BAB280C

BAB280C/ MAY 2015

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TENALPINA TOOLS:
PRODUCT LINE PROFITABILITY
“Spazzatura!” cried Giulia, crumpling the sheet of paper she had been scribbling on and
throwing it against the wall.
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Startled, Jeremy looked up from the bank reconciliation he was working on. “Is something
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wrong?” he asked. He received only a withering stare as a reply. Jeremy decided that his best
course of action would be to return to his task.

Jeremy Rigby was, except for Giulia, the entire administrative staff at TenAlpina Tools. He
had been hired 18 months earlier and so had been working for the company for almost half of
its short life. In that time, he had never seen Giulia Ferrato so upset. After all, why should she
be? Giulia had successfully introduced three product lines and, for such a small operation, the
company was thriving. Just that morning he had given Giulia last month’s Monthly Income
Statement (see Exhibit 1) and it sure looked pretty good from Jeremy’s perspective. Some
additional background information appears in Exhibit 2.

The Product Lines

TenAlpina produced and sold rock climbing equipment. The business had begun with a single
product, titanium pitons, produced by an outsource supplier. The titanium blades on these
pitons made them lighter at a tensile strength equal to the competitors’ steel products.
TenAlpina was selling over 50,000 of them each year to Giulia’s original and only piton
customer. Before the first year of operation was over, Giulia had acquired the supplier’s
operation and introduced her second product, a titanium wall hammer. These lightweight,

This case was prepared by Alfred J. Nanni, Jr., Provost, Professor of Management Accounting, and Paul E. Juras, Chair of
Accounting and Law Division, Professor of Management Accounting and Operational Performance, both of Babson College.
It was developed as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative
situation. It is not intended to serve as an endorsement, source of primary data or illustration of effective or ineffective
management.

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 BAB280C

Tenalpina Tools: Product Line Profitability

BAB280C / MAY 2015

ergonomic-design wall hammers had met with great success, and the demand had surprised
her. In recent months, hammer sales volume had leveled off at 400 units per month, more
than 10% higher than Giulia’s ambitious expectations. About a year ago, Giulia had
introduced her third product, rock nut sets.

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A rock nut, also known as a “stop” or “wedgie,” is a small, wedge-shaped block of aluminum
with a loop of braided steel cable threaded through it. A climber inserts the block of the rock
nut into a small crevice and pulls on the cable loop from the small end, wedging the nut into
the crevice. A line can then be attached to the loop using a carabiner. The set consisted of an
assortment of six sizes. (See Exhibit 3.) Adding this product line required a minor change in
the production floor—an assembly work station with a power crimping tool and an assigned

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Taught by Mr Fred Ng, Stephanie Lau & Bill Ross, from 26-Feb-2024 to 12-Jul-2024. Order ref F504122.
worker.

The Problem
The source of Giulia’s frustration was soon revealed to Jeremy when she had him call Granby
Bolton into the office. Granby was the production supervisor. “I feel like I must be missing
something, Granby, or else something’s wrong with our product margins,” Giulia began. “I
want you and Jeremy to help me talk through some conflicting data to see if we can unravel
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its source.”
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“Aren’t we making money?” Granby responded. “I thought we were doing pretty well.”

“Overall, certainly, we are doing well,” said Giulia. “But I want us to be doing well on purpose,
not by mistake! I initially targeted about a 34% gross margin, and we are close. Now I see
demand for the wall hammer is quite strong, and I believe we could sell even more if we were
to line up more distributors. However, demand has been disappointing for the rock nuts right
from the start. I was expecting to sell about 3,000 sets per month when they were set at a
price to hit our target margin, but demand has been closer to 2,300 per month, and that’s
after lowering the price to $24.50 per set. Even with the price drop, I’m still getting pushback
from our distributors. They say they just can’t justify the price we charge when they can get
equivalent ones from other manufacturers for less.”

Jeremy asked whether competitors could be starting a price war on rock nuts, but Giulia
countered that it wouldn’t make much sense. “There isn’t a fortune to be made on that
product, so I doubt anyone would want to price low intentionally unless they had a lot of
unused capacity,” she said. “If they do have unused capacity, they may be pricing to cover
variable costs. However, I’m more worried about competitors simply being able to make them
for less and still maintaining a good gross margin. Maybe they are more efficient than we are.
If so, that could signal trouble for us in the future because rock nuts represent about 45% of
our revenues.”

Granby pointed out that he believed that the operation was pretty efficient at the current
production levels. “And that efficiency argument doesn’t hold up for the hammers. You aren’t
getting any complaints about price on them. In fact, you just said you think there is
significant unmet demand.” He paused for a moment and went on. “Of course, if all we made
was rock nuts, we could be getting by with less equipment and fewer people, but who is going
to dedicate a whole factory to just rock nuts? All kidding aside, just how is each product
doing?”

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Tenalpina Tools: Product Line Profitability

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“Well, Granby,” Giulia started, “by my calculations, the pitons are doing a little over 35%
gross margin, the rock nut sets are at about 32% after the $1.00 price cut. Hammers,
unfortunately, show a gross margin of around 26%.”

“Giulia, you said that ‘by your calculations,’ the margins were 35%, 32%, and 26%. What did

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you mean when you said ‘by your calculations?’ Isn’t there only one way to calculate gross
margins?” asked Jeremy.

“It’s not really the calculation of the margins that differs, it’s the calculation of the costs,”
Giulia replied.

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“I’ve been using standard direct labor hours as a simple way to divide up labor and overhead
costs among the three product lines. You may recall that shortly after you joined the
company, we did some time measurements all over the shop to determine the average labor
time at each station for each product when production was in full swing. If I sum up the total
for each product, that’s the standard labor time. Here are those times. You will also see that
we performed a similar analysis for machine time, and those numbers are included as well.”
She handed Jeremy Exhibit 4.
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“When you supply me with the monthly volume totals for each product,” she continued, “I
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multiply each of those totals by the associated standard labor time. Then I add up those three
numbers to get the total standard direct labor hours for the month. I then take all of the
factory costs excluding direct material—labor, depreciation, power, occupancy, and so on—
and divide that by the total standard direct labor hours to get a factory conversion cost per
standard labor hour. Finally, I can use that rate to figure how much of the total goes to each
product line by using the individual standard direct labor hour totals. I already have the
volumes and prices and the direct materials costs, so at that point I can figure the gross
margins in dollars and in percentage.

“I don’t know much about accounting, but it seems to me that some of our costs, like
depreciation, variable power consumption, and supplies are really related to machine time,”
Granby responded. “And the rock nuts use a lot less machine time than the pitons and
hammers. Maybe that’s the clue to the difference in costs our competitors seem to think they
have.”

“I suppose we could try that out,” Giulia said slowly. “We already have the standard machine
time, so I could separate the factory costs into two piles—depreciation, variable power, and
supplies to be allocated by standard machine hours, and labor, supervision, lighting, and
occupancy to be allocated by standard direct labor hours.”

Jeremy and Granby still seemed to be processing Giulia’s explanation when she perked up
again. “But you guys just gave me another idea! In my MBA program, we discussed activity-
based costing. The idea is similar to Granby’s point about some costs going with labor time
and some going with machine time. The trick is to find the various cost drivers in the
process—the measures of activity that have a direct logical association with the amount of
resources that get used in the process. Maybe it’s just labor time and machine time like we
just talked about, but maybe those two measures don’t really reflect the underlying causes of
resource consumption very well.”

3
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Tenalpina Tools: Product Line Profitability

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The trio began talking about various processes in use in the factory and about ways to
measure the work done in those processes. One of the first things they did was simply to
enumerate the different possible production steps and the basic activity performed in each
step. They decided the best way to classify activities was by work station. Granby produced a
table (see Exhibit 5), showing the different work stations, the products that used them, and a

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measure of cost-driver activity for each station and for each product at that station.

By reviewing existing data, Jeremy was able to find direct measurements of some of the costs
associated with each work station. Since each station had its own machines or tools,
depreciation could be calculated for each station. Also, each station managed its own
supplies, so directly tracing supply usage to the stations was quite easy. Similarly, each

Purchased by Grant Dotulong for use on the ACCTG321 2024, at University of Auckland Business School.
Taught by Mr Fred Ng, Stephanie Lau & Bill Ross, from 26-Feb-2024 to 12-Jul-2024. Order ref F504122.
station had its own workers, allowing for the computation of total direct labor per station.
Finally, each station had its own power meter for machine operation, meaning variable power
could be determined directly, too.

There were still a few resources that were completely shared. “How should we assign the cost
of building occupancy and the fixed cost for lighting to the process activities?” asked Jeremy.
Granby suggested that both of those were space-related factors, so it made sense to associate
them with the stations on the basis of square feet of floor space. “As for the cost of my salary,”
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he said, “I spend roughly the same amount of time supervising each person on the floor, so I
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guess headcount would work for that.”

Following this conversation, Jeremy produced the table in Exhibit 6. Upon handing it to
Giulia, he commented, “This last approach to calculating product costs seems a lot more
complicated than the way you have been doing it or even the way Granby suggested. Do you
think all the extra work is actually worth it?”

“I guess there is only one way to find out,” Giulia replied. “Let’s try all three and see which
one, if any, makes the most sense!”

4
 BAB280C

Tenalpina Tools: Product Line Profitability

BAB280C / MAY 2015

Exhibit 1

Monthly Income Statement

for January

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Sales
% of
Product Sales Volume Price/unit Revenue sales
Pitons 4,200 $ 10.50 $44,100.00
Hammers 400 $ 61.00 $24,400.00

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Rock nut sets 2300 $ 24.50 $56,350.00
Total $124,850.00 100%

Cost of Goods Sold

Materials
Production
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Product volume Cost/unit Total DM

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Pitons 4200 $ 1.45 $6,090.00

Hammers 400 $ 10.44 $4,176.00
Rock nut sets 2300 $ 6.01 $13,823.00
Total DM $24,089.00 19.3%

Direct Labor $47,916.67 38.4%

Manufacturing Overhead
Light, Heat, and Power $2,855.00
Supplies $725.00
Depreciation $ 1,612.92
Manufacturing occupancy $2,200.00
Supervision $5,270.83
Total manufacturing overhead $12,663.75
Cost of Goods Sold $84,669.42 67.8%

Gross Margin $40,180.58 32.2%

S, G, and A Expense
Office salaries $ 10,541.67
General administration $ 600.00
Administrative occupancy $ 550.00
Shipping and delivery $ 745.00
$12,436.67 10%
Operating Income for the Month $27,743.91 22%

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Tenalpina Tools: Product Line Profitability

BAB280C / MAY 2015

Exhibit 2
Additional Data

Guilia’s annual salary $63,250 per year

Jeremy’s annual salary $63,250 per year

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Granby’s annual salary $63,250 per year
Annual labor payroll per head $57,500 per year
Total annual building occupancy
cost $33,000 per year
Office occupies 20% of building

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Delivery costs per hammer $1.00
per rock nut set $0.15
Variable power per piton $0.18
Variable power per hammer $0.46
Variable power per rock nut set $0.05
Supplies per piton $0.11
Supplies per hammer $0.14
Supplies per rock nut set $0.09
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Exhibit 3: Examples of Rock Nuts

Source: "Assorted Nuts and Nut Tool" by Zakabog—own work. Licensed under CC BY-SA 3.0 via
Wikimedia Commons—
https://commons.wikimedia.org/wiki/File:Assorted_Nuts_and_Nut_Tool.jpg#mediaviewer/File:Ass
orted_Nuts_and_Nut_Tool.jpg.

6
 BAB280C

Tenalpina Tools: Product Line Profitability

BAB280C / MAY 2015

Exhibit 4: Standard Labor and Machine Times

Work Stations

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Oven & Deburr
Cold roll drop- and Injection
and cut forge Bore polish Assemble mold Package Total
Labor Minutes
pitons 1 0.37 0.4 0.2 0.03 2

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hammers 2.35 2.6 1.6 0.35 5.6 0.5 13
rock nut sets 1.7 2.2 0.1 4

Machine Minutes
pitons 0.8 0.3 0.3 0.1 0 1.5
hammers 2 2.25 1.5 0.25 5 0 11
rock nut sets 1 1 0 2
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Exhibit 5: Work Stations, Activity Drivers, and Use by Product

Oven & Deburr

Work Cold roll drop- and Injection
stations: and cut forge Bore polish Assemble mold Package
pitons Yes Yes Yes Yes No No Yes
hammers Yes Yes Yes Yes No Yes Yes
rock nut
sets No No Yes No Yes No Yes

Activity Hammer Holes Edges in Clamp

Driver Roll cuts blows bored cm crimps Injections Packages*

Activity
counts:
pitons 1 1 1 15 0 0 0.1
hammers 1 10 5 45 0 1 1
rock nut
sets 0 0 12 0 6 0 1

* Pitons were packaged ten to a package for shipping to the distributor, who opened and repackaged
them for customers. Hammers and rock nut sets were packaged in single units and one set per
package, respectively.

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Tenalpina Tools: Product Line Profitability

BAB280C / MAY 2015

Exhibit 6
Monthly Costs and Work Station Data
Cold Oven
Deburr
Work roll & Injection
Bore and Assemble Package Total

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stations: and drop- mold
polish
cut forge
Laborers 2 2 2 1 1 1 1 10

Depreciation 241.67 733.33 125.00 75.00 13.33 416.67 7.92 $1,612.92

Variable 235.15 481.33 161.47 71.21 28.24 49.73 27.87 $1,055.0

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power 0
Supplies 117.16 93.73 225.10 147.90 60.55 9.48 71.08 $ 725.00

Percentage of 12.5% 30.0% 10.0% 7.5% 10.0% 20.0% 10.0% 100%

sq feet
Note : Sq feet % are related to the 80% of the building dedicated to production.
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