Question
BW Manufacturing Company produced gas grills in three primary models (Grills A, B, and C). BW was a small player in the industry, but business
BW Manufacturing Company produced gas grills in three primary models (Grills A, B, and C). BW was a small player in the industry, but business had been good, and it was expecting another profitable year. Draft of the company’s operating budget is shown in Exhibit 1. Stand costs for the three products are explained in Exhibit 3. Selling, general, and administrative (SG&A), other costs, interest income, and interest expense were likely to remain the same no matter which product-line combinations the company produced.
Before calling it a day, the two owners asked their assistant, Justine Richardson, to determine the impact of several options on income before tax. They agreed to meet the following day, and Richardson hurried off to look at what these latest ideas would mean. She had four questions to address and was asked to consider each option independent of all other options.
BW Manufacturing Company
1.Calculate the impact of dropping Grill A. Assume no other changes to the plan.
Should BW drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Richardson was told to assume that the volumes and selling prices of the other two products would be the same whether or not the Grill A product line was dropped.
Your response:
2.Calculate the impact of reducing Grill C price to $75, with the expectation that the volume of that product will increase to 220,000 units. Assume no other changes to the plan.
Your response:
3. Calculate the impact of a 10,000 unit decrease in Grill A and 10,000 unit increase in Grill C volume due to the change in the advertising focus. Assume no other changes to the plan.
Should BW change its advertising focus?
Your response:
4. Calculate the impact of a $5 decrease in Grill C’s price and a change in advertising focus leading to a 10,000 unit decrease in Grill A’s volume and a 30,000 unit increase in Grill C’s volume. Assume no other changes to the plan.
Should BW lower the price of Grill C and change its advertising focus?
Your response:
| Table 1. Actual 2009 volumes | |||||||||
| Grill | Volume (# in units) | ||||||||
| A | 115,000 | ||||||||
| B | 110,000 | ||||||||
| C | 225,000 | ||||||||
| Richardson began to wonder if the bottom line was as high as it should have been | |||||||||
| Exhibit 1 | |||||||||
| BW Manufacturing Company | |||||||||
| Operating Budget 2009: Draft 12/18/2008 | |||||||||
| Sales | $41,200,000 | ||||||||
| Less: costs of products sold | $22,800,000 | ||||||||
| Gross margin | $18,400,000 | ||||||||
| SG&A | $9,350,000 | ||||||||
| Other costs | $2,100,000 | ||||||||
| Operating income | $6,950,000 | ||||||||
| Less: Interest expense | $420,000 | ||||||||
| Plus: Interest income | $150,000 | ||||||||
| Income before tax | $6,680,000 | ||||||||
| Income taxes | $2,338,000 | ||||||||
| Net income | $4,342,000 | ||||||||
| Exhibit 2 | |||||||||
| Standard Costs | |||||||||
| Grill A | Grill B | Grill C | |||||||
| Planned Volume (units) | 80,000 | 120,000 | 200,000 | ||||||
| Per Unit: | |||||||||
| Sales price | $150 | $110 | $80 | ||||||
| Direct Costs: | |||||||||
| Materials | 17 | 10 | 7 | directly related to production volume | |||||
| Labor | 21 | 16 | 4 | directly related to production volume | |||||
| Subtotal | $38 | $26 | $11 | ||||||
| Indirect costs: | |||||||||
| Supplies | 7 | 2 | 1 | directly related to production volume | |||||
| Labor | 10 | 8 | 4 | one-half varies with direct labor; the rest is fixed | |||||
| Supervision | 8 | 3 | 1 | unrelated to production volume | |||||
| Energy | 12 | 6 | 4 | one-half varies with direct labor; the rest is fixed | |||||
| Depreciation | 22 | 7 | 5 | unrelated to production volume | |||||
| Head office support | 12 | 6 | 3 | corporate office allocation* | |||||
| All other | 11 | 2 | 1 | unrelated to production volume | |||||
| Subtotal | $82 | $34 | $19 | ||||||
| Total product cost | $120 | $60 | $30 | ||||||
| Product-line profitability | $30 | $50 | $50 | ||||||
| *This category comprises accounting, IT, human resources, legal, and other supporting the production of these products. | |||||||||
| Allocations were made using multiple drivers. Corporate office budgets are unrelated to production levels. | |||||||||
| Exhibit 3 | |||||||||
| 2009 Operating Results: Draft 1/19/2010 | |||||||||
| Revenue | $46,225,000 | ||||||||
| Variable costs: | |||||||||
| Materials | 4,800,000 | ||||||||
| Direct labor | 5,200,000 | ||||||||
| Supplies | 1,300,000 | ||||||||
| Indirect labor | 1,500,000 | ||||||||
| Energy | 1,600,000 | ||||||||
| Total variable cost | $14,400,000 | ||||||||
| Fixed costs: | |||||||||
| Indirect labor | 1,300,000 | ||||||||
| Supervision | 1,200,000 | ||||||||
| Energy | 1,350,000 | ||||||||
| Depreciation | 3,660,000 | ||||||||
| Head office | 2,300,000 | ||||||||
| All other | 1,380,000 | ||||||||
| Total fixed cost | $11,190,000 | ||||||||
| Total cost | $25,590,000 | ||||||||
| Gross margin | $20,635,000 | ||||||||
| SG&A | 9,350,000 | ||||||||
| Other costs | 2,100,000 | ||||||||
| Operating income | $9,185,000 | ||||||||
| Less: interest expense | 420,000 | ||||||||
| Plus: interest income | 150,000 | ||||||||
| Income before tax | $8,915,000 | ||||||||
| Income taxes | $3,120,250 | ||||||||
| Net income | $5,794,750 | ||||||||
Step by Step Solution
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Below Is the base Assumptions Grill A Grill B Grill C Planned Units 115000 110000 200000 Price 15000 11000 8000 Material Variable to Volume 1700 1000 700 Labor Variable to Volume 2100 1600 400 Supplie...
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Applied Regression Analysis And Other Multivariable Methods
Authors: David G. Kleinbaum, Lawrence L. Kupper, Azhar Nizam, Eli S. Rosenberg
5th Edition
1285051084, 978-1285963754, 128596375X, 978-1285051086
