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Soft Spot is a manufacturer of futon mattresses. Soft Spot?s mattresses are priced at $60, but




Question;Soft Spot is a manufacturer of futon mattresses. Soft Spot?s mattresses are priced at $60, butcompetition forces the company to offer significant discounts and rebates. As a result, theaverage price of the futon mattress has dropped to around $50, and the company is losing money.Management is applying value chain analysis to the company?s operations in an effort to reducecosts and improve product quality. A study by the company?s management accountant has determined the following per unit costs for primary processes and support services:Primary ProcessCost per UnitResearch and development$ 5.00Design3.00Supply4.00Production16.00Marketing6.00Distribution7.00Customer service1.00Total cost per unit$42.00Support Service Human resources $ 2.00Information services5.00Management accounting1.00Total cost per unit$ 8.00To generate a gross margin large enough for the company to cover its over-head costs and earn aprofit, Soft Spot must lower its total cost per unit for primary processes to no more than $32.00and its support services to no more than $5.00. After analyzing operations, management reachedthe following con-clusions about primary processes and support services:? Research and development and design are critical functions because the market andcompetition require constant development of new features with ?cool? designs at lower cost.Nevertheless, management feels that the cost per unit of these processes must be reduced by 20percent.? Ten different suppliers currently provide the components for the futons. Ordering thesecomponents from just two suppliers and negotiatin glower prices could result in a savings of 15percent.? The futons are currently manufactured in Mali. By shifting production to China, the unit cost ofproduction can be lowered by 40 percent.? Management believes that by selling to large retailers like Wal-Mart it is feasible to lowercurrent marketing costs by 25 percent.? Distribution costs are already very low, but management will set a target of reducing the costper unit by 10 percent.? Customer service and support to large customers are key to keeping their business.Management therefore proposes increasing the cost per unit of customer service by 20 percent.? By outsourcing its support services, management projects a 20 percent drop in these costs.Required1. Prepare a table showing the current cost per unit of primary processes and support servicesand the projected cost per unit based on management?s proposals.2. Will management?s proposals achieve the targeted total cost per unit? What further stepsshould management take to reduce costs?3. What role should the company?s support services play in the value chain analysis?Financial Performance MeasuresC 2. Tarbox Manufacturing Company makes sheet metal products for heatingand airconditioning installations. Its statements of cost of goods manufacturedand income statementsfor the last two years are presented below and on the next page.Tarbox Manufacturing CompanyStatements of Cost of Goods ManufacturedFor the Years Ended December 31This YearLast YearDirect materials used Materials inventory, beginning$91,240$93,560Direct materials purchased (net)987,640959,940Cost of direct materials available for use$1,078,880$1,053,500Less materials inventory, ending91,240Cost of direct materials used$962,260Direct laborOverheadIndirect laborPowerInsuranceSupervisionDepreciationOther overhead costs95,020$983,860571,410$182,66034,99022,430125,33075,73041,740$171,98032,55018,530120,05072,72036,280Total overhead452,110Total manufacturing costs$1,994,090Add work in process inventory, beginning152,275Total cost of work in process during the period$2,146,365Less work in process inventory, ending148,875Cost of goods manufactured$1,997,490579,720482,880$2,038,150148,875$2,187,025146,750$2,040,275SalesCost of goods sold FinishedGoods inventory, beginning$2,942,960$142,640Cost of goods manufactured2,040,275Cost of goods available for sale$2,182,915Less finished goods inventory, ending186,630Total cost of goods sold1,996,2852,039,670Gross margin$946,675Selling and administrative expensesSales salaries andCommission expense$394,840Advertising expense116,110Other selling expenses82,68072,930 Administrative expenses242,600195,530Total selling and administrative expenses836,230792,230 Income from operations$110,445$264,320Other revenues and expenses Interest expense54,16056,815 Income before income taxes$207,505 Income taxes expense87,586Net income$37,148$119,919$3,096,220$184,8201,997,490$2,182,310142,640$1,056,550$329,480194,290$56,28519,137For the past several years, the company?s income has been declining. You have been asked tocomment on why the ratios for Tarbox?s profitability have deteriorated.1. In preparing your comments, compute the following ratios for each year:a. Ratios of cost of direct materials used to total manufacturing costs, direct labor to totalmanufacturing costs, and total overhead to total manufacturing costs. (Round to one decimalplace.)b. Ratios of sales salaries and commission expense, advertising expense, other sellingexpenses, administrative expenses, and total selling and administrative expenses to sales. (Roundto one decimal place.)c. Ratios of gross margin to sales and net income to sales. (Round to one decimal place.)2. From your evaluation of the ratios computed in 1, state the probable causes of the decline innet income.3. What other factors or ratios do you believe should be considered in determining the cause ofthe company?s decreased income?


Paper#42442 | Written in 18-Jul-2015

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