Transcript Strategic Transfer Pricing, Absorption Costing and

Chapter 13
Strategic Profitability Analysis
1
What is Strategy?

Strategy describes how an organization matches
its own capabilities with the opportunities in the
marketplace to accomplish its overall objectives.

Understanding the industry is key
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Porter’s 5 forces: Industry analysis regarding:
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Competitors
Potential entrants into the market
Equivalent products
Bargaining power of customers
Bargaining power of input suppliers
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Generic Strategies
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1. Product differentiation
ability to offer products or services perceived by its customers to be superior
and unique relative to the products or services of its competitors
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2. Cost leadership
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builds on brand loyalty and the willingness of customers to pay high prices
strategic idea: ride down the experience curve faster than
competitors
key strategic variable: relative market share
can be enhanced preferably during the early stages of the product
life cycle
Implementation of Strategy (Role of Management Accounting) :
Management accountants design reports to help managers
track progress in implementing strategy.
Strategically relevant objectives
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Growth
Price Recovery
Productivity
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Growth Component
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Revenue effect of growth component
= (Actual units sold current year – actual units sold
previous year) × output price (previous year)
Cost effect of growth component
= (Units of input or capacity that would
have been used in previous year to produce
current year’s output assuming the input-output
relationship of previous year
– actual units or capacity current year) × input price
(previous year)
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Price-Recovery Component
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Revenue effect of price-recovery component
= (Output price (current year) – Output price
(previous year))
× Actual units of output sold (current year)
Cost effect of price-recovery component
= (Input prices (current year) – Input prices
(previous year))
× units of input or capacity that would
have been used in previous year to produce
current year’s output assuming the inputoutput relationship of previous year
(current year)
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Productivity Component

Productivity component
= (actual units or capacity current year
– units of input or capacity that would
have been used in previous year to produce
current year’s output assuming the inputoutput relationship of previous year)
× input prices current year)
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Change in Operating Income
Change in operating income
Growth
component
Price-recovery
component
Productivity
component
(prices and volume
of current year)
Revenue
effect
Cost
effect
Revenue
effect
Cost
effect
(productivity and prices (productivity previous year
volume of current year)
previous year)
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Managing unused capacity:
Engineered Costs vs Discretionary Costs
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Engineered costs result specifically from a clear
cause-and-effect relationship between output and
the resources needed to produce that output.
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They can be variable or fixed in the short run
Engineered costs pertain to processes that are detailed,
physically observable, and repetitive.
Discretionary costs have two important features.
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They arise from periodic (usually yearly) decisions
regarding the maximum amount to be incurred.
They have no measurable cause-and-effect relationship
between output and resources used.
Discretionary costs are associated with processes that are
sometimes called black boxes, because they are less
precise and not well understood
E.g. Advertising, executive training, R&D costs
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Managing Unused Capacity
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What actions can management take when it
identifies unused capacity?
 Attempt to eliminate the unused capacity
 Attempt to use the unused capacity to grow
revenue
CCs:
 13-19 modified from 11th ed. (8%)
 13-23 (=11.13-21) (8%)
 13-27 (=11.13-25) (8%)
 13-33 (=11.13-30) (9%)
 13-35 (=11.13-33) (5%)
 13-39 (new in 11th ed.) (9%)
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13-19
2006
Number of T-shirts purchased
200.000
Number of T-shirts discarded
2.000
Number of T-shirts sold
198.000
Average selling price
$
25,00
Average cost per T-shirt
$
10,00
Administrative capacity (number of customers)
4.000
Administrative costs
$1.200.000
Administrative cost per customer
$
300
Design staff
5
Total design costs
$ 250.000
Design cost per employee
$ 50.000
1.
2.
3.
2007
250.000
3.300
246.700
$
26,00
$
8,50
3.750
$1.162.500
$
310
5
$ 275.000
$ 55.000
OI both years
growth, price-recovery, and productivity
components of OI change
comment
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3-23
Units peroduced and sold
Selling price
2005
200
$40 000
2006
210
$42 000
Direct materials (kg)
Direct materials cost /kg
300 000
$8
310 000
$8,50
Manufacturing capacity (units of D4H)
Total conversion costs
250
250
$2 000 000 $2 025 000
Conversion costs per unit of capacity
Selling and customer service capacity (customers)
Total selling and customer service costs
Selling and customer service capacity cost per customer
Design staff
Total design costs
Design cost per employee
$8 000
48 100
100
95
$1 000 000
$940 500
$10 000
$9 900
12
12
$1 200 000 $1 212 000
$100 000
$101 000
Number of customers
1.
2.
3.
75
80
OI both years
growth, price-recovery, and productivity components of OI
change
comment
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13-33
2007
40 000
2008
40 000
Average selling price
$60
$59
Average cost per piece
$40
$41
51 000
43 000
$357 000
$296 700
Selling and customer service capacity cost / customer
$7
$6.90
Purchasing and administrative capacity (dist designs)
980
850
$245 000
$204 000
$250
$240
Pieces of clothing purchased and sold
Selling and customer service capacity (customers)
Selling and customer service costs
Purchasing and administrative costs
Purchasing and administrative capacity cost per dist. design
1.
2.
3.
4.
Strategy?
OI both years
growth, price-recovery, and productivity components of OI
change
comment
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13-35
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1.
2.
3.
750 000 subscribers in 2005
5 customer help desks 8 hrs/day, 250 days per year
fixed salary: $36 000
45 000 customer calls @ 10 minutes (average)
help call costs: engineered or discretionary?
cost of unused capacity in each case
2006: 900 000 subscribers, same percentage calling
help as in 2005; requirement as in 2.
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13-39
Current Operation
Cafeteria employees' annual wages
Additional benefits (% of salary)
Downsized Operation
$150.000
25%
$75.000
25%
Days of cafeteria operation
250
Annual cost of utilities and maintenance (paid by Mayfair) $ 40.000
250
$40.000
Daily sales:
Entrees
Cost of supplies (% of revenues)
Annual rent (paid to Mayfair)
Percent of revenues above breakeven (paid to Mayfair)
1.
2.
3.
250
$40.000
Wilco's revenues and costs:
75 at $5,00 each
120 at $4,00 each
Sandwiches
Beverages/desserts
100 at $3,00 each
250 at $1,00 each
60%
Wilco Foods' Proposal
150 at
280 at
50%
$3,50 each
$1,50 each
95 at
230 at
$4,00 each
$1,50 each
70%
$18.000
5,00%
Downsizing acceptable?
Breakeven level of revenues fo Wilco? Preferred alternative?
other factors to be considered
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3-27
Units of work performed
Selling price
Software implementation, labor hrs
Cost per software implementation labor hr.
Software-implementation support capacity (units of work)
Total cost of software implementation support
Software-implementation support capacity cost/ unit of work
2005
2006
60
70
$50,000
$48 000
30 000
32 000
$60
$63
90
90
$360 000
$4 000
$369 000
$4 100
3
3
$375 000
$125 000
$390 000
$130 000
Number of emloyees doing software development
Total software developmant costs
Software development cost per employee
1.
2.
3.
OI both years
growth, price-recovery, and productivity
components of OI change
comment
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Quiz
1.
a.
b.
c.
d.
Reengineering is a key element in
cost leadership strategy.
price recovery strategy.
product differentiation strategy.
productivity measures.
2.
Which of the following is not a key aspect of
reengineering?
Eliminating unnecessary activities and tasks
Developing employee skills
Changing roles and responsibilities
Working on one activity at a time to improve
production processes
a.
b.
c.
d.
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Quiz
3.
The analysis used for evaluating the success of a strategy
through changes in operating income components uses actual
results of the current year compared to
a.
b.
c.
d.
budgeted results for the current year.
actual results for the previous year.
target amounts for the current year.
budgeted results for the previous year.
4.
The growth in market share is used in calculating the net
income effect
d.
a.
of industry growth.
b.
of product differentiation.
c.
of cost leadership.
of either cost leadership or product differentiation, depending
upon the strategy chosen.
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Quiz
5. The following strategic analysis of profitability was prepared for the Corum Company:
Revenues
Costs
Operating income
Income
Statement
Amounts
in 2004
(1)
Revenue and
Cost Effects
of Growth
Component
in 2005
(2)
Revenue and
Cost Effects of
Price-Recovery
Component
in 2005
(3)
$300,000
240,000
$ 60,000
$40,000 F
24,000 U
$16,000 F
$85,000 F
34,000 U
$51,000 F
Cost Effect of
Productivity
Component
in 2005
(4)
Income
Statement
Amounts
in 2005
(5)
$8,000 U
$8,000 U
$425,000
306,000
$119,000
$59,000 F
Change in operating income
The market growth rate in the industry is 9% in 2005. Sales in 2005 were 17,000 units at $25 each.
Corum sold 15,000 units at a unit-selling price of $20 in 2004.
The effect of the industry market size factor for Corum Company in 2005 was
a. $5,200.
b. $10,800.
c. $12,240.
d. $13,500.
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