Berkshire is one of the eight companies in threaded fasteners industry in New England. The company produces 3 types of metal fasteners (nuts & bolts), including 100 series, the 200 series and the 300 series. The products are sold by the company’s salaried sales force throughout New England. In 1973, Berkshire’s share on industry sales in New England was 12% for the 100 series, 8% for the 200 series, and 10% for the 300 series; and the industry quoted selling prices were at $2.45, $2.58 and 2.75 per 100 pieces respectively.
John Magers took over the company since his father’s untimely death in 1973. He had made several poor decisions resulted in loss of $70,000 in that year, hence the organization had lost confidence in him. John decided to hire Brandon Cook as the General Manager in Feb 1974. Cook would have full authority to run the company and explains the reasons for every decision he made with the hope to train John Magers for successful leadership upon Cook’s retirement. Thanks to Cook’s management the first half of 1974 was a modestly successful period, but the second half of this year will be a challenging period because of price reduction on 100 series announced by the main competitor, Bosworth. With excess capacity for all industry players and very similar products, price competition was always a threat for the industry. Several changes have been proposed by the company management to increase profit and improve long-run profitability.
Having inelastic demand for metal fasteners, price reduction has not been an effective strategy where the industry as a whole sold about the same quantity but at the lower prices. Hence, Berkshire Company needs to identify some alternatives/strategies in order to increase company profits and improve its long-run profitability.
Chart 1: Total Sales and Total Cost for 1 Jan - 30 June 1974
Chart 2:Profit (loss) for 1 Jan – 30 Jun 1974
Whenever possible, it is preferred to use actual figures rather than predicted (standard) for calculations, but detailed actual data for each product line in 1974 has not been provided by Berkshire’s accountants. The only provided data is total actual figures of this year and detailed data from last year; hence we need to divide total actual figures among product lines. Our proposed apportioning method is using the cost ratio from 1973 figures, with this assumption that in 1974 the cost ratio of products relative to total cost is same as 1973. According to the ratio approach, we have computed the ratio based on standard data which are actual data of 1973, and then used each ratio to assign actual cost/sales accordingly to each product line. For each product and each cost, the cost ratio is calculated by dividing that cost to total cost. Table 1 contains computed cost ratios for each cost and product line.
Example: Cost ratio of labor for 100 series = [pic]= [pic] = 0.439
| |100 series |200 series |300 series |Total | | |standard ($) |cost ratio|standard ($) |cost ratio|standard ($) |cost ratio|standard ($) | |labor |604,000 |0.439 |422,000 |0.307 |349,000 |0.254 |1,375,000 | |raw material |627,000 |0.400 |535,000 |0.342 |404,000 |0.258 |1,566,000 | |power |10,000 |0.238 |17,000 |0.405 |15,000 |0.357...