For exclusive use at Universidad del Pacifico, 2015

UV1767
July 8, 2009

BW MANUFACTURING COMPANY

In mid-December 2008, Inez Wallace and Oliver Blanchard were almost through with the
2009 operating budget for their company, BW Manufacturing Company (BW). BW produced
gas grills in three primary models (Grills A, B, and C). The industry was dominated by Weber,
Ducane, Coleman, Sunbeam, and Holland, which together made dozens of types of grills,
smokers, and cooking kettles. BW was a small player in the industry, but business had been
good, and it was expecting another profitable year. A draft of the company’s operating budget is
shown in Exhibit 1. Standard costs for the three products are explained in Exhibit 2. Selling,
general, and administrative (SG&A), other costs, interest income, and interest expense were
likely to remain the same no matter which product-line combinations the company produced.
Before calling it a day, the two owners asked their assistant, Justine Richardson, to
determine the impact of several options on income before tax. They agreed to meet the following
day, and Richardson hurried off to look at what these latest ideas would mean. She had four
questions to address and was asked to consider each option independent of all other options.
1. Should BW drop Grill A? The owners wanted to know the impact of dropping Grill A
from their line of products. Richardson was told to assume that the volumes and selling
prices of the other two products would be the same whether or not the Grill A product
line was dropped.
2. Should BW lower the price of Grill C? The owners wanted to know the impact if they
lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of
Grill C.
3. Should BW change its advertising focus? The owners wanted to know the impact of a
10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A
volume because of a shift in advertising emphasis.
4. Should BW lower the price of Grill C and change its advertising focus? The owners
wanted to know the impact of lowering the price of Grill C to $75 and shifting the
advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and
increasing Grill C volume by 30,000 units.

This case was prepared by Professor Brandt R. Allen. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright  2009 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
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used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,
recording, or otherwise—without the permission of the Darden School Foundation.

This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacifico from August 2015 to October 2015.

lowering the price of Grill C for 2009. and volume was as shown in Table 1. Then. This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes . Wallace and Blanchard chose Option Two. The budget was completed by noon. Having finished her duties. Table 1. Universidad del Pacifico from August 2015 to October 2015. She didn’t give the budget another thought.000 Richardson began to wonder if the bottom line was as high as it should have been. Grill Volume (number of units) A B C 115.000 110. and Richardson found herself a bit bemused by the results. 2015 -2- UV1767 Richardson and the owners met the following morning to review her work. . they were better than had been expected. Early in January 2010. they asked Richardson to prepare a revised 2009 budget incorporating this decision.For exclusive use at Universidad del Pacifico. happily.000 225. After considerable discussion.Actual 2009 volumes. Richardson prepared a rough draft of the actual 2009 financial results (Exhibit 3). Prices on each grill were as planned. she left for an early weekend getaway.

000 9.400.338.000 $18.000 420.000 150.800.000 $6.000 2.342.000 Source: Created by case writer.000 2.950. .680.350. This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes . 2015 -3- UV1767 Exhibit 1 BW MANUFACTURING COMPANY Operating Budget 2009: Draft 12/18/2008 Sales Less: costs of products sold Gross margin SG&A Other costs Operating income Less: Interest expense Plus: Interest income Income before tax Income taxes Net income $41.200. Universidad del Pacifico from August 2015 to October 2015.000 $4.000 22.For exclusive use at Universidad del Pacifico.100.000 $6.

000 120. the rest is fixed unrelated to production volume corporate office allocation* unrelated to production volume Per unit: Sales price Direct costs: Materials Labor Subtotal Indirect costs: Supplies Labor Supervision Energy Depreciation Head office support All other Subtotal Total product cost Product-line profitability Notes * This category comprises accounting. legal.For exclusive use at Universidad del Pacifico. Allocations were made using multiple drivers. Universidad del Pacifico from August 2015 to October 2015. 2015 -4- UV1767 Exhibit 2 BW MANUFACTURING COMPANY Standard Costs Planned Volume (units) Grill A Grill B Grill C 80. the rest is fixed unrelated to production volume one-half varies with direct labor.000 $150 $110 $80 17 21 $38 10 16 $26 7 4 $11 directly related to production volume directly related to production volume 7 10 8 12 22 12 11 $82 $120 $30 2 8 3 6 7 6 2 $34 $60 $50 1 4 1 4 5 3 1 $19 $30 $50 directly related to production volume one-half varies with direct labor. human resources. IT. Source: Created by case writer. and others supporting the production of these products. This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes . Corporate office budgets are unrelated to production levels.000 200. .

000 2.000 $14.000 420.000 3.190.000 $9.200.350.000 1.000 4.185.800.300.600.000 $11.000 1.000 2.100.000 1.000 $20.794.000 1. Universidad del Pacifico from August 2015 to October 2015. 2015 -5- UV1767 Exhibit 3 BW MANUFACTURING COMPANY 2009 Operating Results: Draft 1/19/2010 Revenue Variable costs: Materials Direct labor Supplies Indirect labor Energy Total variable cost Fixed costs: Indirect labor Supervision Energy Depreciation Head office All other Total fixed cost Total cost Gross margin SG&A Other costs Operating income Less: interest expense Plus: interest income Income before tax Income taxes Net income $46.660.250 $5. This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes . .000 9.000 5.300.000 3.400.000 $25.200.120.915.500.000 $8.000 1.000 150.For exclusive use at Universidad del Pacifico.750 Source: Created by case writer.300.590.350.380.225.000 1.635.000 1.