Davis Kitchen Supply

Group 8
Andrew, Andrew, Daniel, Michael,
Pamela, Stefan, Yohei

Managerial Accounting
September 3, 2010
 Current Production Situation

Initial Position

Per Unit Aggregate

Units Produced 6000
Revenue $ 370 $ 2,220,000

Manufacturing Costs
Variable Materials $ 50 $ 300,000
Variable Labor $ 75 $ 450,000
Variable Overhead $ 25 $ 150,000
Fixed Overhead $ 360,000
Total Manufacturing $ 1,260,000

Marketing Costs
Variable $ 25 $ 150,000
Fixed $ 420,000
Total Marketing $ 570,000

Total Costs $ 1,830,000

Profit/Loss $ 390,000

Group 8 – Davis Kitchen Supply September 3, 2010

 A) Increasing production to 7,000 units

Initial Position
Market research says
Per Unit Aggregate 7,000 units can be
Units Produced 6000
Revenue $ 370 $ 2,220,000
sold if price cut to
$325 per unit
Manufacturing Costs Would you
Variable Materials $ 50 $ 300,000
recommend this?
Variable Labor $ 75 $ 450,000
Variable Overhead $ 25 $ 150,000 What is impact on
Fixed Overhead $ 360,000 monthly sales, costs
Total Manufacturing $ 1,260,000 and income?
Marketing Costs
Variable $ 25 $ 150,000
Fixed $ 420,000
Total Marketing $ 570,000

Total Costs $ 1,830,000

Profit/Loss $ 390,000

Group 8 – Davis Kitchen Supply September 3, 2010

 A) Increasing production to 7,000 units

EXISTING PROPOSED
Per Unit Aggregate Per Unit Aggregate
Units Produced 6000 Units Produced 7000
Revenue $ 370 $ 2,220,000 Revenue $ 325 $ 2,275,000

Manufacturing Costs Manufacturing Costs

Variable Materials $ 50 $ 300,000 Variable Materials $ 50 $ 350,000
Variable Labor $ 75 $ 450,000 Variable Labor $ 75 $ 525,000
Variable Overhead $ 25 $ 150,000 Variable Overhead $ 25 $ 175,000
Fixed Overhead $ 360,000 Fixed Overhead $ 360,000
Total Manufacturing $ 1,260,000 Total Manufacturing $ 1,410,000

Marketing Costs Marketing Costs

Variable $ 25 $ 150,000 Variable $ 25 $ 175,000
Fixed $ 420,000 Fixed $ 420,000
Total Marketing $ 570,000 Total Marketing $ 595,000

Total Costs $ 1,830,000 Total Costs $ 2,005,000

Profit/Loss $ 390,000 Profit/Loss $ 270,000

Recommendation: Do not take this action.

Monthly sales ↑, Costs ↑, Income↓

Group 8 – Davis Kitchen Supply September 3, 2010

 B) Producing for the federal government

EXISTING
Per Unit Aggregate Gov’t contract for 1,000 units
Units Produced 8000 Davis fully booked in March
Revenue $ 370 $ 2,960,000 (8,000 units)
If Davis accepts order, it needs to
Manufacturing Costs
sell 1,000 less units to regular
Variable Materials $ 50 $ 400,000
customer
Variable Labor $ 75 $ 600,000
Variable Overhead $ 25 $ 200,000 Gov’t would reimburse its “share
Fixed Overhead $ 360,000 of March manufacturing costs”
Total Manufacturing $ 1,560,000 plus $50,000 fixed fee
No variable marketing costs on
Marketing Costs gov’t contract
Variable $ 25 $ 200,000
Fixed $ 420,000
 What is impact of gov’t contract
Total Marketing $ 620,000
on March income?
Total Costs $ 2,180,000

Profit/Loss $ 780,000

Group 8 – Davis Kitchen Supply September 3, 2010

 B) Producing for the federal government

EXISTING PROPOSED
Per Unit Aggregate Per Unit Aggregate
Units Produced 8000 Units for Govt 1000
Revenue $ 370 $ 2,960,000 Units for Regulars 7000
Units Produced 8000
Manufacturing Costs
Variable Materials $ 50 $ 400,000 Revenue from Govt $ 245 $ 245,000
Variable Labor $ 75 $ 600,000 Revenue from Regs $ 370 $ 2,590,000
Variable Overhead $ 25 $ 200,000 Revenue $ 354 $ 2,835,000
Fixed Overhead $ 360,000
Total Manufacturing $ 1,560,000 Manufacturing Costs
Variable Materials $ 50 $ 400,000
Marketing Costs Variable Labor $ 75 $ 600,000
Variable $ 25 $ 200,000 Variable Overhead $ 25 $ 200,000
Fixed $ 420,000 Fixed Overhead $ 360,000
Total Marketing $ 620,000 Total Manufacturing $ 1,560,000

Total Costs $ 2,180,000 Marketing Costs

Variable $ 25 $ 175,000
Profit/Loss $ 780,000 Fixed $ 420,000
Total Marketing $ 595,000

Recommendation: Total Costs $ 2,155,000

Do not take this action. Profit/Loss $ 680,000

Group 8 – Davis Kitchen Supply September 3, 2010

 C) Entering a foreign market

EXISTING
Per Unit Aggregate Order of 2,000 units
Units Produced 6000 needed to enter foreign
Revenue $ 370 $ 2,220,000
market
Manufacturing Costs $40 / unit shipping costs
Variable Materials $ 50 $ 300,000 Total fixed marketing costs
Variable Labor $ 75 $ 450,000
of $4,000
Variable Overhead $ 25 $ 150,000
Fixed Overhead $ 360,000 No other variable
Total Manufacturing $ 1,260,000 marketing costs required

Marketing Costs
Variable $ 25 $ 150,000  What is the minimum price
Fixed $ 420,000 Davis should consider?
Total Marketing $ 570,000

Total Costs $ 1,830,000

Profit/Loss $ 390,000

Group 8 – Davis Kitchen Supply September 3, 2010

 C) Entering a foreign market

EXISTING PROPOSED
Per Unit Aggregate Per Unit Aggregate
Units Produced 6000 Units for Foreign 2000
Revenue $ 370 $ 2,220,000 Units for Domestic 6000
Units Produced 8000
Manufacturing Costs
Variable Materials $ 50 $ 300,000 Revenue from Foreign $ 192 $ 384,000
Variable Labor $ 75 $ 450,000 Revenue from Dom $ 370 $ 2,220,000
Variable Overhead $ 25 $ 150,000 Revenue $ 326 $ 2,604,000
Fixed Overhead $ 360,000
Total Manufacturing $ 1,260,000 Manufacturing Costs
Variable Materials $ 50 $ 400,000
Marketing Costs Variable Labor $ 75 $ 600,000
Variable $ 25 $ 150,000 Variable Overhead $ 25 $ 200,000
Fixed $ 420,000 Variable Shipping $ 40 $ 80,000
Total Marketing $ 570,000 Fixed Overhead $ 360,000
Total Manufacturing $ 1,640,000
Total Costs $ 1,830,000
Marketing Costs
Profit/Loss $ 390,000 Variable $ 25 $ 150,000
Fixed $ 420,000
Fixed Foreign $ 4,000
Minimum price: Total Marketing $ 574,000

$ 192 Total Costs $ 2,214,000

Profit/Loss $ 390,000

Group 8 – Davis Kitchen Supply September 3, 2010

 D) Selling outdated inventory

Curent Production
460 units of obsolete model
Per Unit Aggregate Must be sold through
Units Produced 6000 regular channels (thus
Revenue $ 370.00 $ 2,220,000.00
incurring variable marketing
Manufacturing Costs
costs)
Variable Materials $ 50.00 $ 300,000.00
Variable Labor $ 75.00 $ 450,000.00
 What is minimum
Variable Overhead $ 25.00 $ 150,000.00
Fixed Overhead $ 360,000.00 acceptable selling price?
Total Manufacturing $ 1,260,000.00
$ 25 / unit
Marketing Costs
Variable $ 25.00 $ 150,000.00
Fixed $ 420,000.00 to cover selling
Total Marketing $ 570,000.00 costs; anything
more is better than
Total Costs $ 1,830,000.00
nothing!
Profit/Loss $ 390,000.00

Group 8 – Davis Kitchen Supply September 3, 2010

 E) Contracting out

EXISTING
Per Unit Aggregate Outside contractor offers to
Units Produced 6000 produce 2,000 stoves / month for
Revenue $ 370.00 $ 2,220,000 Davis
Fixed marketing costs
Manufacturing Costs unaffected; variable marketing
Variable Materials $ 50 $ 300,000 costs cut by 20% (for these
Variable Labor $ 75 $ 450,000 2,000 units)
Variable Overhead $ 25 $ 150,000 Plant would operate at 2/3 of
Fixed Overhead $ 360,000 normal level; fixed
Total Manufacturing $ 1,260,000 manufacturing cost ↓ 30%

Marketing Costs
Variable $ 25 $ 150,000
 What in-house unit cost should
Fixed $ 420,000
be used to compare with quote
Total Marketing $ 570,000
from contractor?
 Is $215 / unit acceptable?
Total Costs $ 1,830,000

Profit/Loss $ 390,000

Group 8 – Davis Kitchen Supply September 3, 2010

 E) Contracting out

BASE CASE
Per Unit Aggregate Davis Cost for 4000 Units Produced
Units Produced 6000 Fixed Mfg Costs $ 63
Revenue $ 370.00 $ 2,220,000 Variable Mfg Costs $ 150
Fixed Mktg Costs $ 105
Manufacturing Costs Variable Mktg Costs $ 25
Variable Materials $ 50 $ 300,000 Total Costs Per Unit $ 343
Variable Labor $ 75 $ 450,000
In-house unit cost for comparison
Variable Overhead $ 25 $ 150,000
cost of 6,000 units at normal cost $ 1,830,000
Fixed Overhead $ 60 $ 360,000
cost of 4,000 units under new proposal $ 1,372,000
Total Manufacturing $ 210 $ 1,260,000
cost of 2,000 units can be no higher than.. $ 458,000
unit cost of 2,000 units $ 229
Marketing Costs …variable marketing costs are internal $ (20)
Variable $ 25 $ 150,000 Final price we can pay to contractor $ 209
Fixed $ 70 $ 420,000
Total Marketing $ 95 $ 570,000
• In-house unit cost used for
Total Costs $ 305 $ 1,830,000 comparison: $209
• Proposal for $215 / unit should
Profit/Loss $ 390,000
not be accepted

Group 8 – Davis Kitchen Supply September 3, 2010

 F) Using idle facilities for extreme stoves

Assume same facts as in (E), except:

Idle facilities are used to produce 1,600 extreme
climate (EC) stoves
EC stoves can be sold for $450 each
EC stove cost of production $275 / unit variable
manufacturing expense.
Variable marketing costs: $50 / unit
Fixed marketing & manufacturing costs
unchanged

 What is maximum purchase price now for stoves

from outside contractor?
 Is $215 / unit acceptable?

Group 8 – Davis Kitchen Supply September 3, 2010

 F) Using idle facilities for extreme climate stoves

EXISTING PROPOSED
Per Unit Aggregate Per Unit Aggregate
Units Produced 6000 Units Produced - Regular 4000
Revenue $ 370 $ 2,220,000 Units Produced - Modified 1600
Units Outsourced 2000
Manufacturing Costs Units for Sale 7600
Variable Materials $ 50 $ 300,000
Variable Labor $ 75 $ 450,000 Revenue from Regular $ 370 $ 2,220,000
Variable Overhead $ 25 $ 150,000 Revenue from Modified $ 450 $ 720,000
Fixed Overhead $ 360,000 Revenue $ 387 $ 2,940,000
Total Manufacturing $ 1,260,000
Manufacturing Costs
Marketing Costs Variable Regular $ 150 $ 600,000
Variable $ 25 $ 150,000 Variable Modified $ 275 $ 440,000
Fixed $ 420,000 Fixed Overhead $ 360,000
Total Marketing $ 570,000 Total Manufacturing $ 1,400,000

Total Costs $ 1,830,000 Outsourcing Costs

Variable Outsourcing $ 255 $ 510,000
Profit/Loss $ 390,000 Total Manufacturing $ 510,000

Marketing Costs
Variable Regular
Variable Modified
Max purchase price: Variable Outsourced
Fixed
$255 / unit Total Marketing
Accept proposal! Total Costs
$ 25 $ 100,000
$ 50 $ 80,000
$ 20 $ 40,000
$ 420,000
$ 640,000
$ 2,550,000

Profit/Loss $ 390,000

Group 8 – Davis Kitchen Supply September 3, 2010

 CONCLUSIONS: What did we learn?

1. Be very aware of fixed and variable costs

2. Separate between relevant and irrelevant data

3. Analyze using base scenario vs. potential scenario

4. Unitarian vs. gross calculations can be used to double-

check your work

5. Using animation in PPT to “shock and awe” audience

into submission; did it work?

Group 8 – Davis Kitchen Supply September 3, 2010

Thank you!
(hope you’re not too dizzy…)

Any questions?