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




Question;The Value Chain;P 7.;Soft Spot is a manufacturer of futon mattresses. Soft Spot?s mattresses;are priced at $60, but competition forces the company to offer significant;discounts and rebates. As a result, the average 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 reduce costs;and improve product quality. A study by the company?s management accountant has;deter-mined the following per unit costs for primary processes and support;services;Primary Process Cost per Unit;Research and development $ 5.00;Design 3.00;Supply 4.00;Production 16.00;Marketing 6.00;Distribution 7.00;Customer service 1.00;Total cost per unit $42.00;Support Service Human resources $ 2.00;Information services 5.00;Management accounting 1.00;Total cost per unit $ 8.00;To generate a gross margin large enough for;the company to cover its over-head costs and earn a profit, Soft Spot must;lower its total cost per unit for primary processes to no more than $32.00 and;its support services to no more than $5.00. After analyzing operations;management reached the following con-clusions about primary processes and;support services;? Research and development and design are;critical functions because the market and competition 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;20 percent.;? Ten different suppliers currently provide;the components for the futons. Ordering these components from just two;suppliers and negotiatin glower prices could result in a savings of 15 percent.;? The futons are currently manufactured in;Mali. By shifting production to China, the unit cost of production can be;lowered by 40 percent.;? Management believes that by selling to;large retailers like Wal-Mart it is feasible to lower current marketing costs;by 25 percent.;? Distribution costs are already very low;but management will set a target of reducing the cost per 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.;Required;1.;Prepare a table showing the current cost per unit of primary processes and;support services and the projected cost per unit based on management?s;proposals.;2. Will management?s proposals achieve the;targeted total cost per unit? What further steps should management take to reduce;costs?;3. What role should the company?s support;services play in the value chain analysis?;Financial Performance Measures;C 2.;Tarbox Manufacturing Company makes sheet metal products for heatingand;air conditioning installations. Its statements of cost of goods manufacturedand;income statements for the last two years are presented below and on the next;page.;Tarbox;Manufacturing Company;Statements;of Cost of Goods Manufactured;For;the Years Ended December 31;This Year Last;Year;Direct materials used Materials inventory;beginning $91,240 $93,560;Direct materials purchased (net) 987,640;959,940;Cost of direct materials available for use $1,078,880;$1,053,500;Less materials inventory, ending 95,020;91,240;Cost of direct materials used $983,860;$962,260;Direct labor 571,410;579,720;Overhead;Indirect labor $182,660 $171,980;Power 34,990 32,550;Insurance 22,430 18,530;Supervision 125,330 120,050;Depreciation 75,730 72,720;Other overhead;costs 41,740 36,280;Total overhead 482,880;452,110;Total manufacturing costs $2,038,150;$1,994,090;Add work in process inventory, beginning 148,875 152,275;Total cost of work in process during the;period $2,187,025 $2,146,365;Less work in process inventory, ending 146,750 148,875;Cost of goods manufactured $2,040,275;$1,997,490;Sales $2,942,960;$3,096,220;Cost of goods sold Finished;Goods inventory, beginning $142,640 $184,820;Cost of goods manufactured 2,040,275 1,997,490;Cost of goods available for sale $2,182,915 $2,182,310;Less finished goods inventory, ending 186,630 142,640;Total cost of goods sold 1,996,285;2,039,670;Gross margin;$946,675 $1,056,550;Selling and administrative expenses;Sales salaries and;Commission expense $394,840 $329,480 Advertising expense 116,110;194,290;Other selling expenses;82,680 72,930;Administrative expenses 242,600;195,530;Total selling and administrative expenses 836,230 792,230 Income from operations $110,445;$264,320;Other revenues and expenses Interest;expense 54,160;56,815;Income before income taxes $56,285;$207,505 Income taxes expense 19,137;87,586;Net income $37,148;$119,919;For the past several years, the company?s;income has been declining. You have been asked to comment 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;total manufacturing costs, and total overhead to total manufacturing costs.;(Round to one decimal place.);b. Ratios of;sales salaries and commission expense, advertising expense, other selling;expenses, administrative expenses, and total selling and administrative;expenses to sales. (Round to 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 in net income.;3. What other factors or ratios do you;believe should be considered in determining the cause of the company?s;decreased income?


Paper#43656 | Written in 18-Jul-2015

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