Group 8 - Davis Kitchen Supply

Davis Kitchen Supply

Group 8Andrew, Andrew, Daniel, Michael,

Pamela, Stefan, Yohei

September 3, 2010

Managerial Accounting

Group 8 – Davis Kitchen Supply September 3, 2010

Current Production Situation

Per Unit AggregateUnits Produced 6000Revenue 370$ 2,220,000$

Manufacturing CostsVariable Materials 50$ 300,000$ Variable Labor 75$ 450,000$ Variable Overhead 25$ 150,000$ Fixed Overhead 360,000$ Total Manufacturing 1,260,000$

Marketing CostsVariable 25$ 150,000$ Fixed 420,000$

Total Marketing 570,000$

Total Costs 1,830,000$

Profit/Loss 390,000$

Initial Position


A) Increasing production to 7,000 units

Market research says 7,000 units can be sold if price cut to $325 per unitWould you recommend this?What is impact on monthly sales, costs and income?







Initial Position


A) Increasing production to 7,000 units

Recommendation: Do not take this action.Monthly sales ↑, Costs ↑, Income↓

Per Unit Aggregate Per Unit AggregateUnits Produced 6000 Units Produced 7000Revenue 370$ 2,220,000$ Revenue 325$ 2,275,000$

Manufacturing Costs Manufacturing CostsVariable Materials 50$ 300,000$ Variable Materials 50$ 350,000$ Variable Labor 75$ 450,000$ Variable Labor 75$ 525,000$ Variable Overhead 25$ 150,000$ Variable Overhead 25$ 175,000$ Fixed Overhead 360,000$ Fixed Overhead 360,000$ Total Manufacturing 1,260,000$ Total Manufacturing 1,410,000$

Marketing Costs Marketing CostsVariable 25$ 150,000$ Variable 25$ 175,000$ Fixed 420,000$ Fixed 420,000$

Total Marketing 570,000$ Total Marketing 595,000$

Total Costs 1,830,000$ Total Costs 2,005,000$

Profit/Loss 390,000$ Profit/Loss 270,000$

EXISTING PROPOSED


B) Producing for the federal government

Gov’t contract for 1,000 unitsDavis fully booked in March (8,000 units)If Davis accepts order, it needs to sell 1,000 less units to regular customerGov’t would reimburse its “share of March manufacturing costs” plus $50,000 fixed feeNo variable marketing costs on gov’t contract

What is impact of gov’t contract on March income?







EXISTING


B) Producing for the federal government

Per Unit Aggregate Per Unit AggregateUnits Produced 8000 Units for Govt 1000Revenue 370$ 2,960,000$ Units for Regulars 7000

Units Produced 8000Manufacturing Costs

Variable Materials 50$ 400,000$ Revenue from Govt 245$ 245,000$ Variable Labor 75$ 600,000$ Revenue from Regs 370$ 2,590,000$ Variable Overhead 25$ 200,000$ Revenue 354$ 2,835,000$ Fixed Overhead 360,000$ Total Manufacturing 1,560,000$ Manufacturing Costs

Variable Materials 50$ 400,000$ Marketing Costs Variable Labor 75$ 600,000$

Variable 25$ 200,000$ Variable Overhead 25$ 200,000$ Fixed 420,000$ Fixed Overhead 360,000$

Total Marketing 620,000$ Total Manufacturing 1,560,000$

Total Costs 2,180,000$ Marketing CostsVariable 25$ 175,000$

Profit/Loss 780,000$ Fixed 420,000$ Total Marketing 595,000$



EXISTING PROPOSED

Recommendation: Do not take this action.


C) Entering a foreign market







EXISTINGOrder of 2,000 units needed to enter foreign market$40 / unit shipping costsTotal fixed marketing costs of $4,000No other variable marketing costs required

What is the minimum price Davis should consider?


C) Entering a foreign market

Per Unit Aggregate Per Unit AggregateUnits Produced 6000 Units for Foreign 2000Revenue 370$ 2,220,000$ Units for Domestic 6000

Units Produced 8000Manufacturing Costs

Variable Materials 50$ 300,000$ Revenue from Foreign 192$ 384,000$ Variable Labor 75$ 450,000$ Revenue from Dom 370$ 2,220,000$ Variable Overhead 25$ 150,000$ Revenue 326$ 2,604,000$ Fixed Overhead 360,000$ Total Manufacturing 1,260,000$ Manufacturing Costs

Variable Materials 50$ 400,000$ Marketing Costs Variable Labor 75$ 600,000$

Variable 25$ 150,000$ Variable Overhead 25$ 200,000$ Fixed 420,000$ Variable Shipping 40$ 80,000$

Total Marketing 570,000$ Fixed Overhead 360,000$ Total Manufacturing 1,640,000$

Total Costs 1,830,000$ Marketing Costs

Profit/Loss 390,000$ Variable 25$ 150,000$ Fixed 420,000$ Fixed Foreign 4,000$




EXISTING PROPOSED

Minimum price: $ 192


D) Selling outdated inventory

Per Unit AggregateUnits Produced 6000Revenue 370.00$ 2,220,000.00$

Manufacturing CostsVariable Materials 50.00$ 300,000.00$ Variable Labor 75.00$ 450,000.00$ Variable Overhead 25.00$ 150,000.00$ Fixed Overhead 360,000.00$ Total Manufacturing 1,260,000.00$

Marketing CostsVariable 25.00$ 150,000.00$ Fixed 420,000.00$

Total Marketing 570,000.00$

Total Costs 1,830,000.00$

Profit/Loss 390,000.00$

Curent Production460 units of obsolete modelMust be sold through regular channels (thus incurring variable marketing costs)

What is minimum acceptable selling price?

$ 25 / unit

to cover selling costs; anything

more is better than nothing!


E) Contracting out

Per Unit AggregateUnits Produced 6000Revenue 370.00$ 2,220,000$






EXISTINGOutside contractor offers to produce 2,000 stoves / month for DavisFixed marketing costs unaffected; variable marketing costs cut by 20% (for these 2,000 units)Plant would operate at 2/3 of normal level; fixed manufacturing cost ↓ 30%

What in-house unit cost should be used to compare with quote from contractor?

Is $215 / unit acceptable?


E) Contracting out

Fixed Mfg Costs 63$ Variable Mfg Costs 150$ Fixed Mktg Costs 105$ Variable Mktg Costs 25$ Total Costs Per Unit 343$

cost of 6,000 units at normal cost 1,830,000$ cost of 4,000 units under new proposal 1,372,000$ cost of 2,000 units can be no higher than.. 458,000$ unit cost of 2,000 units 229$ …variable marketing costs are internal (20)$ Final price we can pay to contractor 209$

In-house unit cost for comparison

Davis Cost for 4000 Units Produced Per Unit AggregateUnits Produced 6000Revenue 370.00$ 2,220,000$

Manufacturing CostsVariable Materials 50$ 300,000$ Variable Labor 75$ 450,000$ Variable Overhead 25$ 150,000$ Fixed Overhead 60$ 360,000$ Total Manufacturing 210$ 1,260,000$

Marketing CostsVariable 25$ 150,000$ Fixed 70$ 420,000$

Total Marketing 95$ 570,000$

Total Costs 305$ 1,830,000$


BASE CASE

• In-house unit cost used for comparison: $209

• Proposal for $215 / unit should not be accepted


F) Using idle facilities for extreme stoves

Assume same facts as in (E), except:Idle facilities are used to produce 1,600 extreme climate (EC) stovesEC stoves can be sold for $450 eachEC stove cost of production $275 / unit variable manufacturing expense.Variable marketing costs: $50 / unitFixed marketing & manufacturing costs unchanged

What is maximum purchase price now for stoves from outside contractor?

Is $215 / unit acceptable?


F) Using idle facilities for extreme climate stoves

Per Unit Aggregate Per Unit AggregateUnits Produced 6000 Units Produced - Regular 4000Revenue 370$ 2,220,000$ Units Produced - Modified 1600

Units Outsourced 2000Manufacturing Costs Units for Sale 7600

Variable Materials 50$ 300,000$ Variable Labor 75$ 450,000$ Revenue from Regular 370$ 2,220,000$ Variable Overhead 25$ 150,000$ Revenue from Modified 450$ 720,000$ Fixed Overhead 360,000$ Revenue 387$ 2,940,000$ Total Manufacturing 1,260,000$

Manufacturing CostsMarketing Costs Variable Regular 150$ 600,000$

Variable 25$ 150,000$ Variable Modified 275$ 440,000$ Fixed 420,000$ Fixed Overhead 360,000$

Total Marketing 570,000$ Total Manufacturing 1,400,000$

Total Costs 1,830,000$ Outsourcing CostsVariable Outsourcing 255$ 510,000$

Profit/Loss 390,000$ Total Manufacturing 510,000$

Marketing CostsVariable Regular 25$ 100,000$ Variable Modified 50$ 80,000$ Variable Outsourced 20$ 40,000$ Fixed 420,000$




EXISTING PROPOSED

Max purchase price:$255 / unit

Accept proposal!


1. Be very aware of fixed and variable costs

2. Separate between relevant and irrelevant data

3. Analyze using base scenario vs. potential scenario

4. Unitarian vs. gross calculations can be used to double-check your work

5. Using animation in PPT to “shock and awe” audience into submission; did it work?

CONCLUSIONS: What did we learn?

Thank you! (hope you’re not too dizzy…)

Any questions?

Group 8 - Davis Kitchen Supply

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