment 1

The labor dispute at the Riverside Hotel arose because kitchen workers believed the $15 cost assigned to their free meals was too high, while management argued overhead costs like labor, utilities, and large equipment like the $18,000 oven needed to be considered. Sara explained to the manager at Herbert Products that the relevant cost information depends on the specific decision being considered, as dropping a product would require different analysis than increasing production of it by 100 units.

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Bhupesh Bajwa
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75 views1 page

Case Study Assignment 1

The labor dispute at the Riverside Hotel arose because kitchen workers believed the $15 cost assigned to their free meals was too high, while management argued overhead costs like labor, utilities, and large equipment like the $18,000 oven needed to be considered. Sara explained to the manager at Herbert Products that the relevant cost information depends on the specific decision being considered, as dropping a product would require different analysis than increasing production of it by 100 units.

Uploaded by

Bhupesh Bajwa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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CASES 29

CASES
1-1 LOCAL 635 forget that when the worker finishes his or her meal,
someone has to clean up. That costs money too. When
Local 635 represents kitchen workers at ho- you add up all of these items, a prime rib dinner easily
tels in several Midwestern cities. Part of adds up to $15!"
their labor agreement states that
workers "shall receive one meal
free Required
per shift up to a cost of $8, with any a. examples of costs, at the Riverside Hotel, that
List
cost over $8 being deducted from wages are variable, fixed, and sunk. Provide an example of an
paid to said employee." opportunity cost.
A labor dispute arose at the River- b. What is the source of conflict between labor and
side Hotel shortly after itwas opened in management? What changes would you recommend
June. Kitchen workers who ate dinner on the wording of the labor agreement?
in the
late shift found that their wages were reduced by
$7 for each meal they consumed at the hotel dur-

I ing their dinner break. Josh Parker, a line cook,


stated the widely held belief of the workers, "There's
1-2 HERBERT PLUMBING
no way these dinners cost the Riverside Hotel $8 to PRODUCTS
make let alone $15. This is just another case of man-
Herbert Products produces a variety of valves, connec-
agement trying to rip us off. Take last night. I had the
tors, and fixtures used in commercial and residential
prime rib dinner. The piece of meat cost about $5 and
plumbing applications. Recently, a senior manager
the salad less than $1. That's only $6 in total. Really,
walked into the cost accounting department and asked
there aren't any other costs to speak of. The cook, well
Sara Fielding to tell him the cost of the D45 valve.
he's going to be working in the kitchen and getting
Sara quickly replied "Why do you want to know?"
paid for eight hours whether he makes my meal or
Noticing that the manager appeared somewhat star-
not. This claim that my meal cost $15 is baloney!"
tledby this statement she explained that "The cost in-
Management of the Riverside Hotel sees the situa-
formation you need depends on the decision you're
tion differently. Take the case of Josh's dinner. In pre-
going to make. You might be thinking of increasing a
senting the hotel's case to a labor arbitration board,
scheduled production run of 3,000 D45s by 100 units,
Sandy Ross, manager of the hotel explained, "Look,
or scheduling an additional production run, or you
that dinner goes for $25 on the menu so assigning a
might even be thinking of dropping the product. For
cost of $ 1 5 represents a very good value to the kitchen
each of these decisions, the "cost" information that
workers. The contention that the meal only costs $6 is
you need is different."
nonsense. True, the meat costs $5 and the salad ingre-
dients cost $1, but there's also the labor costs related Required
to preparing the meal and numerous overhead costs Using the concept of incremental analysis, expand on
like the cost of the oven that the prime rib is cooked Sara's response of "Why do you want to know?" What
in. That oven cost more than $18,000. And, there's cost information would be relevant to a decision to
heat, light, power, etc. Each meal we prepare should drop the product that would not be relevant to a deci-
be assigned part of these overhead costs. And, don't sion to increase a production run by 100 units?

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