STRATEGIC COST MANAGEMENT BERKSHIRE THREADED FASTNERS COMPANY CASE

STRATEGIC COST MANAGEMENT

BERKSHIRE THREADED FASTNERS COMPANY CASEPRESENTED BYANJANI MANURINARESH PRADHANVIJAY JAYABALABHIROOP SENCASE ANALYSISThis analysis examines the income and cost information presented by Berkshire Threaded Fasteners Company from historical and projected perspectives to justify two major decisions:

Withdrawal of the 300 series.Reduction of the selling price of the 200 series.

Furthermore, these decisions will lead into suggestions about the overall strategic approach of the firm. 1. Analysis regarding the withdrawal of the 300 seriesAt the beginning of 1974, Berkshire leadership advocates withdrawal of the 300 Series product line.

First glance at the income statement for the period ending December 31, 1973 appears to reveal that production of the 300 Series causes substantial overall losses to the firm.

Verdict regarding the withdrawal of the 300 seriesThe excel worksheet illustrates that the withdrawal of the 300 Series product line will affect labor, raw materials, power, and repairs.

It will have no affect upon the other costs as they are either allocated across the three product lines or historical costs with no relevance.

The result based upon period-end numbers for first six months of 1974 would project a loss of $693,000 instead of $110,000 loss.

To withdraw the 300 Series would thus be a poor decision. 2. Analysis regarding the reduction of the selling price of the 200 seriesAs the profit and loss statement for June 30, 1974 indicates, the reduction of the unit sales price of Series 100 from $2.45 to $2.25 would mean that the unit sales price would be below the total unit cost of $2.29.

However, Berkshire must take into account the forecasting for the entire period.

Verdict regarding the reduction of the selling price of the 200 seriesProduction of an additional 750,000 units at the current unit sales price would essentially cancel out the increase in forecasted operating income for the first half of 1974.

As shown in the previous slide that reduction in unit sales price to $2.25 will indeed create a break-even production quantity of near one million units as projected.

This reduction would not increase operating profit from the first half, though the overall losses would be reduced.

Thus, Berkshire should reduce the unit sales price of the Series 100 product to $2.25.

The VerdictBerkshire is one of the eight competitors in a localized market in which demand is inelastic.

This price cut should force the competition to either follow suit or get out of the market for this particular product line, depending upon the respective costs of each of their manufacturing processes.

This should increase operating income and contribute to a healthy bottom line.ContinuedThis should also create additional outputs produced for Berkshire, which would result in new revenues.

Furthermore, the firm should continue to work toward improving efficiencies with respect to its 200 and 300 Series, with the goal of increasing contribution margin for each product.

Prob 1Company's profit if it had dropped 300 Series300 Series (in 000s)RetainDropVariableLabor3490Raw Material4040Power150Repairs50Total7730

FixedSelling Expense239239General Admin9090Rent9595Other Fact Costs5656Depreciation186186Interest2727Total693693

Total Cost1466693Unit Sales5012760Sales13550Contribution Margin5820Profit-111-693Profit from Series 1 and Series 23535Total Profit for firm-76-658Hence dropping series 300 is not advisable

Prob 2Whether to lower the price of series 100 from $2.45 to $2.25Lowering prices will increase the volume from 750,000 to 1,000,000Seling Price2.422.25Unit Sales750,0001,000,000Total Sales18150002250000Variable Cost per unit sales (100 pcs)Labor0.610.61Raw Material0.630.63Power0.010.01Repairs0.010.01Total1.261.26

Variable Cost9450001260000Contribution870000990000

Fixed Cost

Selling Expense426000426000General Admin161000161000Rent8800088000Other Fact Costs6500065000Depreciation264000264000Interest2500025000Total10290001029000Fixed Cost per unit sales (100 pcs)Total1.3721.029Total Cost per unit sales2.6322.289Profit-0.212-0.039Hence, to reduce prices is a good option

Prob 3Most Profitable Product Line100 Series200 Series300 SeriesSelling Price per unit sales2.422.522.7

Variable Costs per unit sales ( 100 pcs)

Labor0.610.590.7Raw Materials0.630.750.81Power0.010.020.03Repairs0.010.010.01Total Variable Cost1.261.371.55Total Contribution Margin2,494,0001,174,0001,145,000

Fixed Costs

Rent88,000109,00095,000Depreciation264,000296,000186,000Other Factory Cost65,00076,00056,000Selling Expense426,000317,000239,000General Admin161,00090,00090,000Interest25,00028,00027,000Allocated fixed cost1,029,000916,000693,000Fixed Cost per unit sales (100 pcs)1.0321.2861.382Contribution Margin per 100 piece lot1.161.151.15Contribution Margin Ratio0.4793388430.45634920630.4259259259Profit(loss) per unit sales ( 100 pcs)0.128-0.136-0.232

Hence, 100 Series is the most profitable one

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Prob 1Company's profit if it had dropped 300 Series300 Series (in 000s)RetainDropVariableLabor3490Raw Material4040Power150Repairs50Total7730

FixedSelling Expense239239General Admin9090Rent9595Other Fact Costs5656Depreciation186186Interest2727Total693693

Total Cost1466693Unit Sales5012760Sales13550Contribution Margin5820Profit-111-693Profit from Series 1 and Series 23535Total Profit for firm-76-658Hence dropping series 300 is not advisable

Prob 2Whether to lower the price of series 100 from $2.45 to $2.25Lowering prices will increase the volume from 750,000 to 1,000,000Seling Price2.422.25Unit Sales750,0001,000,000Total Sales18150002250000Variable Cost per unit sales (100 pcs)Labor0.610.61Raw Material0.630.63Power0.010.01Repairs0.010.01Total1.261.26

Variable Cost9450001260000Contribution870000990000

Fixed Cost

Selling Expense426000426000General Admin161000161000Rent8800088000Other Fact Costs6500065000Depreciation264000264000Interest2500025000Total10290001029000Fixed Cost per unit sales (100 pcs)Total1.3721.029Total Cost per unit sales2.6322.289Profit-0.212-0.039Hence, to reduce prices is a good option

Prob 3Most Profitable Product Line100 Series200 Series300 SeriesSelling Price per unit sales2.422.522.7

Variable Costs per unit sales ( 100 pcs)

Labor0.610.590.7Raw Materials0.630.750.81Power0.010.020.03Repairs0.010.010.01Total Variable Cost1.261.371.55Total Contribution Margin2,494,0001,174,0001,145,000

Fixed Costs

Rent88,000109,00095,000Depreciation264,000296,000186,000Other Factory Cost65,00076,00056,000Selling Expense426,000317,000239,000General Admin161,00090,00090,000Interest25,00028,00027,000Allocated fixed cost1,029,000916,000693,000Fixed Cost per unit sales (100 pcs)1.0321.2861.382Contribution Margin per 100 piece lot1.161.151.15Contribution Margin Ratio0.4793388430.45634920630.4259259259Profit(loss) per unit sales ( 100 pcs)0.128-0.136-0.232

Hence, 100 Series is the most profitable one

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