G.G. TOYS
Written Written Analysis of the Case Prepare Prepared d by: Adjarani, Adjarani, Alberto, Alberto, Andalahao, Andalahao, Palma, Palma, Wee Wee J., Ya Yap
I. STATEMENT STATEMENT OF THE PROBLEM PR OBLEM
In the light of increasing production costs and diminishing profit margins for its products, what actions should G.G. Toys (The Company) take to improe its profita!ility oer the ne"t twele (#$) months%
II. OBJECTIVES
The primary o!&ectie of this paper is to formulate a recommendation that is in the !est interest of The Company gien e"isting and potential circumstances. 'pecifically, this this paper aims to •
To recommend recommend a costing system that would !etter ! etter reflect the contri!ution and profit margin of The Companys products than the e"isting system.
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To compare and contrast the profit margins computed using old costing system and the proposed costing system.
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To recommend marketing strategies (e.g. pricing matri", adertising strategies) that would help increase reenues and profits !ased on the new analysis of costs and profits
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To address the issue of e"cess capacity from *cto!er to +une due to the seasonality of The Companys -oliday eindeer doll
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To proide an analysis that would help The Company decide on whether to produce the omaine /atch 0oll
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To identify identify potential pro!lems that may arise from the recommended course of action
III. AREAS OF CONSIDERATION
SWOT Analysis – Th C!"#any
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STRENGTHS 1eading and esta!lished supplier of high 2uality dolls 3ni2ue and dura!le design of products -igh demands for products from retail outlets 'eparate manufacturing plants (for the dolls and its cradles) which contri!utes to ease of managing production and efficiency 'upplies of raw materials come from accessi!le sources
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WEA$NESSES 4isleading cost system which distorts profit margins of each product 'eparate manufacturing plants (for the dolls and its cradles) which can !e a reason why oerhead costs are high 4ultiple set5ups re2uired for each product line 6ailure to ad&ust prices in spite of increasing production costs 'tatic marketing strategies Idle capacity
OPPORT%NITIES •
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7ew product lines (e.g. -oliday reindeer dolls, omaine dolls) /roduction of dolls made from scrap and recycled materials /artnership with complementary !usinesses Innoation in product lines 3nutili8ed capacity that may !e used for current operations current operations
THREATS •
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ising production costs (especially raw materials) Competition from other doll manufacturers 3ncatered demand that may lead to customer dissatisfaction and low retention
ABC C!s&in' PHASE () Computation of *- ate per Cost 0rier O*+ha, -!s& #!!l
4achine elated 'etup 1a!or elated /roduction *rder elated /ackaging and 'hipping /lant 4gmt. > 6acilities
C!s& ,+i*+
4achine hours 7o. of production set5ups 7o. of production runs runs 7o. of shipments /roduction units
T!&al -!s& /A0 9##$,:::
Ca#a-i&y L*ls /B0 ##,$:: hrs.
Ra& #+ 1ni& !2 -!s& ,+i*+ /A3B0 4(5
9#;,;;;
#<: setups
467.77
9<;,:::
#<# runs
478(.75
9=;,::: 9?:,:::
;=: shipments $@,::: units
4(9(.:7
total cost and capacity levels is obtained from the Exhibits (arch !""" Prod#ction $ata%
4(.:6
PHASE ;) Allocation of *- Costs to the /roducts O*+ha, -!s&s
4achine runs 6acilities 'etups /roduction runs 7um!er of shipments shipments T!&al all!-a&, OH Di*i,) %ni&s #+!,1-, C!s& !2 OH #+ 1ni&
G!22+y D!ll
S#-ial&y B+an,, < (5=
C+a,ls
9;@,=:: ##,###.## ;;.;# ;,B#;.:? #,=#?.$B 49:>6?(.?9 ?>955 4?.7;
9#$,::: =,B$=.B; ,;;;.#; ;B,#;:.?; ;;,;#?.$B 486>?57.?? :>555 4;:.=6
9: ?,???.?? : ;B#.;: @,=@#.?; 4(;>:5?.(? 7>555 4:.(:
&allocation is done by m#ltiplyin' the rate per cost driver (A), comp#ted in Phase *% by the level of activity for each prod#ct (sho+n in Exhibit %
PHASE 7) Computation of Gross 4argins using 3nit Costs C!s&s
G!22+y D!ll
0irect 1a!or cost 0irect 4aterials cost 4anufacturing *erhead (ADC Costing) S&an,a+, %ni& -!s& Sllin' P+i- G+!ss "a+'in G+!ss "a+'in @ /ABC C!s&in'0
9;.:: =.:: @.;$ 4(9.7; ;(.55 49.=6
;?.59@
S#-ial&y B+an,, <(5= 9;.@=
C+a,ls
<.:: $?.< 47:.:7 7=.55 4(.9?
9@.=: #$.:: ?.#? 4;7.=: 75.55 4=.7=
:.7?@
;(.;5@
C!"#a+a&i* Analysis !2 G+!ss "a+'ins) T+a,i&i!nal *s. ABC C!s&in'
T+a,i&i!nal /Sin'lall!-a&i!n as0 A-&i*i&y Bas, C!s&in' /ABC0
Analysis
G!22+y D!ll
S#-ial&y B+an,, <(5=
C+a,ls
B.::E
;?.::E
$#.::E
$@.:=E
?.;@E
$#.$:E
Traditional costing has resulted to the !*+ -!s&in' of Geoffrey dolls
Traditional costing has resulted to the 1n,+ -!s&in' of Geoffrey dolls.
N! si'ni2i-an& ,i22+n- !etween the two cost systems due to the same allocation !ases
Ra&i!nal hin, ABC C!s&in'
In the Chicago plant, The Company should modify its e"isting cost accounting system from traditional costing to actiity5!ased costing (ADC). In allocating oerhead as a percentage of direct la!or cost, the resulting margins for the product lines do not properly reflect the oerhead costs attri!uta!le to the same. 3sing one cost drier distorts the allocation of oerhead costs. The effects are perasie since manufacturing oerhead at the Chicago plant is ery high (a!out B=E of the oerall oerall GG Toys oys manufa manufactu cturin ring g oerhead oerhead). ). Fach Fach doll doll re2uir re2uires es diffe different rent amounts amounts of machine hours and other aria!le costs. Dy using ADC Costing, each specific category of doll would hae a different different manufacturing manufacturing oerhead oerhead (and conse2uently, conse2uently, a different different contri!ution contri!ution margin) allocated to it. The more accurate allocation shall !e used in measuring profita!ility and in decision making for production leels. 6or the 'pringfield plant, there is no significant !enefit in changing the cost system since the traditional system yields almost the same cost allocation. Therefore, the new system shall only !e used for the Chicago plant to minimi8e implementation costs.
E-ss Ca#a-i&y 2+!" O-&!+ &! J1n
The case stated that The Company ac2uired additional machines and leased space specifically for the production of its seasonal product 5 -oliday eindeer 0ollH, which is only salea!le for three months (+uly, August and 'eptem!er). This means that payments of rent and depreciation (which are year5round e"penses) do not generate any form of reenue for nine (B) months. The case is silent as to whether these machines may !e used for the production of other product lines and the terms of the lease. Assuming the same, the Company can do the following to fully or partially recoer the costs resulting from the unused capacity a. 'u!leas 'u!leasee the the space space to to a third third party party !. 3se the e"cess capacity to produce other product lines in anticipation of high demand for the same in the holiday season.
R!"ain Pa&-h D!ll) T! P+!,1- !+ N!&
Dased on the case, the computation of the omaine /atch 0olls e"pected contri!ution margin is as follows
-ontrib#tion mar'in (-% /ales Price (/P% 01abor -ost ($1% 0aterials -ost ($% - 23."" 0 4."" 0 5."" - 2(*.""%
The negatie contri!ution margin attri!uted to this proposed product may !e a result of an erroneous estimate in price, cost or !oth. The case mentions that the omaine /atch 0oll will !e manufactured using scrap or leftoerH materials from the doll pa&amas of the regular and specialty dolls. The decision of what should !e done for this product line depends on the assumption on whether the scrap costs were accounted for in the computation of direct materials cost for the e"isting product lines as shown in F"hi!it F"h i!it ;.
Assumption #1: The costs of scrap materials hae !een included in the allocation of materials
cost per unit to the regular and specialty dolls Implication: This means that the direct materials cost for omaine /atch 0olls is essentially
8ero, giing it a positie positie contri!ution margin of 9=.:: (i.e. 9.:: ;.::).
Assumption #2: The costs of scrap materials hae 7*T !een included in the allocation of
materials cost per unit to the regular and specialty dolls Implication: This simply means that the estimated selling price of the dolls should !e increased
to recoer the costs of manufacturing it.
IV. ALTERNAT ALTERNATIVE IVE CO%RSES C O%RSES OF ACTION /ACOAs0 /AC OAs0
3sing the n -!s&in' sys&" /ABC0> the following are the alteratie courses of action that the proponents hae come up with. Fach course of action is a com!ination of decisions and approaches that address the multiple issues and concerns identified ide ntified in this paper
ACOA <() In-+as In-+as #+i- !2 S#-ial&yB+an, S#-ial&yB+an,, , D!ll <(5= &! a+n a '+!ss #+!2i& #+!2i& "a+'in !2 a& las& (9@
R&ain #+i- !2 G!22+y D!lls %s i,l -a#a-i&y &! #+!,1- "!+ +'1la+ ,!lls in an&i-i#a&i!n !2 #!ssil in-+as in sals *!l1" ,1+in' h!li,ay sas!n P1+s1 i&h &h #+!,1-&i!n an, sal !2 R!"ain Pa&-h D!ll 1sin' &h !+i'inal sals #+i- !2 46.55
Assuming that there will !e price increases for the 'pecialty5Dranded 0oll J#:<, the price that increase that would hae to !e suggested would !e
Cost per unit (ADC Costing) 0iide Target cost margin Target sales price Current unit sales price Increase in unit sales price
9;?.?; KK=EKK 9?:.=# KK;<.::KK 9?.=#
Assuming that there will !e no changes in cost structure and that the num!er of units sold and produced is the same, this will increase total profits profits !y 9#,:?: (9?.=# " ?,::: units).
ACOA <;) T"#!+a+ily T "#!+a+ily ,is-!n&in1 &h #+!,1-&i!n !2 S#-ial&yB+an,, D!ll <(5= D! n!& #1+s1 i&h &h #+!,1-&i!n an, sal !2 R!"ain Pa&-h D!ll F!-1s !n &h "a+&in' an, inn!*a&i!n !2 G!22+y D!lls %s i,l -a#a-i&y &! #+!,1- "!+ G!22+y D!lls in an&i-i#a&i!n !2 #!ssil in-+as in sals *!l1" ,1+in' h!li,ay sas!n
This course of action emphasi8es on the deelopment and marketing of The Companys flagship product which is the Geoffrey 0olls. In spite of the strong competition, the case makes it clear the G.G. Toys Toys has !etter market positioning and !randing. What needs to !e done
ACOA <7)
In-+as In-+as #+i- !2 S#-ial&yB+an, S#-ial&yB+an,, , D!ll <(5= &! a+n a '+!ss #+!2i& #+!2i& "a+'in !2 a& las& ;5@ D-+as #+i- !2 G!22+y D!lls &! -!"#l"n& &h in-+as in &h #+i- !2 D!ll <(5= %s i,l -a#a-i&y &! #+!,1- "!+ +'1la+ ,!lls in an&i-i#a&i!n !2 #!ssil in-+as in sals *!l1" ,1+in' h!li,ay sas!n P1+s1 i&h &h #+!,1-&i!n an, sal !2 R!"ain Pa&-h D!ll> i&h sals #+i- ,&+"in, 1sin' a -!s& "a+1# a##+!a-h ins&a, !2 a #+,&+"in, sals #+i- Li"i& &h *a+i&y !2 S#-ial&y D!ll <(5= an, i"#!s a "ini"1" !+,+ in 1ni&s I"#+!* 22i-in-y in shi##in' &! ,-+as shi##in' -!s&s
V. RECOMMENDATION
ACOA <7) In-+as In-+as #+i- !2 S#-ial&yB+an, S#-ial&yB+an,, , D!ll <(5= &! a+n a '+!ss #+!2i& #+!2i& "a+'in !2 a& las& ;5@ D-+as #+i- !2 G!22+y D!lls &! -!"#l"n& &h in-+as in &h #+i- !2 D!ll <(5= %s i,l -a#a-i&y &! #+!,1- "!+ +'1la+ ,!lls in an&i-i#a&i!n !2 #!ssil in-+as in sals *!l1" ,1+in' h!li,ay sas!n P1+s1 i&h &h #+!,1-&i!n an, sal !2 R!"ain Pa&-h D!ll> i&h sals #+i- ,&+"in, 1sin' a -!s& "a+1# a##+!a-h ins&a, !2 a #+,&+"in, sals #+i- Li"i& &h *a+i&y !2 S#-ial&y D!ll <(5= an, i"#!s a "ini"1" !+,+ !2 1ni&s I"#+!* 22i-in-y in shi##in' &! ,-+as shi##in' -!s&s
Ra&i!nal)
In spite of the low profit margins, it would not !e adisa!le to discontinue the 'pecialty Dranded 0olls J#:< product line. The positie margin still suggest that the product helps recoer fi"ed oerhead costs and is contri!uting in the profits of the Company. 0iscontinuing the product line would only decrease decrease operating operating profits further since attri!uta!le attri!uta!le fi"ed costs will not !e aoided !ut only redistri!uted to other e"isting products.
VII. ACTION PLAN Ti" 2+a"
A-&i*i&y
D#a+&"n& !+ P+s!n in-ha+'
Es&i"a&, B1,'&
Apply the use of ADC Costing in the Chicago /lant while retaining the use of traditional costing in the 'pringfield /lant Assess current machinery to determine efficiency lapses that lead to long production runsL repair or replace if necessary 4arket
VII. POTENTIAL PROBLEM ANALYSIS
a. 0ue to changi changing ng producti production on leels leels and shifts shifts in practica practicall capaci capacity ty,, it would would !e diffi difficul cultt and costly for management to implement ADC Costing for its products, especially now that it is proposing to introduce new products in the market.
!. There is no assurance that the market will respond to changes in the price since demand elasticity cannot !e deried from the information in the case. c. 6urther 6urther increases increases in manufact manufacturing uring costs, costs, especiall especially y raw materials materials,, may pose pro!lems pro!lems in in standardi8ing unit product costs for each product line.
