Hathaway Bears Company

Hathaway Bears Co. Discussion Questions Assignment: Answer Questions 1, 2 and 4 1. Using the information in the case and Tables 1-5. prepare a flexible budget for the Hathaway Bears Company for the year ended June 30. 1998. Analyze the company's total master (static) budget variance for the year. Compare the flexible and master (static) budgets and prepare a schedule showing the sales volume variance. Compare the actual results and the flexible budgets, and prepare a schedule showing the flexible budget variance. Subdivide the flexible budget variances into appropriate price and efficiency variances for materials, labor and variable overhead. (A template is provided separately) 2. Compute the bonuses earned in fiscal 1998, if any, by David Hall of the purchasing department, Rita Smith of the marketing department, and Bill Wilford of the production 3. You will be assisting in the investigation of certain variances. Using the information provided, formulate some likely explanations for the observed variances. 4 Comment on the advantages and disadvantages of the incentive compensation plan as it applies to department heads. What modifications to the incentive plan would you recommend? Why? Hathaway Bears Company Jenny Hayes is employed by the Premium Products Corporation, a publicly traded conglomerate. The corporation manufactures and sells many different kinds of products, including luggage, music synthesizers, breakfast cereals, peanut butter, and children's toys Hayes is Vice President in charge of the Hathaway Bears Company, a division of Premium Products It is late July 1998 and Hayes has just recelved the preliminary income statement for her division for the year ended June 30, 1998 (see Table ). The master (static) budget and master budget variances for the same period are included for comparison purposes. Hayes looks at the bottom line, a loss approsching a million dollars, then picks up the phone to call you. You are an accountant in the controller's office at the headquarters of Premium Products Corporation. You worked with Hayes when her company was acquired by Premium Products, and now she has called you for advice. 1know the bottom line looks pretty bad,"she says. "But we made great strides this year, Sales are higher than ever, Customers love our product and respect our quality. There must be a way to make this business work and turn a profit, too. The budget variances should provide some insights. Could you do an analysis of the budget variances? The Mathaway Bears Company was founded by Franklin Hathaway, Jenny Hayes's father in 1974, Hathaway was an industrial artist who enjoyed making stuffed animals in his spare time His first creation, a teddy bear that he presented to Jenny on her seventh birthdasy, occupies place of honor at Hathaway Bears Company's headquarters. In 1974, Frank Hathaway acquired an old pneumatic pump that had been used to fi life-jackets for the Navy during Worild War He modified the machine to mass produce stuffed animals, and the Hathaway Bears Company was born The company started small at first, but grew quickly as Hathaway's reputation for quality spread By 1986, annual sales exceeded a million dollars for the first time. Jenny Hayes had learned the business from the bottom up. She had started out with the company in the mail room as a part- time summer employee. As a college student, she had spent summers and Christmas vacations working on the production floor, in the sales department, and finally in the accounting department. She was named Assistant to the President in 1988 after recelving her M.B.A In 1991, at her urging the company launched an Initial public offering (IP0) of common stock and became publicly traded on the NASDAQ Jenny Hayes became CEO of the company on July l 1993 when her father retired. On March 17, 1995, Hathaway Bears was acquired by the Premium Products Corporation in a friendly exchange of common stock valued at $23.2 million.1 The terms of the acquisition included an agreement to employ Hayes for no fewer than five years at an annual salary of $120,000. The Hathaway Bears Company produces the Hathaway Bear, a fifteen-inch teddy bear enjoyed by children and adult toy collectors around the world. The company touts the handcrafted features of the bear and advertises its product as the only teddy bear made in America. The bears are fully jointed, constructed of washable acrylic pile fabric, and stuffed with a polyester fiber filling. The toys are dressed in various accessories, such as bow ties, sports jerseys, or character and occupational costumes Thus, the product can be personalized for numerous occasions. The Hathaway Bear is sold with an unconditional lifetime guarantee. In communicating with customers, the company refers to its repair center as the 'bear hospital. A damaged bear may be returned by the customer and repaired (or replaced, at the company's discretion) free of charge The Hathaway Bears Company's 241 employees are organized into three departments purchasing, production, and marketing. The purchasing department consists of David Hall, the purchasing manager, and a staff of ten. The department is responsible for acquiring and maintaining the supply of production materials. B wiford manages 174 employees in the production department, where the manufacture and assembly of the product takes place. The marketing department is headed by Rita Smith. She is responsible for all aspects of marketing and she supervises the nine sales clerks and 42 sales representatives that make up Hathaway's sales force. The remaining three employees are Hayes, her secretary, and her secretary's assistant Production begins with a large press that cuts the acrylic pile fabric into the required pattern pieces. The press-cutter machine applies 23,000 pounds per square inch of pressure to a tray of pattern stainless steel dies that are stamped into the fabric. The bolts of fabric are in friendly acquston, the terms ofthe edang, are eagosted by thie acquemg company and the nonbent management of the target (acqured)fum This method of merging two compan". #quee dmerent from 'hostie takeover," which is intated by Keuing company over the oepections of the target's incumbent Dies are heavy-duty, three-d mensonai paterns used to cut tabe amo parts for the bear Dies tuncton-na Fatnes shipped from the manufacturer wrapped around . aindncal cor. or . A standard boit of f ten yards leng and 72 inches wide Hathaway Bears Co. Discussion Questions Assignment: Answer Questions 1, 2 and 4 1. Using the information in the case and Tables 1-5. prepare a flexible budget for the Hathaway Bears Company for the year ended June 30. 1998. Analyze the company's total master (static) budget variance for the year. Compare the flexible and master (static) budgets and prepare a schedule showing the sales volume variance. Compare the actual results and the flexible budgets, and prepare a schedule showing the flexible budget variance. Subdivide the flexible budget variances into appropriate price and efficiency variances for materials, labor and variable overhead. (A template is provided separately) 2. Compute the bonuses earned in fiscal 1998, if any, by David Hall of the purchasing department, Rita Smith of the marketing department, and Bill Wilford of the production 3. You will be assisting in the investigation of certain variances. Using the information provided, formulate some likely explanations for the observed variances. 4 Comment on the advantages and disadvantages of the incentive compensation plan as it applies to department heads. What modifications to the incentive plan would you recommend? Why? Hathaway Bears Company Jenny Hayes is employed by the Premium Products Corporation, a publicly traded conglomerate. The corporation manufactures and sells many different kinds of products, including luggage, music synthesizers, breakfast cereals, peanut butter, and children's toys Hayes is Vice President in charge of the Hathaway Bears Company, a division of Premium Products It is late July 1998 and Hayes has just recelved the preliminary income statement for her division for the year ended June 30, 1998 (see Table ). The master (static) budget and master budget variances for the same period are included for comparison purposes. Hayes looks at the bottom line, a loss approsching a million dollars, then picks up the phone to call you. You are an accountant in the controller's office at the headquarters of Premium Products Corporation. You worked with Hayes when her company was acquired by Premium Products, and now she has called you for advice. 1know the bottom line looks pretty bad,"she says. "But we made great strides this year, Sales are higher than ever, Customers love our product and respect our quality. There must be a way to make this business work and turn a profit, too. The budget variances should provide some insights. Could you do an analysis of the budget variances? The Mathaway Bears Company was founded by Franklin Hathaway, Jenny Hayes's father in 1974, Hathaway was an industrial artist who enjoyed making stuffed animals in his spare time His first creation, a teddy bear that he presented to Jenny on her seventh birthdasy, occupies place of honor at Hathaway Bears Company's headquarters. In 1974, Frank Hathaway acquired an old pneumatic pump that had been used to fi life-jackets for the Navy during Worild War He modified the machine to mass produce stuffed animals, and the Hathaway Bears Company was born The company started small at first, but grew quickly as Hathaway's reputation for quality spread By 1986, annual sales exceeded a million dollars for the first time. Jenny Hayes had learned the business from the bottom up. She had started out with the company in the mail room as a part- time summer employee. As a college student, she had spent summers and Christmas vacations working on the production floor, in the sales department, and finally in the accounting department. She was named Assistant to the President in 1988 after recelving her M.B.A In 1991, at her urging the company launched an Initial public offering (IP0) of common stock and became publicly traded on the NASDAQ Jenny Hayes became CEO of the company on July l 1993 when her father retired. On March 17, 1995, Hathaway Bears was acquired by the Premium Products Corporation in a friendly exchange of common stock valued at $23.2 million.1 The terms of the acquisition included an agreement to employ Hayes for no fewer than five years at an annual salary of $120,000. The Hathaway Bears Company produces the Hathaway Bear, a fifteen-inch teddy bear enjoyed by children and adult toy collectors around the world. The company touts the handcrafted features of the bear and advertises its product as the only teddy bear made in America. The bears are fully jointed, constructed of washable acrylic pile fabric, and stuffed with a polyester fiber filling. The toys are dressed in various accessories, such as bow ties, sports jerseys, or character and occupational costumes Thus, the product can be personalized for numerous occasions. The Hathaway Bear is sold with an unconditional lifetime guarantee. In communicating with customers, the company refers to its repair center as the 'bear hospital. A damaged bear may be returned by the customer and repaired (or replaced, at the company's discretion) free of charge The Hathaway Bears Company's 241 employees are organized into three departments purchasing, production, and marketing. The purchasing department consists of David Hall, the purchasing manager, and a staff of ten. The department is responsible for acquiring and maintaining the supply of production materials. B wiford manages 174 employees in the production department, where the manufacture and assembly of the product takes place. The marketing department is headed by Rita Smith. She is responsible for all aspects of marketing and she supervises the nine sales clerks and 42 sales representatives that make up Hathaway's sales force. The remaining three employees are Hayes, her secretary, and her secretary's assistant Production begins with a large press that cuts the acrylic pile fabric into the required pattern pieces. The press-cutter machine applies 23,000 pounds per square inch of pressure to a tray of pattern stainless steel dies that are stamped into the fabric. The bolts of fabric are in friendly acquston, the terms ofthe edang, are eagosted by thie acquemg company and the nonbent management of the target (acqured)fum This method of merging two compan". #quee dmerent from 'hostie takeover," which is intated by Keuing company over the oepections of the target's incumbent Dies are heavy-duty, three-d mensonai paterns used to cut tabe amo parts for the bear Dies tuncton-na Fatnes shipped from the manufacturer wrapped around . aindncal cor. or . A standard boit of f ten yards leng and 72 inches wide