CASE

\f\fthe production of cradles. The company elected not to allocate selling, general, and administrative costs to products. Internal Cost Study G.G. Toys had recently commissioned a small internal team to study its overhead costs in both plants. The study revealed the following information: 1. Workers in the Chicago facility often operated several machines simultaneously once they were set up. Thus, machine-related expenses might relate more to the machine hours of a product than to its production-run labor hours. 2. A setup was performed in the Chicago facility each time a modification to the dolls was made. For example, to switch from a batch of girl dolls to a batch of boy dolls, a setup was required. Additionally, each time a specialty-branded doll was produced, a separate setup was required to process the raw materials to the required specifications. As the cradles were assembled entirely by hand, there were no setups in the Springfield plant. 3. For each production run, people in the receiving and production-control departments of the Chicago plant ordered, processed, inspected, and moved each batch of raw materials. This work required the same amount of time regardless of the production run length. The Springfield plant received materials on a just-in-time basis and continuously inspected and moved these materials. 4. The work in the packaging and shipping areas of both plants had increased during the past couple of years as the company increased the number of customers it served. Each time products were packaged and shipped, about the same amount of work was required, regardless of the number of items in the shipment. The team had collected the data shown in Exhibit & based on operations in March 2000 and felt that this month was typical of ongoing operations with the plant producing at practical capacity. The team decided that plant management and facilities-related costs should continue to be allocated to products in the same way they had been under the old system, as a percentage of production-run direct labor cost. The team collected data on the standard Geoffrey doll, the specialty-branded doll #106, and the cradle (Exhibits 2-4). Specialty-branded doll #106 had been ordered by several of G.G. Toy's largest customers and made an extremely successful debut in the marketplace. While the Chicago plant produced many different specialty-branded doll models, this particular doll concerned management. Because each retailer required slight alterations to the doll's clothing (e-g., retailer logo on pajamas), a new setup and production run were required each time the clothing design was changed. Because the doll was fairly new, retailers were conservative in their ordering patterns; most ordered fewer units more frequently. Due to these concerns, G.G. management wanted to assess the profitability of the specialty-branded doll #106. Current Situation Because of their high margins, Parker was willing to accept many orders for specialty-branded dolls even if this meant that the company had to lower production of the standard Geoffrey doll. Inthe meeting, Parker would discuss this issue with Hausner and More-house. Additionally; Parker wanted to discuss two additional product lines. GE. Toys had decided to produce holiday reindeer dolls in the Chicago plant during jidy, August, and September. The Chicago plant expanded its production capacityr [Leo maddnes and leased space} and rmerved the additional capacity for production of the holiday.r reindeer. Thus. this impurity]r would sit idle from October through lune. Parker was unsure about hot-Ir this excess capacity would affect the results of the internal oost study in the Chicago plant and overall plant performance. Additionally, GE. Toys was considering producing a hand-made r"Romaine Patch"I dol]. This doll would he a simply oonstructed doll made of a soncloth bod}? stuffed with the same soft-clout material. Because of the simple construction of the doll; GIG. Toys Felt that it would he low cost to produce but was our-fused by its estimated negative contribution margin. Based on management estimates, the expected sales prioe per doll was 53131 the expected direct labor cost per doll was $3.53). and the expected direct material oost per doll was $6M. The latter material cost was based on Mo facts: new material cost the Ctdcago plant $2 per yard, and each Romaine Patch doll would use three yards of material. This doll would be produced in the it-Gaga plant, and GE. Felt that it could produce all units of this doll by hand, using the scrap material from production of all doll pajamas at the Clucago plant. Currently; the production of pajamas resulted in significant amounls of scrap material. This material was disposed of at no additional cost to GI]. Toys. Approximately Ell'ii': of the material ordered for the doll pajamas resulted in scrap; all of this material would be used in Romaine Paid: production. isn't-ya Questions 1. Do you recommend that GE. Toys chane its existing cost system in the Chicago plant? ln 111E Springeld plant? Why or why not? Calculate the cost of a Geoffrey dull, the specialtybranded doll #1045, and a cradle using the cost study conclusions Compare and contrast the protability of each doll under the new and old systems. Based on your recomputed product costs. what actions would you recommend the company consider to enhance its profitability? What additional infotmation would you like to have to make these recommendations? How should GE. Toys account for the escorts capacity created to produce the holiday ref-dear dolls? Qualitatively, haw will this impact your Calculated cost of the Gmf't'y doll and the specialtybranded dolls in question numbm 2? Explain your method and its impact. {Answer qualitatively. Do not rooompute any of your product seats from question 2.} What explains the difference between forecasted and actual revenue for the Chicago plant during March of 240110? What other information would you collect to help explain this difference? Do you reconunend GE. Toys produce the Romaine Patch doll? Why or why not? [Ignore manufacturing overhead costs including packaging, shipping, and receitrutg and production control.) Exhibit 1 G.G. Toys: Operating Results (March 2000) Corporate Chicago Springfield Level Facility Facility TOTAL Sales $786,000 $125,400 $911,400 Direct labor 72,000 22,500 94,500 Direct materials 144,000 36,000 180,000 Manufacturing Overhead Machine related 112,000 112,000 Plant management and facilities-related costs 33.333 6,667 40,000 Setup labor 13,333 13,333 Receiving and production control 60.000 3,000 63,000 Packaging and shipping 50,000 3,000 53,000 Total manufacturing overhead $268,666 $12,667 $281,333 Selling, general, and administrative 296.650 296,650 Operating income (pretax) $ 58,917 Source: Casewriter. Exhibit 2 Product Profitability Analysis (March 2000) Specialty- Branded Doll Geoffrey Doll #106 Cradles Direct labor cost ($) 3.00 3.75 7.50 Direct material cost ($) 5.00 6.00 12.00 Manufacturing overhead. ($) 11.19 13.99 4.20 Standard unit cost ($) 19.19 23.74 23.70 Selling price ($) 21.00 36.00 30.00 Margin ($) 9% 34% 21%Exhibit 3 Product Data Specialty- Product Lines Geoffrey Doll Branded Doll Cradles Materials cost per unit $5 $12 Production-run direct labor per unit 20 DL hours .25 DL hours 50 DL hours Production-run direct labor $/unit @ $15/DL hours (including employee benefits) $3.00 $3.75 $7.50 Machine hours per unit 0.5 0.3 0.0 Source: Casewriter. Exhibit 4 Monthly Production and Operating Statistics (March 2000) Chicago Plant Springfield Plant Other Specialty- Specialty- Geoffrey Branded Branded Doll Doll #106 Dolls Total Cradles Total Production (units) 7,500 4,000 12,500 24,000 3,000 3,000 Machine hours 3,750 1,200 6,250 11,200 Setups 10 100 50 160 0 Production runs 10 100 50 160 Number of shipments 10 220 70 300 50 50