Morgan Manufacturing

AGW610 LESSON 3 CASE 3: Morgan Manufacturing Charles Crutchfield, manager of manufacturing operations at Morgan Manufacturing, was evaluating the performance of the company. Given his position, he was primarily interested in the health of the operating aspects of the business. At Morgan, the gross margin percentage was considered to be a key measure of operating performance; other measures considered to provide essential information on the health of business operations were pre-tax return on sales and pre-tax return on assets. Crutchfield considered the after-tax versions of these measures less relevant for his purposes because they combined information reflecting health of operations with information reflecting the effectiveness of the tax accounting department, which was not under his control. From Morgan Manufacturing’s 2010 income statements and balance sheets, shown in Exhibit 1, Crutchfield computed Morgan Manufacturing’s gross margin percentage (44.5%), pre-tax return on sales (14.5%), and pre-tax return on assets (13.4%). Crutchfield was especially interested in comparing his firm’s performance against that of its competitor, Westwood, Inc. Crutchfield felt that Morgan had recently made significant productivity improvements over Westwood that would be reflected in the financial statement. When he looked at Westwood’s 2010 financial statements (Exhibit 2), he was quite disappointed. Despite the similarities between the two companies based on the three key measures, he concluded that Westwood’s financial performance was better. Distraught, Crutchfield sought the advice of Edward Drewery, controller. “How can Westwood’s results be better than ours, when I know that our operations are more efficient?” The controller responded, “I’m not sure about the relative efficiency of the two firms’ operations, but I do know that we use a different method to account for inventory than Westwood uses. Have you taken that into account?” “Not really,” replied Crutchfield.