Issues Affecting the Management at Greenwood - Case Study Example

Running header: Case Report Student’s name: Instructor’s name: Subject code: Date of submission: Executive summary This report is addressed to Charles Kim, the CEO of Greenwood industries concerning the various issues affecting the management of the various divisions. The report starts with explaining whether Birchtree should accept the offer to buy the component QoN67 instead of manufacturing own after considering all the relevant qualitative and quantitative factors. The report also presents computation of the break even points for the various types of blenders manufactured by the company before advising Pinetree division on whether or not to accept the special order by SHC. Finally, the report presents the factors that Gum tree division should have considered when doing the division’s sales forecast for the next quarter before computing various aspects of the forecasted sales for the next quarter. It is hoped that the company’s management will find this report useful in ensuring that more informed decisions are made regarding the management issues addressed by the report. Birchtree Whether Birchtree should accept the offer from Chivas Walker to supply QoN67 and the qualitative factors that Michael Fowler needs to consider Before accepting the offer, Michael Fowler ought to be aware of whether such decision would result in an increase in the company’s profitability or not. If it would result in increased profitability, then Michael should consider qualitative factors before making the decision to accept the offer. In determining whether the offer results in increased profitability, then Michael ought to analyze the incremental costs that would result from making the component or accepting the offer and hence buying it from outside. This is computed below; Per unit Relevant costs Make Buy Purchase price $45,000 Direct materials $3,000 Material handling cost $600 Direct labor $24,000 Variable Manufacturing overhead (1/3* 36,000) $12,000 Total relevant cost $39,600 $45,000 Difference in favor of making $5,400 In computing the above figures, it has been assumed that there will be no change in the company’s fixed costs and hence they are not considered as relevant in making this decision. Based on profitability alone, it would not be wise for the company to accept the offer from Chivas Walker. This is because if the offer is accepted, the relevant cost would increase by $5,400 thus leading to a decline in the profitability from selling the Heart pump 5000 by the same amount. Alternatively, the company would be forced to increase the Heart pump 5000 price by the same amount in order to remain at the same level of profitability. However, as indicated by Michael Fowler, the company stands to gain by buying the component from Chivas Walker since this would free up space for the company to start producing a new product Eyes can 1000 that would give the company a contribution of $156,000. In this regard then, the company should accept the offer since the contribution is far much greater than the increase in relevant costs involved in buying the component. As such, the company can go ahead and accept the offer from Chivas but it should then ensure that it should ensure that it starts the production of Eyes scan 1000 immediately if the decision to accept the special offer is to make any economic sense. It is worth noting that before the final decision to either continue making own component or accepting the new offer, there are some qualitative factors that the company needs to consider. Such factors include the following; a) Control over quality of the component – before accepting the offer, Birchtree needs to ensure that Chivas Walker are fully informed of the quality of QoN67 it would expect and that it has the capacity to continue producing the parts that meet the quality requirements at all times. This way, the company can ensure that it will maintain the quality of the Heart pump 5000 it produces and hence its reputation that would ensure that its relationship with its customers is not negatively affected. b) Reliability of the supplier – the company should also ensure that Chivas Walker will reliably supply the parts at all the times that it would be required to ensure continuous production of Heart pump 5000. c) Impact of the decision on suppliers- the department will also have to consider how this will affect its relationship with suppliers especially if they also supply other components. Conclusion If the company can assure itself of all the above qualitative factors, the quantitative factors show that it would be wise for the company to accept the offer. As such, it should go ahead and accept the offer. Cedar tree: kitchen accessories) The unit sales for each of the blenders based on the original data provided in order to breakeven In determining the break-even point for each of the blenders, it is worth noting that the fixed overhead is incurred for all the three types of blenders. It is thus assumed that the fixed overheads are incurred evenly for all the units based on the information given. Break-even point in units (X) = FC/P-V Where; P is the price per unit X is the number of units V is variable cost per unit FC is total fixed cost But fixed cost is being apportioned for the three types of blenders. This is done as follows; Total fixed cost = $6,000,000 +$1,800,000 = $7,800,000 Total number of blenders for all types sold = 50,000+50,000+100,000 = 200,000 units Fixed cost per unit =$ 7,800,000/200,000 = $39 per unit Fixed cost Café blenders = $39*50,000= $1,950,000 Fixed cost professional blenders = $39*50,000 = $1,950,000 Fixed cost Masterpiece = $39*100,000 =$3,900,000 For Café blenders, the break-even point is given by (X) = FC/P-V Where FC = $1,950,000 P = 84 V is given by; Variable manufacturing costs per unit = $39 Variable selling costs per unit = $15 Total variable costs per unit= $54 Thus, break-even point (x) = $1,950,000/ (84-54) = $1,950,000/30 =65,000 units For Professional blenders, the break-even point is given by (x) = FC/P-V Where FC = $1,950,000 P = $108 V is given by; Variable manufacturing costs per unit = $36 Variable selling costs per unit = $12 Total variable cost per unit = $48 Thus, break-even point (x) = $1,950,000/ (108-48) = $1,950,000/60 = 32,500 units For Masterpiece blenders, the break-even point is given by (x) = FC/P-V Where FC = $3,900,000 P = 144 Variable manufacturing costs per unit= $75 Variable selling costs per unit = $18 Total variable cost = $93 Thus, break-even point = $3,900,000/ (144-93) = 76,470.588 = 76,471 units With changes in the cost structure of all the three types of blenders, the new break even points will be given by; The new cost structure is shown in the table below; Café Professional Masterpiece Unit sales 50,000 50,000 150,000 Unit selling price $84 $108 $144 Variable manufacturing costs per unit (to increase by 20% for masterpiece 39 36 90 Variable selling costs per unit 15 15 18 Thus, the new break even points for Professional and Masterpiece blenders will be given by; Professional FC =$ 1,950,000 V = $36+15 = $51 P =$108 BEP = $1,950,000/(108-51) = $1,950,000/57 =34,210.52 =34,211 Units Masterpiece FC = $3,900,000 V = $90+18 = $108 P =$144 BEP = $3,900,000/(144-108) = $3,900,000/36 = 108,333.33 =108,334 Units Note that for the Café blenders, the break-even will remain the same since its cost structure does not change. Thus, its breakeven point remains 65,000 units. Pinetree: video cameras The factors other than price that are preventing pintree from accepting the SHC order The following factors are keeping pintree from accepting the pintree order other than the price of the special order. i) Lack of idle capacity –Gordon has indicated that Pintree’s production capacity is 20,000 units. However, they are currently producing 16,000 units. This implies that the company has only a 4,000 unit’s idle capacity. This means that they can only be able to accept a special order for the sale of a maximum of 4,000 units. However, the SHC order is for 5,000 units and hence they can’t accept it unless SHC is willing to buy only 4,000 units from pintree. This is because if they accept it, it means that they will be forced to sell 1,000 units of the 16,000 units’ current production at $35 which would not be profitable for the company. ii) If there is a better alternative for making use of the idle capacity than accepting the special order, then the company should not accept the order. iii) The company is also failing to accept the special order since it may be likely that the special order will affect customer loyalty. The recommended price that we should charge SHC for the special order is computed as follows; Incremental revenue = $35 *5,000 = $175,000 Incremental variable costs include; Direct materials = $9*5,000 = $45,000 Direct labor = $8*5 000 = $40,000 Manufacturing overhead = $4*5,000 = $20,000 Non-manufacturing overheads = $4*5,000 = $20,000 Total incremental costs $125,000 Incremental increase in profit if the order is accepted $50,000 It is worth noting that the above computation has been made bearing in mind that SHC has promised to share the non-manufacturing costs equally with us. Thus, if price is the main issue, then the minimum price that we should charge SHC for its order is the $35 the company has suggested. This is because by charging them $35 for the 5,000 units, our current profitability level will rise by $50,000. It is worth noting that fixed costs will remain the same whether or not the special order is accepted and are hence not relevant for the decision whether to accept the SHC order and this is why I did not include them in the calculation above to determine the minimum price that we ought to charge SHC. Gumtree: sound systems In making the sales forecast, the department should have considered a number of factors including the ones explained below; The department should have considered existing sales contracts that will not be renewed in the next quarter as well as the new contracts that the company has signed in a bid to accurately forecast sales. The department should also consider the consumers purchasing power in order to gauge their ability to make the forecasted sales. This is because such factors as economic and political factors prevailing in the market are likely to affect consumer’s purchasing power. In addition, such factors may also affect existing government contracts as well as consumer purchases thus leading to low demand for products which may mean the company not being able to hit the targeted sales. On the other hand where economic conditions as well as political conditions improve, consumer purchasing power may increase thereby increasing sales. The company’s inventory, pricing and credit policies ought also to be considered. The effect of distribution and sales promotion should also be considered when doing sales forecast. All the above factors need to be put in mind in sales forecasting in a bid to eliminate the risk of under forecasting and hence loosing on sales or over forecasting and hence incurring the costs related to idle stock and foregoing opportunities that would be profitable through tying a lot of capital in stock. Large and small houses to be produced next quarter This will be given by; Small house Large house Desire ending inventory Add sales forecast Required production Less expected beginning inventory Units to be produced 25,000 60,000 85,000 20,000 65,000 9,000 40,000 49,000 8,000 41,000 Quantity of sheet metal required for each type of house is given by; i) Small house Requirement per unit = 4kg Units to be produced = 65,000 units Number of kgs required = 65,000*4 =260,000 kgs ii) Large house Requirement per unit =5 kg Units to be produced = 41,000 units Number of kgs required = 41,000*5 =205,000 kgs Quantity of bar stock required for each type of house is given by; i) Small house Requirement per unit =2kg Units to be produced = 65,000 units Number of kgs required = 65,000*2 =130,000 kgs ii) Large house Requirement per unit = 3 kg Units to be produced = 41,000 units Number of kgs required = 41,000*3= 123,000 kgs Quantity of base required for large housed is given by; i) Requirements per unit = 1 unit Units to be produced = 41,000 units Base requirement = 41,000*1 =41,000 units Units of direct materials to be purchased are given in the table below; Sheet metal Bar stock Base Desire ending inventory Add requirement for units to be produced Total requirement Less expected beginning inventory to be purchased 36,000 kgs 465,000 kgs 501,000 kgs 32,000 kgs 469,000 kgs 32,000 kgs 253,000 kgs 285,000 kgs 29,000 kgs 256,000 kgs 7,000 units 41,000 units 48,000 units 6,000 units 42,000 units Purchase price @8 per kg @$5 per kg @$3 per unit Total purchase price $3,752,000 $1,280,000 $126,000 Total direct material cost = $3,752,000+$1,280,000+$126,000 = $5,158,000 The direct labor budget for the expected production is given by Expected production –Small houses = 65,000 units Direct labor hours per unit = 2hrs/ unit Total direct labor hours requirement= 130,000 hours Cost per direct labor hour = $15/hour Total direct labor cost = $1,950,000 Add Expected production- Large houses = 41,000 units Direct labor hours per unit = 3hrs/unit Total direct labor hours requirements = 123,000 hours Cost per direct labor hour = $20/hour Total direct labor cost $2,460,000 Total direct labor budget for the entire production is given by small house+ large house requirements = $1,950,000 + $2,460,000 = $4,410,000 The manufacturing overhead budget has been computed below; Purchasing and material handling overhead is based on raw materials purchases as follows; Sheet metal to be purchased = 469,000 kgs @$0.25/ kg of sheet metal purchased = 0.25/kg Material handling for sheet metal= $117,250 Bar stock to be purchased = 256,000 kgs @0.25/kg of bar stock purchased = 0.25/kg Material handling for Bar stock= $64,000 Total material handling costs= $181,250 Depreciation, inspection and utilities overheads have been computed as shown below based on units produced Total number of houses produced Small houses =65,000 units Large houses = 41,000 units Total units produced =106,000 units @$4 per unit =$4/unit Depreciation …. Overheads =$424,000 Shipping overheads are based on the number of units shipped as follows; Total units shipped = 106,000 @$1 per unit =$1/unit Total shipping overhead =$106,000 General manufacturing overhead is computed based on direct labor hours as follows; Total direct labor hours; Small houses =130,000 hours Large houses = 123,000 hours Total direct labor hours =153,000 hours @$3 per direct labor hour = $3 per hour Total general manufacturing overheads = $459,000 Overheads budget Material handling costs overheads =$181,250 Depreciation, inspection and utilities overheads =$424,000 Shipping overheads =$106,000 General manufacturing overheads = $459,000 Total manufacturing overheads $1,170,250 The budgeted finished goods inventory at the end of the quarter will be given by; Expected production Small houses Direct materials (4kg per unit@$8) metal sheet = $32 Direct materials (2kg per unit @$5) Bar stock =$10 Direct labour (2hrs per unit@$15) =$30 Purchasing and material handling (0.25/kg sheet metal) 0.25*4 =$1 (0.25/kg bar stock) 0.25*2 =$0.5 Depreciation, utilities and inspection ($4 per unit) =$4 Shipping ($1 per unit) =$1 General manufacturing overhead ($3/hour) 2*$3 =$6 Total product cost $84.5 Budgeted finished goods inventory 25,000 units Unit cost $84.5per unit Value of small house inventory $2,112,500 Large houses Direct materials (5kg per unit@$8) sheet metal = $40 Direct materials (3 kg per unit @$5) Bar stock =$15 Direct materials ($1 per unit) Base =$3 Direct labour (3hrs per unit@$20) =$60 Purchasing and material handling (0.25/kg sheet metal) 0.25*5 =$1.25 (0.25/kg bar stock) 0.25*3 =$0.75 Depreciation, utilities and inspection ($4 per unit) =$4 Shipping ($1 per unit) =$1 General manufacturing overhead ($3/hour) 3*$3 =$9 Total product cost $134.0 Budgeted finished goods inventory 9,000.00 Value of large house inventory $1,206,000 Total value of inventory = small house inventory + Large house inventory =$2,112,500 +$1,206,000 =$3,318,500 The company’s total inventory at the end of the next quarter is expected to be $3,318,500. References: Jared, B2014, Management accounting simplified, London, Rutledge. Read More