Bw Manufacturing Company
5 Pages Posted: 5 Apr 2010
Abstract
A small manufacturer of gas grills is making final changes to its 2009 operating budget and considering several changes in pricing, advertising, and product availability. This short case addresses the topic of contribution analysis as an easy way to analyze profit planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this situation there are three products, each with different proportions of variable and fixed costs. The product with the highest profit/unit on a full cost basis has the lowest contribution/unit on a variable cost basis, and vice versa. Four different marketing plans are proposed before one is finally adopted as the plan for the year. At year end, the actual results can be compared to the budget and to a flex or adjusted budget based on the actual product volumes realized. The numbers are simple and the students can readily see the benefit of variable costing.
Excerpt
UVA-C-2294
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.
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Keywords: relevant costs, variable and fixed costs, contribution analysis, keep or drop, cost-price-volume analysis, flexible budget
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