University of Virginia
Darden Graduate Business School
September 15, 2008
Giberson’s Glass Studio
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:
Direct Materials Cost
per Unit, $
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:
Production Time, Hr.
Total Direct Labor per Unit Time, Hr.
Total Direct Labor per Unit Cost, $.
Hot Time, Hr.
Cold Time, Hr.
In addition to the direct variable costs, I also detected multiple operating costs. I would underline among others, the following:
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:
Hand tools and manufacturing supplies
Advertising & promotion
Dues & subscriptions
Travel & entertainment
Taxes & licenses
Repairs & maintenance
Utilities & telephone
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.
Fixed Operating Cost per Unit Allocation
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:
Direct Variable Costs:
Total Direct Cost:
Less Indirect Fixed Costs
Operating Profit (Loss)
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:
Total per Bundle
Expected Monthly Sales, Units
Expected Monthly Revenues
Less Variable Costs
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