Sippican Corporation (B) - Assignment Questions

Q5. Estimate the resource demands from Knights forecasted sales and production plan in Exhibit 1. (Rubric #3)

Q6. Based on the revised cost and profitability estimates, what actions should the companys management team take to improve the companys profitability? (Rubric #3)

Q7. Prepare a pro forma product line income statement based on the new plan. (Rubric #4)

Q8. Comment on the magnitude of the change in profit with the new plan in relation to the change in production and sales under the previous plan. (Rubric #4

Sippican's senior executive committee met to consider the implications of its time-driven ABC model. Frankly, all had been shocked to learn that their apparently highest-margin product line, flow 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 - Focus on core products: valves and pumps. - Increase market share in valves by offering discounts for large orders. - Reduce discounting for pumps, especially in small order sizes. - Aggressively raise prices for small orders of flow controllers. Productivity - 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 10%15% adjustments up or down to accommodate 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 flow controller line. Exhibit 1 Forecasted Monthly Sales and Production Plan Sippican's senior executive committee met to consider the implications of its time-driven ABC model. Frankly, all had been shocked to learn that their apparently highest-margin product line, flow 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 - Focus on core products: valves and pumps. - Increase market share in valves by offering discounts for large orders. - Reduce discounting for pumps, especially in small order sizes. - Aggressively raise prices for small orders of flow controllers. Productivity - 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 10%15% adjustments up or down to accommodate 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 flow controller line. Exhibit 1 Forecasted Monthly Sales and Production Plan