Budgeting and Performance Evaluation at the Berkshire Toy Company
Karen M. Foust, Ph.D., C.P.A. Adjunct Professor at Tulane University A.B. Freeman School of Business New Orleans, Louisiana
Andres A. Calderon email@example.com PO Box 21420 Baton Rouge, LA 70893
September 4, 2000
Janet McKinley’s father, Franklin Berkshire, founded Berkshire Toy Company (BTC) in 1974. In 1988 Janet worked her way up to the position of Assistant to the President after completing her MBA. Janet promoted employee participation and teamwork. The company went public in 1991, and in 1993 Mr. Berkshire retired, leaving Janet as corporate CEO. In 1995 Quality Products Corporation, a company with a wide variety of products, acquired BTC for $23 million. Janet had an agreement that allowed her to continue to work for BTC for at least 5 years at an annual salary of $120,000. The company had a staff of 241 employees organized in three different departments: purchasing (11 employees managed by David Hall), production (175 employees managed by Bill Wilford), and marketing (52 employees managed by Rita Smith)1. BTC produces a fifteen-inch, fully jointed, washable, stuffed teddy bear. The bear is packaged in a designer box and is accompanied by an unconditional lifetime guarantee, and a piece of chocolate candy. The bears are accessorized according to customer order specifications. Internet sales began in 1997. Janet has just received the June 30, 1998 income statement showing Operating Income at $1,632,317 below budget, while Total Revenue is at $1,440,487 above budget (see Exhibit 1). Janet is having trouble understanding how the company’s revenue is thriving, but the company is not generating profits as expected.
BTC is a decentralized division of Quality Products Corporation that has been experiencing growth in sales over the past four years (see Exhibit 2a). BTC’s strategy is to have an enhanced product image, build customer brand loyalty through product differentiation, and produce an all American quality product. BTC implemented a management compensation plan in 1997; the plan is structured as follows: • • David at Purchasing: 20% of net materials price variance, assuming favorable Rita at Marketing: 10% of excess variance of net revenue, assuming favorable
The remaining three employees are Janet, her secretary, and her secretary’s assistant
Bill at Production: 3% of net variance in material, labor, variable overhead, labor rate variance, and the variable and fixed overhead spending, assuming favorable variances
The bear is hand made and the quality of material acquired by purchasing can negatively affect production generating excess waste or potentially jeopardizing the quality of the product. Marketing sells the bear through catalogs, company’s retail store adjacent to the factory, Internet sales, wholesale to department stores, toy boutiques, and other specialty retailers. Most orders are shipped the same day as they are received. Commissions of 3% are paid on retail store sales and sales to wholesale buyers, no commissions are paid on catalog sales. Internet sales began in 1997 with bears being sold at a wholesale price of $32.
The Marketing and the Purchasing departments seem to be operating well, but the Production department manager has identified the following problems: production was affected by materials ruined during flood, raw material is substandard, high rate of product stock-out, deviations from standard production plans, overtime to met sale demands is high, overworked staff, plant is at maximum capacity, and maintenance is almost impossible to be scheduled.
Analysis of the Case
BTC could work an alliance with its supplier in such a way that raw material is guaranteed to meet high levels of quality. Currently Bill in production receives the...