Solved: Joe Bell president and chief executive officer of

Dyna Golf

Joe Bell, president and chief executive officer of Dyna Golf, has called a meeting of the
executive committee of his board of directors. He is concerned about the price competition and
declining sales of his golf wedge line of business. Bell summarizes the current situation by
saying,

As you know, we set target prices to maintain a gross margin on sales of 35 percent. On some
products, such as our drivers, we have been able to achieve the target price. We have been
able to achieve higher prices on our putters than a target 35 percent gross margin would
dictate. But our wedges are a totally different story.

Our factory is among the most efficient in the world. I think that some foreign companies are
dumping wedges in the U.S. market, driving down prices and unit sales. We've been reluctant to
further cut our prices for fear of what this will do to our gross margins. Fortunately, we've been
able to offset the decline in sales of wedges by significantly raising the price of our putters. We
were pleasantly surprised when our customers readily accepted the price increases of our
putters, and we haven't experienced much reaction from our competitors on the putter price
increases.

Steve Barber, an outside director on the board, asks:

Joe, I don't pretend to know a lot about the golf club business, but how confident are you in your
cost data? If your costs are off, won't your prices be off as well?

Joe Bell responds:

That's a good point, Steve, and one I've been worried about. We've been modernizing our
production facilities and I've asked our controller, Phil Meyers, to look into it and report back
after he has undertaken a thorough analysis. My purpose for calling this meeting was to update
you on our current situation and let you know what we are doing.

Background

Dyna Golf has been in business for 15 years. Its one plant manufactures three different types of
golf clubs: drivers, wedges, and putters. Dyna does not produce a complete club with a shaft
and grip. It makes the metal head that is sold to other companies that assemble and market the
complete club. Dyna holds four patents on a unique golf club head design that forges together
into one club head three different metals: steel, titanium, and brass. It also has a very distinctive
appearance. These three metals weigh different amounts, and by designing a club head with
the three metals, Dyna produces a club with unique swing and feel properties. While the Dyna
club is unique and covered by patents, other manufacturers have recently introduced similar
technology using comparable manufacturing methods.

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The Dyna driver is sold to a single distributor that adds the shaft and grip and sells the driver to
retail golf shops. Dyna first made its reputation with its driver. It became an "instant hit" with
amateurs after a professional golfer won a tournament using the Dyna driver. Based on the
name recognition from its driver, Dyna introduced a line of putters and then wedges. The
wedges are sold to three different distributors and the putters to six different distributors.
Specialty, high-end putters like Dyna's have a retail price of $120 to $180 and drivers a retail
price of $350 to $500. Golfers like to experiment with new equipment, especially when they are
playing badly. Therefore, it is not uncommon for golfers to own several putters and switch
among them during the year. Putter manufacturers seek to capitalize on this psychology with
aggressive advertising campaigns. It is less common for players to switch among wedges as
they do with putters. Since it takes several rounds of golf playing with a new wedge to get its
feel and distance control, most players don't experiment as much with wedges as with putters,
or even drivers.

Table 1: Dyna Golf Basic Product Information

Production process

All three clubs (drivers, wedges, and putters) use the same manufacturing process. Each of the
three clubs consists of between 5 and 10 components. A component is a precisely machined
piece of steel, brass, or titanium that Dyna buys from outside suppliers. The components are
positioned in a jig, which is placed in a specially designed computer-controlled machine. This
machine first heats the components to a very high temperature that fuses them together, then
cools them, and polishes the finished club.

The factory is organized into five departments: Receiving, Engineering, Setup, Machining, and
Packing. Before a production run begins, Receiving issues a separate order for each
component comprising the club head and inspects each order when it arrives. Engineering
ensures that the completed club heads meet the product's specifications and maintains the
operating efficiency of the machines. Because of the preciseness of the production process,
Engineering is constantly having to issue Engineering change orders in response to small
differences in purchased components. Setup first cleans out the machine and jigs, adjusts the
machine to the correct settings to produce the desired club head, and then makes a few pieces
to ensure the settings are correct. Machining contains several machines, any of which can be
used to manufacture drivers, wedges, or putters once it is equipped with the proper jigs and
tools. Packing is responsible for packaging and shipping completed units.

Table 1 summarizes the basic product information for the three products: production, shipments,
target prices, and actual prices. For example, Dyna manufactured all 10,000 drivers in a single
production run and shipped them all out in a single shipment. The 5,000 putters were
manufactured in 10 separate runs and shipped in 20 shipments. Dyna set a target price for
drivers to be $162.61 (wholesale price) and achieved it. However, it was not able to achieve its
target price for wedges ($134.09 versus $125.96), but it exceeded its target price for putters
($105.70 versus $81.31).

Accounting system
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Table 2 summarizes raw material, setup and run labor, and machine time for each of the three
products. Each product is produced in the machining department by assembling the metal
components. Drivers require 5 components, whereas wedges and putters require 6 and 10
components, respectively. Before the production begins, the machine must be set up, requiring
setup labor. Then to produce clubs, operating the machines requires both machine time and run
labor time. Both setup and run labor cost $20 per hour. Machining has a total budget of
$700,000, consisting of the depreciation on the machine, electricity, and maintenance. Drivers
take more run labor time than machine time because several operators are required to operate
the machinery when drivers are produced. During putter machining, the operator can be
operating two machines at once.

Table 3 summarizes the overhead accounts.

Phil Meyers, Dyna's controller, and Joe Bell meet a week after the executive committee meeting
of the board of directors.

Joe Bell asks Phil to report on what he has found. Phil begins, Joe, as you know, our current
accounting system assigns the direct material costs of the components and the direct labor for
run time to the three products. Then it allocates all overhead costs, including setup time and
machine costs, to the three products based on direct run labor dollars. Setup labor is
considered an indirect cost and is included in overhead. Based on these

Table 2: Dyna Golf Production Information

Table: 3 Dyna Golf Overhead

Receiving department ........................... $ 300,000

Engineering department ........................... 500,000

Machining department ............................. 700,000

Packing department ................................ 200,000

Setup department ..................................... 3,000

................................................... $1,703,000

procedures we calculate our product costs for drivers, wedges, and putters to be $105.70,
$87.16, and $52.85, respectively.

I've been looking at our system and have become worried that our overhead rate is getting out
of line. It's now over 750 percent of direct labor cost. Since we've introduced more automated
machines, we're substituting capital or overhead dollars for labor dollars. The Engineering
department schedules its people based on change orders it receives. Drivers are pretty
standard and only generate 25 percent of the change orders and wedges about 35 percent.
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 Putters are our most complex production process and require the remainder of the change
orders.

I'm thinking we should refine our accounting system along the following lines. First, we should
break out setup labor from the general overhead account and assign that directly to each
product. We know how much time we are spending setting up each machine for each club-head
run. Second, we should stop allocating receiving costs based on direct labor dollars but rather
on raw material dollars. And third, the remaining overhead (excluding setup and receiving)
should be allocated based on machine hours. If we make these three changes, I think we'll get a
more accurate estimate of our products' costs.

Joe Bell responded,

These seem to be some pretty major changes in our accounting system. I'll need some time to
mull these over. Let me think about it and I'll let you know in a few days how to proceed.

Required:

What advice would you offer Joe Bell?'

Joe Bell president and chief executive officer of Dyna Golf

ANSWER
https://solvedquest.com/joe-bell-president-and-chief-executive-officer-of-dyna-golf/

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