A small manufacturer of gas grills is making final changes to its 2009 operating budget and considering several changes in pricing, advertising, and product availability. This short case addresses the topic of contribution analysis as an easy way to analyze profit planning issues such as adding or dropping a product or service; changing a price; adding or decreasing expected volumes; or preparing a profit budget. In this situation there are three products, each with different proportions of variable and fixed costs. The product with the highest profit/unit on a full cost basis has the lowest contribution/unit on a variable cost basis, and vice versa. Four different marketing plans are proposed before one is finally adopted as the plan for the year. At year end, the actual results can be compared to the budget and to a flex or adjusted budget based on the actual product volumes realized. The numbers are simple and the students can readily see the benefit of variable costing.
CASE 1: BW Manufacturing CompanyOverview: BW Manufacturing Company (BW) manufactures grills alongside compeTtors such as Weber, Ducane, Coleman, Sunbeam, and Holland. BW is proFtable, but wants to evaluate the forecasted impact of four independent relevant cost decisions. A±er having reviewed the impact of each scenario, BW owners concluded that neither eliminaTng Grill A, decreasing producTon of Grill A while increasing producTon of Grill C, or lowering the price of Grill C while changing adverTsing focus, are good ideas. Instead, they decide to lower the price of Grill C by $5 per unit while increasing producTon by 20,000 units to 220,000, which BW is conFdent, will result in an increase of $180,000 in total contribuTon.²he quanTtaTve decision making process based on the informaTon given clearly points to opTon two. Before moving forward with this decision BW management will want to evaluateother factors such as total plant capacity to ensure the increase in producTon is possible and what opportunity costs may be associated with execuTng opTon two. Using linear programming based on the BW plant constraints may lead to further opTmizaTon of their pricing and producTon levels. BW management will also want to evaluate other qualitaTve strategic consideraTon before implemenTng opTon two. ³or example, BW needs to decide if lowering the price of Grill C will result in a less favorable percepTon of quality by consumers, does the lowering of the price Ft BW’s long-term strategy, and can BW reliably ship and service the increased quanTty of grills.Below are the calculaTons and explanaTons of the impact of each of the four opTons presented in the case. 1. Calculate the impact of dropping Grill A. Assume no other changes to the plan. (5 points)GROUP 11