CASE ANALYSIS – HANSON MANUFACTURING COMPANY 1. If the company had dropped dropped Product Product 103 103 as of January January 1, 1974, what what effect would that actions have on the $160,000 profit for the first six months of 1974? Steps of Computation: 1. Selling price for Product 103 2. Cost of Product 103 3. Variable Cost per cwt/unit (direct labour, compensation insurance, materials, power, supplies, and repairs) 4. Fixed costs per cwt/unit (rent, property taxes, property insurance, indirect labour, light and heat, building service, selling expense, general administrative, interest, other income, cash discount, and depreciation) 5. Unit sales 6. Unit Contribution Margin 7. Fixed costs 8. Total contribution margin of Product 103 9. Current Profit 10. Loss due to drop of Product 103
$5.41 $5.83 $2.59865
= 1.393+(5% of 1.393) +.9824+.0610+ .0710 + .0206
$3.21
501276 $2.81135 $1609597.24 $1409262.28 $160000 $1249262.28
= 1. – 3. Remain as is = 5. * 6. = 9. – 8.
Hence, the company will incur a loss. They should retain Product 103. 1. The current price of product 103 is $5.41/unit. Its fixed cost i s $5.83/unit. The variable cost of direct labour, compensation insurance, materials, power, supplies, and repairs is $2.59865/unit. The fixed costs of rent, property taxes, property insurance, indirect labour, light and heat, building service, selling expense, general administrative, interest, other income, cash discount, and depreciation are $3.21/unit. 2. Thus the contribution margin = revenue-variable cost = $5.41-$2.59865= $2.81135/unit. 3. If the company stops producing the product 103, the variable cost would go away, but the fixed cost would still remain, and the company would still have total fixed costs of $1609597.24. 4. Thus by dropping the product 103, we are just reducing the variable costs incurred due to this product, but the fixed costs still remain. 5. Therefore there would be a loss of 160000-(501276*2.81135) 160000-(501276*2.81135) =$1249262.28, should Hanson and Company drop product 103.
2.
In January January 1975, 1975, should should the the company company have have reduced reduced the price price of Product 101 from $4.90 to $4.50? $4.50?
1. 2. 3. 4. 5. 6. 7.
Variable cost for Product 101 per cwt/unit Contribution margin with $4.90 price and 8% discount Contribution margin with $4.50 price and 8% discount Volume at $4.90 Volume at $4.50 Total contribution at $4.90 Total contribution at $4.50
$2.0386 $2.8085 $2.4128 750000 1000000 1000000 $2106375 $2412800
= 2. * 4. = 3. * 5.
Hence, the reduction in price to $4.50 makes the most sense for profitability. This is on the basis that the prediction of the 25% difference holds true.
Q3. Which is Hanson’s most profitable product in 1974 ?
SP /unit VC/unit Contribution/unit
Product 101 4.9 2.09 2.81
Product 102 5.16 2.3538 2.8062
Product 103 5.5 2.62 2.88
Hence, Product 103 is the most profitable in 1974 by the way of contribution margin/unit. In case of sales(volume) for the first six months: Product 101 = 2.81*996859 = 2801173.79 Product 102 = 2.8062*712102 = 1998300.632 Product 103 = 2.88*501276 = 1443674.88 Q4. What appears to have caused the return to profitable operations in the fi rst six months of 1974?
Current Sales 6 months 1974 yearly sales Previous year sale avg 6 months 73 Difference
Product 101
Product 102
Product 103
996859 2132191
712102 1029654
501276 986974
1066096 -69236.5
514827 197275
493487 7789
Though Hanson suggested that the Product 103 be immediately dropped since they could not sustain the losses incurred by this product, Wessling decided to wait and watch. Wessling asked for the accounting statements to be redone using standard costs as the costs per cwt and made minor marketing and production changes based on this modified accounting statements. Using standard costs gave the correct costs of each of the products and hence the strategies based on these costs yielded fruits, causing a return to profitable operations in the first six months of 1974. Submitted By: Group 9, Section 2 Manish (FT12229) Neeti (FT12233) Sanchit (FT12251) Shraddha (FT12255) Yogesh (FT12277)
