Sippican Case

1 SIPPICAN CORPORATION CASE ANALYSYS 20229 Cost Management System 2 Executive Summary ? Company Overview ? Accounting method ? jabuction do ? Activities performed ? Q1. Should Sippican use a contribution margin approach? Explanation ? Q2. Capacity speak to rates for resources ? Q3. ? a. Revised addresss and profits ? b. Product costs and lucrativeness abstract with the new tryst method. Cause of the shifts in values. ? Q4. What actions should the management take to improve Sippicans favorableness? 3 Company overview Sippican is a company manufacturing hydraulic control devices alves, pumps and flow controllers Recent trends (March 2006) ? Valves margin remained at standard 35% ? Pumps Sippicans main business, gross margin fell to 5% (below expect. 35%) ? light controllers price increase by 10% with no effect on demand Issue Sippican had to react to competitors pumps price reductions to maintain volumes Decline in profitability pre tax margin to less than 2% 4 Competitive scenario Sippican High quality Unique design Loyal customer base Major supplier High volumes Commodities Major presence Customized Various typesIndustry Able to match Sippicans quality, but no bids for market share with price cuts SippicansReaction Stable 35% gross margin Valves Pumps expenditure reduction Price reduction & consequent decline in profitability More employment give outs and shipments to meet demand + 10% Price increase w/o affecting demand Flow Controllers Much variety of types in the industry 5 Accounting method Simple cost cyphering system , full cost method ? DM costs= price of components (annual agreement) ? DL= 32. 5$/h (fringe benefits are included) charged on std run times for each product ?OH allocated as % of product-run DL cost (185% current OH rate) Variable costs are only DL and DM Meeting to sell the possibility of aggrandiseing a contribution margin approach 6 Production process Purchase Machine Assembly ? A unique product surgical inc ision ? Same equipments and trade union movement for all the 3 product lines ? Just in time Valves 4 components Standardized Large lots Pumps 5 components Standardized Products go to industrial distributors after assembly Flow Controllers Varied&customized to a greater extent components, more labor , more products runs 7 Activities Set up 2x 7. h/d shifts 20 days per month each time batch components is machined in a production run 15 workers per shift (25% production workforce) 62 machines Workers simultaneously at more machines 45 workers per shift (production&assembly workers) 5,400$/month operating expense Productivity 6 per shift Production run Receiving and production control Orderind, processing, inspecting, mournful batch componetnts to production runs 75 (regardless type of production run & components price) 4 people over the 2 shifts 50 per shipment 8 bubble wrapper and pack 14 workers per shift (tot28) 7. h/d shift 30 pedagogy 215 breaks *Productio n& assembly workers 2x 15 breaks 30 training 30 preventive mainteinance Packaging and shipping New product design and development 9750$/m compensation 7. 5h/d shift 8 Q1 Should executive adopt a contribution margin approach? Yes Costs-volumeprofits analysis No Variable costsdm&dl significant contribution to oh Pricing decisions No account of all costs related to products Significant set costs JIT no need to incorporate inventories NO company cost structure significant fixed overhead costs and significant activities influencing the values of the final products the whole analysis leave based on the contribution margin approach. The results which will be obtained will be influenced by the use of Time-driven ABC, with the right cost driver allocation to cost pools. It will make the difference for perfoming a more accurate analysis 9 Q2 Compute capacity rates for resources Hrs/month Monthly cost* Production workers 20 $3. 900 Indirect workers 20 $3. 900 Engineers 20 $9. 750 Machines 20 $5. 400 x Paid hrs 7,5 7,5 7,5 Productive hrs 6 6,5 6 12 ? Monthly hrs 120 130 120 240 Cost per hr $32,50 $30,00 $81,25 $22,50 DL Set up Machines Rec&Prod Pack&Shp Eng social units 90 30 62 4 28 8 Monthly hrs 120 120 240 130 130 120 Hrs available Hrs employ % Capacity used 10800 10700 99,07% 3600 3400 94,44% 14880 14600 98,12% 520 431,25 82,93% 3640 3483,33 95,70% 960 900 93,75% *given by the text Q2 Product data March 2006 10 Product Lines Valves Pumps Flow Contr. DM units 4 5 10 DM cost 16 20 22 DL h/unit 0,38 0,50 0,4 Machine h/unit 0,5 0,5 0,3 Set up h/unit 5 6 12 Production Units Machine hrs (run time) Production runs Setup hrs(labor&machine) of shipments Hrs engineering work Valves Pumps Flow Contr. 7500 12500 4000 3750 6250 1200 20 snow 225 100 600 2700 40 100 200 60 240 600 summariseal 24000 11200 345 3400 340 900 genuine quantities per activity Activities Set up hrs Machine hrs Receiving& control hrs Packaging & Shipment hrs Engeneering hrs Pr Units x DLhrs Mhrs+set up hrs(machine) 75/60) x production runs (50/60) x ship + (8/60) x pr. Units Eng hrs Valves 2850 3850 25 1. 033,33 60 Pumps 6250 6850 125 1750 240 Flow contr 1600 3900 281,25 700 600 Total hrs used 10700 14600 431,25 3483,33 900 Q3 Valves Pumps Flow Controllers Tot $592. 500,0 $875. 000,0 $380. 000,0 $1. 847. 500,0 $212. 625,0 $453. 125,0 $140. 000,0 $805. 750,0 $120. 000,0 $92. 625,0 $250. 00,0 $203. 125,0 $88. 000,0 $52. 000,0 $458. 000,0 $347. 750,0 11 Q3. a Revised costs and profits for the 3 product lines Revenues VC DM* DL* Contribution Margin TOH* Machine related expenses Setup labor Setup Machine R&P Control P&S Engeneering $379. 875,0 $421. 875,0 $126. 499,0 $249. 374,1 $84. 375,0 $3. 250,0 $2. 250,0 $750,0 $30. 999,0 $4. 875,0 $140. 625,0 $19. 500,0 $13. 500,0 $3. 750,0 $52. 499,1 $19. 500,0 $240. 000,0 $253. 687,8 $27. 000,0 $87. 750,0 $60. 750,0 $8. 437,5 $21. 000,3 $48. 750,0 $1. 041. 750,0 $629. 560,9 $252. 000,0 $110. 500,0 $76. 500,0 $12. 937,5 $104. 498,4 $73. 25,0 glaring Margin GS&A Operating Income % Gross Margin * Cost allocation slide 11 $253. 376,0 $172. 500,9 -$13. 687,8 $412. 189,1 $350. 000,0 $62. 189,1 22,31% 42,76% 19,71% -3,60% 12 Cost Allocation DM&DL SQxSP Valves Prod. Units 7500 DM costs 16 DL costs 12. 35 Pumps 12500 20 16. 25 Flow Contr. 4000 22 13 OH Activities Set up hrs Machine hrs Receiving& control hrs Packaging & Shipment hrs Engeneering hrs Pr Units x DLhrs Mhrs+set up hrs(machine) (75/60) x production runs (50/60) x ship + (8/60) x pr. Units Eng hrs Valves 2850 3850 25 1. 033,33 60 Pumps 6250 6850 125 1750 240Flow contr 1600 3900 281,25 700 600 Total hrs used 10700 14600 431,25 3483,33 900 Capacity Costs Production workers 32,5 Indirect workers 30 Machines 81,25 Engineers 22,5 13 Q3. b Product costs and profitability with new cost grant ? old cost assignment DL cost DM cost Man OH cost (185%) Std Unit cost Target selling price Planned gross margin Actual selling price Actual Gross margin Actual gross margin% Valves Pumps $12,35 $16,25 $16,00 $20,00 $22,85 $30,06 $51,20 $66,31 $78,77 $102,02 35% 35% $79,00 $70,00 $27,80 $3,69 35% 5% Flow C $13,00 $22,00 $24,05 $59,05 $90,85 35% $95,00 $35,95 38% ? new cost assignmentDL cost DM cost Man OH cost Std Unit cost Target selling price Planned gross margin Actual selling price Actual Gross margin Actual gross margin% Valves $12,35 $16,00 $16,87 $45,22 $78,77 43% $79,00 $33,78 43% Pumps $16,25 $20,00 $19,95 $56,20 $102,02 45% $70,00 $13,80 20% Flow C $13,00 $22,00 $63,42 $98,42 $90,85 -8% $95,00 -$3,42 -4% Valves more profitable 35%(old) vs (43%) No changes in expectations Lower cost allocated less activities dedicated to their production(std products, large lots) Pumps No meet expectations, but still profitable 20% Lower cost allocated less activities dedicated to their production (std products) Flow controllers No profitable -4% Higher cost many activities and people used in their production Q3. B 14 The shift is caused by the Time-driven ABC me thod Costs are allocated to product lines which absorb more costs more detailed and tenacious production process for flow controllers .. 15 Q4. What actions should the management take to improve Sippicans profitability? Flow Controllers Flow controllers not profitable as anticipate $253. 87,8 $27. 000,0 $87. 750,0 $60. 750,0 $8. 437,5 $21. 000,3 $48. 750,0 High setup costs (148000) compared to the other overheads TOH* Machine related expenses Setup labor Setup Machine R&P Control P&S Engeneering Potential solutions Impose a minimum quantity order to lower set up costs Gross margin -3,6 (how to convince customers to buy a minimum quantity? ) Production process improvement, with lower set up times 16 Q&A