Adapted trom ROBERT S KAPLAN INCOM Company The decline in our profits has become
ID: 2601755 • Letter: A
Question
Adapted trom ROBERT S KAPLAN INCOM Company The decline in our profits has become intolerable The severe price cuming in pumps has dropped ourpre-ta margin to less than 3%, far below our histoncal 10% margins. Fortunately, our competitors are overlooking the opportunities for profit inflow controllers. Our recent 10% price increase in that line has been implemented without losing any businets. Robert Johnson, president of the INCOM Company, was discussing operating results in the latest month with Ahmed Khan, his controller, and John Scott, his manufactring manager. The meeting among the three was taking place in an atmosphere tinged with apprehension because competitors had been reducing prices on pumps, INCOM's major product line. Since pumps were a commodity product, Johnson had seen no altemative but to match the reduced prices to maintain volume. But the price cuts had led to declining company profits, especially in the pump line (summary operating results for the previous month March 2016, are shown in Exhibits 1 and 2). INCOM supplied products to mamfacturers of water purification equipment. The company had started with a unique design for valves that it could produce to tolerances that were better than any in the incustry Johnson quickly established a loyal customer base because of the high quality of its manufactured valves. He and Scott realized that INCOM's existing labor skills and machining equipment could also be used to produce pumps and flow controllers, products that were also purchased by its customers. They soon established a major presence in the high-volume pump product line and the more customized flow controller line. INCOMs production process started with the purchase of semi-finished components from several suppliers. It machined these parts to the required tolerances and assembled them in the company's modern manufacturing facility. The same equipment and labor were used for all three product Lines, and production rms were scheduled to match customer shipping requirements. Suppliers and customers had agreed to just-in-time deliveries, and products were packed and shipped as completed. Valves were produced by assembling four different machined components (2 components of L12 and 2 of L15). Scott had designed machines that held components in fixtures so that they could be machined automatically. The valves were standard products and could be produced and shipped in large lots. Although Scott felt several competitors could now match Johnson's quality in valves, none had tried to gain market share by cutting price, and gross margins had been maintained at a standard 35%. The manufacturing process for pumps was practically identical to that for valves. Five components G components of L12 and 2 of L14) were machined and then assembled into the final product. The pumps were shipped to inchustrial product distibutors after assembly. Recently, it seemed as if each month brought new reports of reduced pnces for pumps. INCOM had matched the lower prices so that it would not give up its place as a major pump supplier. Gross margins on pump sales in the latest month had fallen below 20%, well below the company's planned gross margin of 35%. Flow controllers were devices that controlled the rate and direction of flow of chemicals. They required more components and more labor, than pumps or valves, for each finished unit. Each Flow controller required 4 components of L16, 5 components of L12 and 1 component of L21. Also, there was much more variety in the types of flow controllers used in industry, so many more production runs and shipments were performed for this product line than for valves. NCOM had recently raised flow controller prices by more than 10% with no apparent effect on demand.Explanation / Answer
3)
1
DM INCREASE 105%
16
20
22
16.8
21
23.1
SP INCREASED TO
86.8
88
106.1
3
INCOME STATEMENT IN APRIL
7600
12000
4200
X 86.8
X 88
X 106.1
7)
THE PRODUCT TO CHANGE WOULD BE FLOW CONTROLLER AS IT IS LESS COMPETITIVE
8)
OVEHREADS CANNOT BE ALLOCATED ON DM AS IT HAS NO RELEVANCE ON PRODUCTION RUNS. IT HAS TO BE CONNECTED OR LINKED TO THE RUNS IN FACTORY
10)
IT RELEALS THAT ABC IS MORE ACCURATE
11) SUGGEST ABC TO BE MORE REALSITIC
9. ABC METHOD ( $)
VALVES
PUMPS
F/CON
$
MACHINE RELATED
112500
187500
36000
336000
SET UP LABOUR
2500
12500
25000
40000
REC/ PROD
56250
93750
30000
180000
ENGINEERING
20000
30000
50000
100000
PACKAGINH SHIPP
5000
35000
110000
150000
SUB TOTAL
196250
358750
251000
806000
NO OF UNITS
7500
12500
4000
PER UNIT
$26.17
$28.70
$62.75
CON MARGIN STATEMENT MAR 2016
VALVES
PUMPS
F/CONTL
TOTAL
UNITS
7500
12500
4000
SP
86
87
105
TOTAL
645000
1087500
420000
2152500
MARGIN
225105
212063
172200
609368
DL
75000
156250
40000
DM
12000
250000
88000
MACHINE RELATED 80% VC
84000
140000
44800
268800
RECEIVING 90% VC
56250
93750
30000
162000
PACKING 50% VC
23438
39063
12500
75000
GEN ADMIN 10%
17490
29148
9328
55965
CONTRIBUTION
376822
378289
195372
950483
MACH RELATED FIXED 20%
67200
SET UP 100% FIXED
40000
RECEIVING 10%
18000
ENGINERRING 100%
100000
PACKING 50%
75000
GEN ADMIN 90%
503685
TOTAL OHS
803885
NET INCOME
146598
1
DM INCREASE 105%
16
20
22
16.8
21
23.1
SP INCREASED TO
86.8
88
106.1
3
INCOME STATEMENT IN APRIL
7600
12000
4200
X 86.8
X 88
X 106.1
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.