Giberson’s Glass Studio

Topics: Variable cost, Costs, Cost Pages: 7 (1303 words) Published: November 12, 2008
Felicia Coates
University of Virginia
Darden Graduate Business School

September 15, 2008

Edward Giberson
Giberson’s Glass Studio
Owner

Dear Mr. Giberson:

I appreciate an opportunity you provided for me to observe and analyze a production process at your studio. I would like to share with you my observations and recommendations.

There are four products you produce at the studio: Patterned glasses, Paperweights, Wrapped tumblers and Vases. Based on amount of a batch mix and average number of units produced, I calculated Direct Materials per Unit as following:

ItemDirect Materials Cost
per Unit, $

Patterned glasses0.29
Paperweights0.52
Wrapped tumblers0.29
Vases0.35

I also measured an amount of time you spend on blowing and finishing of the goods. In order to calculate Direct Labor cost per unit, I used hourly rate of $25.00 Direct labor costs are represented below:

ItemProduction Time, Hr.Total Direct Labor per Unit Time, Hr.Total Direct Labor per Unit Cost, $.
Hot Time, Hr.Cold Time, Hr.

Patterned glasses0.250.050.307.50
Paperweights0.250.250.5012.50
Wrapped tumblers0.250.050.307.50
Vases0.420.080.5012.50

In addition to the direct variable costs, I also detected multiple operating costs. I would underline among others, the following:

Furnace Gas$1,000.00
Insurance90.00
Rent175.00
Total Fixed$1,265.00

These costs are fixed. They do not depend on a production level. Even if you do not produce any number of goods, the fixed costs will stay the same.

There are also a number of variable operating costs estimated as following:

Office supplies$25.00
Hand tools and manufacturing supplies150.00
Part-time labor 100.00
Professional services50.00
Advertising & promotion20.00
Contributions15.00
Dues & subscriptions35.00
Travel & entertainment75.00
Taxes & licenses45.00
Repairs & maintenance25.00
Utilities & telephone60.00
Miscellaneous50.00
Total Variable$650.00

These amounts can change on a monthly basis.

I suggested allocations of Fixed Operating Costs to production lines proportionally by Direct Manufacturing Costs. Theoretically, the more labor time is spent on a unit, the higher should be rent and insurance charges. The higher number of direct materials used for an item, the more furnace gas it would take to melt. The average weekly production can be converted to monthly basis by multiplying of a weekly number by 52 and dividing by 12.

ItemFixed Operating Cost per Unit Allocation

Patterned glasses$3.83
Paperweights$6.40
Wrapped tumblers$3.83
Vases$6.31

The previous calculations were necessary to analyze the current pricing. The question is how well the prices cover the direct and indirect allocated costs?

Current prices analysis detected the following:

Patterned glassesPaperweightsWrapped tumblersVases

Selling Price$9.00$15.00$8.00$25.00

Direct Variable Costs:
Direct Labor7.5012.507.5012.50
Direct Materials0.290.520.290.35
Total Direct Cost:7.7913.027.7912.85
Gross Profit 1.21 1.98 0.21 12.15

Less Indirect Fixed Costs3.836.403.836.31

Operating Profit (Loss)(2.62)(4.42)(3.62)5.84

Unfortunately, the analysis confirmed your suspicions that prices were too low. The Vases line is the only one that provides descent profitability. The other lines’ prices are not sufficient to cover operating costs.

Under current prices with the current sales mix, it will going to more than double monthly production to cover just a fixed operating costs:

Patterned glassesPaperweightsWrapped tumblersVasesTotal per Bundle

Expected Monthly Sales, Units784313030282

Selling Price$9.00$15.00$8.00$25.00

Expected Monthly Revenues$702.00$650.00$1,040.00$758.33$3,150.33

Less Variable Costs
Direct Labor585.00541.67975.00379.172,480.83
Direct...
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