BW Manufacturing Company produced gas grills in three primarymodels (Grills A, B, and C). BW was a small player in the industry,but business had been good, and it was expecting another profitableyear. Draft of the companyâs operating budget is shown in Exhibit1. Stand costs for the three products are explained in Exhibit 3.Selling, general, and administrative (SG&A), other costs,interest income, and interest expense were likely to remain thesame no matter which product-line combinations the companyproduced.
Before calling it a day, the two owners asked their assistant,Justine Richardson, to determine the impact of several options onincome before tax. They agreed to meet the following day, andRichardson hurried off to look at what these latest ideas wouldmean. She had four questions to address and was asked to considereach option independent of all other options.
BW Manufacturing Company
1.Calculate the impact of dropping Grill A. Assume no otherchanges to the plan.
Should BW drop Grill A? The owners wanted to know the impact ofdropping Grill A from their line of products. Richardson was toldto assume that the volumes and selling prices of the other twoproducts would be the same whether or not the Grill A product linewas dropped.
Your response:
2.Calculate the impact of reducing Grill C price to $75, withthe expectation that the volume of that product will increase to220,000 units. Assume no other changes to the plan.
Your response:
3. Calculate the impact of a 10,000 unit decrease in Grill A and10,000 unit increase in Grill C volume due to the change in theadvertising focus. Assume no other changes to the plan.
Should BW change its advertising focus?
Your response:
4. Calculate the impact of a $5 decrease in Grill Câs price anda change in advertising focus leading to a 10,000 unit decrease inGrill Aâs volume and a 30,000 unit increase in Grill Câs volume.Assume no other changes to the plan.
Should BW lower the price of Grill C and change its advertisingfocus?
Your response:
Table 1. Actual2009 volumes Grill Volume (# in units) A 115,000 B 110,000 C 225,000 Richardson began to wonder ifthe bottom line was as high as it should have been Exhibit 1 BW Manufacturing Company Operating Budget 2009: Draft12/18/2008 Sales $41,200,000 Less: costs of products sold $22,800,000 Gross margin $18,400,000 SG&A $9,350,000 Other costs $2,100,000 Operating income $6,950,000 Less: Interest expense $420,000 Plus: Interest income $150,000 Income before tax $6,680,000 Income taxes $2,338,000 Net income $4,342,000 Exhibit 2 Standard Costs Grill A Grill B Grill C Planned Volume (units) 80,000 120,000 200,000 Per Unit: Sales price $150 $110 $80 Direct Costs: Materials 17 10 7 directly related to production volume Labor 21 16 4 directly related to production volume Subtotal $38 $26 $11 Indirect costs: Supplies 7 2 1 directly related to production volume Labor 10 8 4 one-half varies with direct labor; the rest isfixed Supervision 8 3 1 unrelated to production volume Energy 12 6 4 one-half varies with direct labor; the rest isfixed Depreciation 22 7 5 unrelated to production volume Head office support 12 6 3 corporate office allocation* All other 11 2 1 unrelated to production volume Subtotal $82 $34 $19 Total product cost $120 $60 $30 Product-line profitability $30 $50 $50 *This category comprisesaccounting, IT, human resources, legal, and other supporting theproduction of these products. Allocations were made usingmultiple drivers. Corporate office budgets are unrelated toproduction levels. Exhibit 3 2009 Operating Results: Draft1/19/2010 Revenue $46,225,000 Variable costs: Materials 4,800,000 Direct labor 5,200,000 Supplies 1,300,000 Indirect labor 1,500,000 Energy 1,600,000 Total variable cost $14,400,000 Fixed costs: Indirect labor 1,300,000 Supervision 1,200,000 Energy 1,350,000 Depreciation 3,660,000 Head office 2,300,000 All other 1,380,000 Total fixed cost $11,190,000 Total cost $25,590,000 Gross margin $20,635,000 SG&A 9,350,000 Other costs 2,100,000 Operating income $9,185,000 Less: interest expense 420,000 Plus: interest income 150,000 Income before tax $8,915,000 Income taxes $3,120,250 Net income $5,794,750
BW Manufacturing Company produced gas grills in three primarymodels (Grills A, B, and C). BW was a small player in the industry,but business had been good, and it was expecting another profitableyear. Draft of the companyâs operating budget is shown in Exhibit1. Stand costs for the three products are explained in Exhibit 3.Selling, general, and administrative (SG&A), other costs,interest income, and interest expense were likely to remain thesame no matter which product-line combinations the companyproduced.
Before calling it a day, the two owners asked their assistant,Justine Richardson, to determine the impact of several options onincome before tax. They agreed to meet the following day, andRichardson hurried off to look at what these latest ideas wouldmean. She had four questions to address and was asked to considereach option independent of all other options.
BW Manufacturing Company
1.Calculate the impact of dropping Grill A. Assume no otherchanges to the plan.
Should BW drop Grill A? The owners wanted to know the impact ofdropping Grill A from their line of products. Richardson was toldto assume that the volumes and selling prices of the other twoproducts would be the same whether or not the Grill A product linewas dropped.
Your response:
2.Calculate the impact of reducing Grill C price to $75, withthe expectation that the volume of that product will increase to220,000 units. Assume no other changes to the plan.
Your response:
3. Calculate the impact of a 10,000 unit decrease in Grill A and10,000 unit increase in Grill C volume due to the change in theadvertising focus. Assume no other changes to the plan.
Should BW change its advertising focus?
Your response:
4. Calculate the impact of a $5 decrease in Grill Câs price anda change in advertising focus leading to a 10,000 unit decrease inGrill Aâs volume and a 30,000 unit increase in Grill Câs volume.Assume no other changes to the plan.
Should BW lower the price of Grill C and change its advertisingfocus?
Your response:
| Table 1. Actual2009 volumes | |||||||||
| Grill | Volume (# in units) | ||||||||
| A | 115,000 | ||||||||
| B | 110,000 | ||||||||
| C | 225,000 | ||||||||
| Richardson began to wonder ifthe bottom line was as high as it should have been | |||||||||
| Exhibit 1 | |||||||||
| BW Manufacturing Company | |||||||||
| Operating Budget 2009: Draft12/18/2008 | |||||||||
| Sales | $41,200,000 | ||||||||
| Less: costs of products sold | $22,800,000 | ||||||||
| Gross margin | $18,400,000 | ||||||||
| SG&A | $9,350,000 | ||||||||
| Other costs | $2,100,000 | ||||||||
| Operating income | $6,950,000 | ||||||||
| Less: Interest expense | $420,000 | ||||||||
| Plus: Interest income | $150,000 | ||||||||
| Income before tax | $6,680,000 | ||||||||
| Income taxes | $2,338,000 | ||||||||
| Net income | $4,342,000 | ||||||||
| Exhibit 2 | |||||||||
| Standard Costs | |||||||||
| Grill A | Grill B | Grill C | |||||||
| Planned Volume (units) | 80,000 | 120,000 | 200,000 | ||||||
| Per Unit: | |||||||||
| Sales price | $150 | $110 | $80 | ||||||
| Direct Costs: | |||||||||
| Materials | 17 | 10 | 7 | directly related to production volume | |||||
| Labor | 21 | 16 | 4 | directly related to production volume | |||||
| Subtotal | $38 | $26 | $11 | ||||||
| Indirect costs: | |||||||||
| Supplies | 7 | 2 | 1 | directly related to production volume | |||||
| Labor | 10 | 8 | 4 | one-half varies with direct labor; the rest isfixed | |||||
| Supervision | 8 | 3 | 1 | unrelated to production volume | |||||
| Energy | 12 | 6 | 4 | one-half varies with direct labor; the rest isfixed | |||||
| Depreciation | 22 | 7 | 5 | unrelated to production volume | |||||
| Head office support | 12 | 6 | 3 | corporate office allocation* | |||||
| All other | 11 | 2 | 1 | unrelated to production volume | |||||
| Subtotal | $82 | $34 | $19 | ||||||
| Total product cost | $120 | $60 | $30 | ||||||
| Product-line profitability | $30 | $50 | $50 | ||||||
| *This category comprisesaccounting, IT, human resources, legal, and other supporting theproduction of these products. | |||||||||
| Allocations were made usingmultiple drivers. Corporate office budgets are unrelated toproduction levels. | |||||||||
| Exhibit 3 | |||||||||
| 2009 Operating Results: Draft1/19/2010 | |||||||||
| Revenue | $46,225,000 | ||||||||
| Variable costs: | |||||||||
| Materials | 4,800,000 | ||||||||
| Direct labor | 5,200,000 | ||||||||
| Supplies | 1,300,000 | ||||||||
| Indirect labor | 1,500,000 | ||||||||
| Energy | 1,600,000 | ||||||||
| Total variable cost | $14,400,000 | ||||||||
| Fixed costs: | |||||||||
| Indirect labor | 1,300,000 | ||||||||
| Supervision | 1,200,000 | ||||||||
| Energy | 1,350,000 | ||||||||
| Depreciation | 3,660,000 | ||||||||
| Head office | 2,300,000 | ||||||||
| All other | 1,380,000 | ||||||||
| Total fixed cost | $11,190,000 | ||||||||
| Total cost | $25,590,000 | ||||||||
| Gross margin | $20,635,000 | ||||||||
| SG&A | 9,350,000 | ||||||||
| Other costs | 2,100,000 | ||||||||
| Operating income | $9,185,000 | ||||||||
| Less: interest expense | 420,000 | ||||||||
| Plus: interest income | 150,000 | ||||||||
| Income before tax | $8,915,000 | ||||||||
| Income taxes | $3,120,250 | ||||||||
| Net income | $5,794,750 | ||||||||
