ROBERT E. KAPLAN Sippican Corporation (B) Sippican's senior executive committee met to consider the implications of its timedriven ABC model. Frankly, all had been shocked to learn that their apparently highestmargin product line, ow controllers, could actually be losing money because of its many shipments, short production runs, and heavy use of engineering time. The team contemplated action steps to restore profitability. After some deliberation, the executive team crafted a new strategy that involved the following principles: Improve Revenue Quality: Product Focus and Menu-Based Pricing I Focus on core products: valves and pumps. I Increase market share in valves by offering discounts for large orders. I Reduce discounting for pumps, especially in small order sizes. I Aggressively raise prices for small orders of flow controllers. Productivity I Reduce setup times. Based on the new strategy, Peggy Knight developed the forecasted monthly sales and production plan shown in Exhibit 1. She wondered whether the shift in product mix, new pricing model, and forecasted productivity improvement in setup times would be sufficient to restore Sippican's historic margins. Sippican's machines were leased monthly and had staggered expiration times; Knight believed she could, on short notice, make 10951591\":- adjustments up or down to accomodate changes in demand for machine capacity. Also, Knight felt that she had some flexibility with the size and composition of the labor force. The company had recently hired quite a few production employees on short-term contracts to meet the expanded demand for the newly introduced ow controller line. Exhibit 1 Forecasted Monthly Sales and Production Plan Valves Pumps Flow Controllers Total Forecasted Price $75 $80 $110 Forecasted Sales (units) 10,000 12,000 2,500 24,500 Number of production runs 40 40 50 130 Number of shipments 40 70 100 210 Total DL hours 3,800 6,000 1,000 10,800 Setup labor hours/run 4.0 4.8 9.6 Total setup hours 160 192 480 832 Machine hours: run + setup 5,160 6,192 1,230 12,582 Engineering hours 60 240 400 700Sippican Corporation (B) Assignment Questions Q7. Prepare a pro fonna product line income statement based on the new plan. (Rubric #4) Q8. C onnnent on the magnitude of the change in prot with the new plan in relation to the change in production and sales under the previous plan. (Rubric #4)