Katy EH Manufacturing Company

In mid-December 2015, Peter Johnson and Lily Brown were almost through with the 2016 operating budget for their company, Katy EH Manufacturing Company (EH). EH produced gas grills in three primary models (Grills A, B, and C). The industry was dominated by Coleman, Phoenix, Napolean, Meco, Holstein, which made several of types of gas and charcoal grills. Katy was a small player in the industry with solid customer base and a profitable business over last few years. This year was a little different their profit was significantly lower than the prior years. The companys financials are provided in draft of the companys operating budget is shown in Exhibit 1.

The company produces 3 products lets call them Grill A, B and C for simplicity. The standard costs for these three products are provided in Exhibit 2. The Selling, general, and administrative (SG&A), other costs, interest income, and interest expense were likely to remain the same no matter which productline combinations the company produced.

The company hires your services as their consultant. They believe that they can improve their bottomline (net profits) by changing the product mix, pricing and advertising decisions. (Note: The total production capacity is fixed at 400,000 units).

(This case is adopted and modified from Cases in Managerial and Cost Accounting, Cambridge Business Publishers).

Required

1. Should Katy EH drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Sharp 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 (3 points).

2. Should Katy EH lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C by $5 and if doing so led to a 20,000-unit increase in sales of Grill C (2 points).

3. Should Katy EH change its advertising focus? The owners wanted to know the impact of a 10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A volume because of a shift in advertising emphasis (3 points).

4. Prepare a revised 2016 profit budget assuming the owners chose Option 2 lowering the price of Grill C by $5 and expecting sales volume of that grill to increase by 20,000 units (4 points).

Use the excel spreadsheet in this folder to solve this case. Provide a brief summary of what you have learned from the above exercise of budgeting (3 points)

Exhibit 1 Katy EH Manufacturing Company Operating Budget 2016: Draft 12/31/2015 Sales39,025,000Less: costs of products sold 21,445,000 Gross margin$17,580,000SG&A 9,350,000 Other costs 215,000 Operating income$8,015,000Less: Interest expense740,000 Plus: Interest income78,000 Income before tax$7,353,000Income taxes2,573,550 Net income$4,779,450

Exhibit 2 Katy EH Manufacturing Company Operating Budget 2016: Draft 12/31/2015

Grill A Grill B Grill C Notes Planned units 75,000125,000180,000Per unit

Sales price$145$110$80Direct costs:

Materials 17 10 7 directly related to volume Labor 21 18 8 directly related to volume Subtotal $38$26$11Indirect cost:

Supplies 7 4 2 directly related to volume Labor 10 8 4 half varies with direct labor, the rest is fixed Energy 12 6 3 two third varies with direct labor, rest is fixedSupervision 8 3 1 unrelated to volume Depreciation 22 7 5 unrelated to volume Accounting/Legal/IT support 12 6 3 unrelated to volume Other Fixed Costs 11 2 1 unrelated to volume Subtotal$82$36$19Total cost$120$62$30Profitability$25$48$50

Homework 5 - Case Study Katy EH Manufacturing Company In mid-December 2015, Peter Johnson and Lily Brown were almost through with the 2016 operating budget for their company, Katy EH Manufacturing Company (EH). EH produced gas grills in three primary models (Grills A, B, and C). The industry was dominated by Coleman, Phoenix, Napolean, Meco, Holstein, which made several of types of gas and charcoal grills. Katy was a small player in the industry with solid customer base and a profitable business over last few years. This year was a little different - their profit was significantly lower than the prior years. The company's financials are provided in draft of the company's operating budget is shown in Exhibit 1. The company produces 3 products - let's call them Grill A, B and C for simplicity. The standard costs for these three products are provided in Exhibit 2. The Selling, general, and administrative (SG&A), other costs, interest income, and interest expense were likely to remain the same no matter which productline combinations the company produced. The company hires your services as their consultant. They believe that they can improve their bottomline (net profits) by changing the product mix, pricing and advertising decisions. (Note: The total production capacity is fixed at 400,000 units). (This case is adopted and modified from Cases in Managerial and Cost Accounting, Cambridge Business Publishers). Required 1. Should Katy EH drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Sharp 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 (3 points). 2. Should Katy EH lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C by $5 and if doing so led to a 20,000-unit increase in sales of Grill C (2 points). 3. Should Katy EH change its advertising focus? The owners wanted to know the impact of a 10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A volume because of a shift in advertising emphasis (3 points). 4. Prepare a revised 2016 profit budget assuming the owners chose Option 2 - lowering the price of Grill C by $5 and expecting sales volume of that grill to increase by 20,000 units (4 points). Use the excel spreadsheet in this folder to solve this case. Provide a brief summary of what you have learned from the above exercise of budgeting (3 points) Exhibit 1 Katy EH Manufacturing Company Operating Budget 2016: Draft 12/31/2015 Sales Less: costs of products sold Gross margin SG&A Other costs Operating income Less: Interest expense Plus: Interest income Income before tax Income taxes Net income 39,025,000 21,445,000 $17,580,000 9,350,000 215,000 $8,015,000 740,000 78,000 $7,353,000 2,573,550 $4,779,450 Exhibit 2 Katy EH Manufacturing Company Operating Budget 2016: Draft 12/31/2015 Grill A Grill B Grill C Planned units Per unit Sales price Direct costs: Materials Labor Subtotal Indirect cost: Supplies Labor Energy Supervision Depreciation Accounting/Legal/IT support Other Fixed Costs Subtotal Total cost Profitability Notes 75,000 125,000 180,000 $145 $110 $80 17 21 $38 10 18 $26 7 directly related to volume 8 directly related to volume $11 7 10 12 8 22 12 11 $82 $120 $25 4 8 6 3 7 6 2 $36 $62 $48 2 4 3 1 5 3 1 $19 $30 $50 directly related to volume half varies with direct labor, the rest is fixed two third varies with direct labor, rest is fixed unrelated to volume unrelated to volume unrelated to volume unrelated to volume