Ten Alpina Case memo PDF

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Memo 1. Guilia mentioned that if competitors have excess capacity they might be pricing to cover variable costs. Compute the contribution margin per unit of each product line in terms of both dollars and percentage.

2.

Assuming the product mix does not change a. Compute the breakeven point for TenAlpina as a whole. b. Compute the current margin of safety for TenAlpina as a whole

3. What is the value of this information to management? Does it make sense to compute a breakeven point for each product separately?

As the sales mix changes, breakeven could change. It is clear that variable costs quite small and most costs are fixed and may be common to all 3 products. It is not clear how direct labor is going to impact overhead, so it may not be the best overhead allocation base. 4. Using standard direct labor time as the overhead allocation base, compute the gross margin for each product in order to verify Guilia’s belief about current gross margins.

5. Computer the gross margin for each product line using the combination of direct labor hours and machine hours to allocate overhead. a. Do the results make sense with respect to Guilia’s belief about margins? b. Do the results make sense with respect to current market conditions?

6. Compute the gross margin using the more detailed ABC approach. (identify activities, identify the resources used, select resource drivers, cost the activities, identify the activity cost drivers, determine the rate per unit of activity, determine the cost of the objects.) a. Do the results make sense with respect to Guilia’s belief about margins? b. Do the results make sense with respect to current market conditions? The results do make sense with respect to Guilia’s belief about margins. She was on track about thinking that her cost allocations using direct labor and machine hours were inaccurate and not a good measure. She was right that cost allocation should be used by the activities that the products use. The margins were a lot higher showing that the costs were a lot lower than she thought. Work stations:

Cold roll and cut

Oven & dropforge

Bore

Deburr and polish

Assembl e

Injectio n mold

Package

Total

labor

9583.40

9583.40

9583.40

4791.70

4791.70

4791.70

4791.70

47917.0 0

depre

241.67

733.33

125.00

75.00

13.33

415.67

7.92

1612.92

variable power

235.15

481.33

161.47

71.21

28.24

49.73

27.87

1055.00

supplies

117.16

93.73

225.10

147.90

60.55

9.48

71.08

715.00

sq feet

275

660

220

165.00

220

440

220

2200

total

10452.3 8

11550.7 9

10314.6 7

5250.81

5113.82

5706.58

5298.57

53687.6 2

pitons: 4200

pitons 1

pitons 1

pitons 1

pitons 15

pitons 0.1

5.06/ piton

Hammers : 400

hammers hammers hammer 1 10 s5

hammer s1

36.58/ hammer

Rocknut: 2300

rocknut 12

rocknut 1

7.64/ rocknut

2.27/ rollcuts

1.41/ hammer blows

0.31/ holes bored

hammer s 45

hammer s1 rocknut 6

0.06/ edges in cm

0.37/ clamp crimps

14.26/ injection s

1.70/ package s

Products

Revenue

COGS

Gross Margin

GM %

Pitons

$44100

$21252

$22848

51.8%

Hammers

$24400

$14632

$9768

40%

Rock Nuts

$56350

$17572

$38778

68.8%

7. Which of the three cost-allocation methods seems to fit the situation best? Why? Are there conditions under which your answer would be different? Out of the three cost-allocation methods, the activity based costing seems to fit the situation the best because the cost of each activity are allocated specifically to each product. This way it shows what cost activity is directly needed for each product making the cost a lot more specific. Some products do not use some activity stations so that cost would not be factored into the product cost. Only the activity stations that the product uses will be used for the cost of the product. This shows a more accurate cost. The best method to use for cost-allocation would be the reciprocal method. The reciprocal method allocates costs to the operating departments by fully recognized among the service departments. This give management a clear picture of how efficient each work station is

performing and which products are the heaviest cost drivers. It accurately reflects costs of each activity or service provided within the company, while the direct method does not. It works better than the sequential method because it allocates all costs to all departments while ignoring the sequence. Yes, it would be a more effective method of cost allocation to use the sequential method, but only if the production work stations required services to be rendered for one another. 8. What if the volume of rock nut sets increased by 10%? What would happen to total conversion costs for the month? Explain the effect that this could have on the ABC-based gross margins for each of the 3 products. Originally, total monthly conversion cost stood at $60,580.42. A total volume of 2,530 rock nut sets would be the result of a 10% increase and would also have the following effects.

Rock Nut Sets

Std DL Minutes

Monthly Volume

Total SDLM

Total % SDLM

4

2,300

9,200

40%

Manufacturing Overhead ($12,663.75) + Direct Labor ($47,916,67) = $60,580.42 After the change in volume, both manufacturing overhead and direct labor will increase.  Materials: 230 x $6.01 = $1382.30  Light, heat, and Power: $0.05 x 230 = $11.50  Supplies: $0.09 x 230 = $20.70 This would generate a $1,414.50 increase resulting in a new total monthly conversion cost of $61,994.92.

Rock Nut Sets

Std DL Minutes

Monthly Volume

Total SDLM

Total % SDLM

4

2,530

10,120

42.66%

New total monthly volume would equal 23,720. This would result in a new rate of $2.61 per standard DL minute. If the volume of rock nut sets increased by 10%, the total conversion costs for the month would increase for the month. There would be an increase to the bore, assemble, and packaging activities, while cold roll and cut, oven & drop forge, deburr and polish, and injection mold cost activities would remain unchanged. Only workstations required to make additional units will require additional overhead to produce these units. The gross margin for both the piston and hammers would increase because no additional costs would be allocated to cost of goods sold for these two products, however revenues increase. When rock nut’s increased revenue is calculated into gross margin, it remains unchanged. 9. Arguably, the better activity driver for each of these steps is the duration of time consumed at each step rather than just the activity count. DL(Direct Labor) time seems to be larger than MH(Machine Hours) time at each step in Exhibit 4, so that might be an approximation of total time for each product type at each step. What if DL minutes were

used for the activity driver at each step? How would that affect the ABC computation of unit costs, gross margins, and GM%? If DL minutes were used for the activity driver at each step then the ABC computation of unit costs would be higher which in turn will make lower gross margins and GM %. This would result in lower gross margins and GM% which is not what Guilia wants. 10. Based on your analysis, what advice would you give Guilia about her business? Guilia should clearly switch Tenalpina to activities based costing. Activities based costing will give Guilia a much more reliable and accurate cost per unit for each product. Through this method they will discover that the cost per set of hammers was remarkably low, which would explain the higher demand for hammer sets, so we would recommend raising that price....