ATC 13-1 Business Application Case Analyzing inventory reductions at Proctor & Gamble Real-world companies often seek to reduce the complexity of their operations in an attempt to increase profits. In 2012, Procter & Gamble (P&G) believed it could increase the company's profits by eliminating some product-lines. In 2017, P&G announced that it had "divested, discontinued, or consolidated 105 brands." As a result, even though its sales had decreased by 22 percent from 2012 to 2017, its profit as a percentage of sales had increased by 55 percent. Other companies have also tried to improve their financial performance by downsizing. In November 2017, General Electric announced it would begin a downsizing operation that would result in their exiting businesses using over $20 billion in assets in the next one to two years. In January 2018, Newell Brands, the company whose products include Tupperware, Sharpie pens, Elmer's Glue, and Rawlings sports products, announced it would be reducing its product offerings to the extent that it would close half of its facilities and reduce it revenues by 20 percent. Required a. Identify some cost savings these companies might realize by reducing the number of items they sell or use in production. Be as specific as possible, and use your imagination. b. Consider the additional information presented as follows, which is hypothetical. All dollar amounts are in thousands; unit amounts are not. Assume that P&G decides to eliminate one shampoo line, Luster, for one of its segments that currently produces three products. As a result, the following are expected to occur. (1) The number of units sold for the segment is expected to drop by only 125,000 because of the elimination of Luster, since most customers are expected to purchase an Anagen or Catagen product instead. The shift of sales from Luster to Anagen and Catagen is expected to be evenly split. In other words, the sales of Anagen and Catagen will each increase by 50,000 units. (2) Rent is paid for the entire production facility, and the space used by Luster cannot be sublet.{3) Utilities costs are expected to be reduced by $40,000. {4) All of the supervisors for Luster were terminated. No new supervisors will be hired for Anagen or Catagen. {5) Half of the equipment being used to produce Luster is also used to produce the other two products and its depreciation cost must be absorbed by them. The remaining equipment has a bookvalue of $340,000 and can be sold for onlyr $60,000. {6) Facilitylevel costs will continue to be allocated between the product lines based on the number of units produced. Prepare revised productline earnings statements based on the elimination of Luster. {Hint It will be necessary to calculate some perunit data to accomplish this}. Product-Line Earnings Statements (Dollar amounts are in thousands) Annual Costs of Anage Catage Luste Total Operating Each n n r Product Line Sales in units 450.000 450.000 225.000 1.125.000 Sales in dollars 900.000 900,000 |450,000 2,250,000 Unit-level costs: Cost of production 85.500 85.500 46.200 217.200 Sales commissions 11,700 11,700 6.000 29,400 Shipping and handling 20.250 18.000 9.000 47.250 Miscellaneous 6.750 4.500 2.250 13.500 Total unit-level costs 124.200 119,700 63.450 307.350 Product-level costs: Supervisors' salaries 9.600 7.200 2.400 19.200 Facility-level costs: Rent 100.000 100,000 50.000 250,000 Utilities 112.500 112,500 56,250 281.250 Depreciation on equipment 400.000 400,000 200,000 1,000,000 Allocated companywide expenses 22.500 22.500 11.250 56.250 Total facility-level costs 635.000 635.000 317.500 1.587.500 Total product cost 768.800 761.900 383.350 1,914.050 Profit on products $131,200 $138,100 $66,650 $335,950ATC 13-1 Worksheet Product-line Earnings Statements Annual Costs of Operating Each Product Line Anagen Catagen Luster Total Sales in units 450,000 450,000 225,000 1,125,000 Sales in dollars (1) 900,000 900,000 450,000 2,250,000 Unit-level costs: Cost of production 85,500 85,500 46,200 217,200 Sales commissions 11,700 11,700 6,000 29,400 Shipping and handling 20,250 18,000 9,000 47,250 Miscellaneous 6,750 4,500 2,250 13,500 Total unit-level costs 124,200 119,700 63,450 307,350 Product-level costs: Supervisors salaries 9,600 7,200 2,400 19,200 Facility-level costs: Rent (2) 100,000 100,000 50,000 250,000 Utilities (3) 112,500 112,500 56,250 281,250 Depreciation on equipment (4) 400,000 400,000 200,000 1,000,000 Allocated company-wide expenses (5) 22,500 22,500 11,250 56,250 Total facility-level costs 535,000 635,000 317,500 1,587,500 Total product cost $768,800 $761,900 383,350 1,914,050 Profit on products $131,200 $138,100 66,650 $335,950ATC 13-1 Win rksheet b. Per unit data must be calculated for sales and unit-level costs. These are (remember, dollar amounts are in thousands]: Anagen Amount Units Per Unit Sales Cost of production Sales commissions Shipping and handling Miscellaneous Catagen Sales Cost of production Sales commissions Shipping and handling Miscellaneous Revised Product-line Earnings Statements Annual Costs of Operating Each Product Line Anagen Catagen Luster Total Sales in units Sales in dollars {1] Unitlevel costs: lCost of production Sales commissions Shipping and handling Miscellaneous Total unitlevel costs Product-level costs: Supervisors salaries Facilitylevel costs: Rent [2} Utilities {3] Depreciation on equipment [4) Allocated companywide expenses [5} Total facilitylevel costs Total product cost Profit on products Sale of Luster equipment Segment earnings Calculation Details: 1] 2] 3] 4i 5 l l l i l l