Case 3 Marvin Co.

Marvin Co. manufactures both an automatic and a manual household dehumidifier. Exhibit 1 contains information on the price and cost per unit for both automatic and manual dehumidifiers. Exhibit 1 also contains production time for both products and capacity constraints. Because of limited demand, for several years, production has been at 80% of estimated capacity. Capacity is constrained by the number of machine hours available. Management wants to make use of the companys current excess capacity. Management has several independent strategies to utilize this excess capacity. For each independent strategy, conduct an incremental analysis to determine the net impact the strategy will have on operating income. Unless noted, all cells should only contain cell references. Then, make a suggestion to management on which strategy they should implement. You will be assigned a number. Download the excel file from Blackboard that matches your number. For example, Student 1 will download Marvin_1.xlsx.

BASELINE Before analyzing the three strategies, in the ORANGE boxes: Calculate the contribution margin per unit for both products. Calculate the contribution margin per unit of machine hours for both products.

STRATEGY 1 Fulfill a special order Marvin Co. is in communications with a local construction company that develops subdivisions across the Midwest. The construction company is interested in a special order to purchase a combination of manual and automatic dehumidifiers for every home in the build project, but they would require a reduction on price for the bulk order. Marvin Cos production manager believes that the special order would require some additional fixed costs. The details of the special order are summarized in Exhibit 2. In the YELLOW boxes, determine the net change in operating income if Marvin Co accepts the special order.

STRATEGY 2 Market extra units in foreign market Marvin Co. has not yet sold their product abroad. If they enter the foreign market, sales price must be reduced by 20% and no more than 6,000 units of either model can be sold. All costs will remain the same except that the sales commission of 10% (included in the variable operating expenses in Exhibit 1) will be avoided. (You may hard code not cell reference the three numbers contained in this paragraph.) In the BLUE boxes, complete the formulas, calculate the contribution margin per unit and the contribution margin per machine hour for units sold abroad. In the GREEN boxes, determine the profit maximizing product mix that could be sold abroad and the net change in operating income if Marvin Co sells this product mix abroad.

STRATEGY 3 Increase domestic market sales with promotion campaign Marvin Cos marketing team believes that a targeted domestic marketing campaign could increase demand allowing them to sell units at regular prices. However, the marketing campaign would need to target EITHER manual units OR automatic units (not both). So, Marvin Co would need to decide whether to use all of its excess capacity to produce and sell manual units or to produce and sell automatic units. The promotion campaign would cost $235,000 to promote the manual model, but would only cost $225,000 to promote the automatic model. (You may hard code not cell reference the two numbers contained in this paragraph.) In the PURPLE boxes, determine the net change in operating income if Marvin Co. adopts a domestic marketing campaign for automatic units. In the PINK boxes, determine the net change in operating income if Marvin Co. adopts a domestic marketing campaign for manual units.

RECOMMENDATION In the TEXTBOX provide a recommendation: Which strategy do you recommend Marvin Co. implement? Why?

\begin{tabular}{|l|rr|ll|} \hline \multicolumn{2}{|c|}{ Exhibit 1: Data } & \\ \hline & Automatic & \multicolumn{2}{c|}{ Manual } \\ \hline Sales Price & $ & 350.00 & $ & 150.00 \\ \hline Per Unit Costs & & & & \\ \hline Direct Materials & $ & 65.00 & $ & 32.00 \\ \hline Direct Labor & $ & 35.00 & $ & 25.00 \\ \hline Variable MOH & $ & 68.00 & $ & 16.00 \\ \hline Fixed MOH & $ & 50.00 & $ & 18.00 \\ \hline Variable Operating Expenses & $ & 52.00 & $ & 21.00 \\ \hline Fixed Operating Expenses & $ & 30.00 & $ & 13.00 \\ \hline & & & & \\ \hline Production Time (in Machine Hours) & & 2.5 & & 1.0 \\ \hline & & & & \\ \hline Total Capacity (in Machine Hours) & & 50,000 & & \\ \hline Excess Capacity (in Machine Hours) & & 10,000 & & \\ \hline \end{tabular} \begin{tabular}{|l|ll|rr|} \hline \multicolumn{2}{|c|}{ Baseline } & \multicolumn{3}{c|}{} \\ \hline & Automatic & \multicolumn{2}{c|}{ Manual } \\ \hline Sales Price & $ & 350.00 & $ & 150.00 \\ \hline Less: Variable Cost & $ & 220.00 & $ & 94.00 \\ \hline Contribution Margin & $ & 130.00 & $ & 56.00 \\ \hline Divided by: Machine Hour & & 2.5 & & 1.0 \\ \hline Contribution Margin per machine hour & $ & 52.00 & $ & 56.00 \\ \hline \end{tabular} \begin{tabular}{|l|r|} \hline \multicolumn{2}{|c|}{ Strategy 1: Special Order } \\ \hline & \\ \hline Revenue from Special Order & $1,225,000 \\ \hline Less: Variable Cost from Special Order & $910,000 \\ \hline Contribution Margin & $315,000 \\ \hline Less: Additional Fixed Costs & $85,000 \\ \hline Net Change in Ol for Special Order & $230,000 \\ \hline \end{tabular} RECOMMENDATION. Choosing from the three strategies you investigated, which strategy do you recommend thot Marvin Co. implement? Why? \begin{tabular}{|c|l|c|} \hline \multicolumn{2}{|c|}{ Strategy 2: Foreign Market } \\ \hline CM Calculation & Automatic & Manual \\ \hline Sales Price & & \\ \hline Less: Variable Cost & & \\ \hline Contribution Margin & & \\ \hline Divided by: Machine Hour & & \\ \hline Contribution Margin per machine hour & & \\ \hline Product Mix & & \\ \hline Quantity & & \\ \hline Incremental Analysis & & \\ \hline Net Change in Ol for Foreign Sales & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|} \hline \multicolumn{2}{|c|}{ Strategy 3: Promotion Campaigns } \\ \hline & Automatic & Manual \\ \hline Contribution Margin per Unit & & \\ \hline Mult: Units produced from Excess Capacity & & \\ \hline Total Contribution Margin from Campaigns & & \\ \hline Less: Cost of Campaign & & \\ \hline Net Change in Ol for Promotion Campaign & & \\ \hline \end{tabular}