Question

Tannert Company manufactures furniture. One of its product lines is an economy- line kitchen table. During the last year, Tannert produced and sold 100,000 units for $100 per unit. Sales of the table are on a bid basis, but Tannert has always been able to win sufficient bids using the $100 price. This year, however, Tannert was losing more than its share of bids. Concerned, Larry Franklin, owner and presi- dent of the company, called a meeting of his executive committee (Megan Johnson, marketing manager; Fred Davis, quality manager; Kevin Jones, production manager; and Helen Jackson, controller). Larry: “I don't understand why we're losing bids. Megan, do you have an explana- tion?” Megan: “Yes, as a matter of fact. Two competitors have lowered their price to $92 per unit. That's too big a difference for most of our buyers to ignore. If we want to keep selling our 100,000 units per year, we will need to lower our price to $92. Otherwise, our sales will drop to between 20,000 and 25,000 per year.” Helen: "The unit contribution margin on the table is $10. Lowering the price to $92 will cost us $8 per unit. Based on a sales volume of 100,000, we'd make $200,000 in contribution margin. If we keep the price at $100, our contribution margin would be $200,000 to $250,000. If we have to lose, let's just take the lower market share. It's better than lowering our prices." Megan: "Perhaps. But the same thing could happen to some of our other product lines. My sources tell me that these two companies are on the tail end of a major quality-improvement program-one that allows them significant savings. We need to rethink our whole competitive strategy-at least if we want to stay in business. Ideally, we should match the price reduction and work to reduce the costs to recap- ture the lost contribution margin.” Fred: "I think I have something to offer. We are about to embark on a new quality- improvement program of our own. I have brought the following estimates of the current quality costs for this economy line. As you can see on the overhead, these costs run about 16 percent of current sales. That's excessive, and we believe that they can be reduced to about 4 percent of sales over time.” Scrap Rework Rejects (sold as seconds to discount houses) Returns (due to poor workmanship) $ 700,000 300,000 250,000 350,000 $1,600,000

Answer 1

1. Hence the we time * - page:- caluciate the tetemanation of the unit contribution margin Rejsied + $10... Lost contribution margin = $8* 100,000 units H9uorters : 800.000 -$200.000 per quarter Sales Revenue per quarter : $99x95,000 units. = $2,300,000 Percentage of sales to regain cox contribution margin : $ 200000 x 100 $2,300,000 8:47. At ll gain per quarters -8.7.quarters 8 mole than two years are needed to Restôle priel profitability

B) Page 2 Computation of the increase yn contribution margin After theree years quality cost will be hel of sales , a decline equal to 124. of sales, Savings = 0.12 X $92 x 100,000 $1,104,000 Increase Rn unit contribution margin= Tin con. mar: = $ 1,104,000 100,000 unito $11.04 contribution margin = $110042 +($92-890) porojected unit : : $1301 total contribution margin at the . projected bire of $92: SD :13:04 X 100,000 31, 304,000

B) Page 2 Computation of the increase yn contribution margin After theree years quality cost will be hel of sales , a decline equal to 124. of sales, Savings = 0.12 X $92 x 100,000 $1,104,000 Increase Rn unit contribution margin= Tin con. mar: = $ 1,104,000 100,000 unito $11.04 contribution margin = $110042 +($92-890) porojected unit : : $1301 total contribution margin at the . projected bire of $92: SD :13:04 X 100,000 31, 304,000

Page 1-3 Price deceasesin At $i total contribution margin = $12.0 HX1101000 - $1,394400 $11.04x 120,000 contribution margin At $2 total = $1,324,800 At $3 total contribution margin = $ 1004 *130.000 = $1,305,800 Thereffies gecommended decrease of from $9a to $90 In creage ya contri bution margin: $1,324,800 - $1,304,000 - $ 20800 3 I dentification of tuture changes Let x = contribution margin per unit con tribution margin: 100,000* New con tribution margin . = 10000-(4-81) 180,000 x = 10.000(*-$1] contrib I current

page! 4 10,000 X= $ 10.000 . X=$1 when $11, the the unit contribution margin more than price should be declined by $1. point In Time in know to find this Co current contribution margin = $92-$90 =$2 Gain Required = $11-82 Annual contri bution margin needed = $9 X 100,000 . = $900,000 Qua terly contribution margin needed : $900.000 . . : $ 225,000 = $225,000

page!-5 2 X 100 Quay terry percent of saley needed = $295,000 $9,300,000 -98.13 At H: per quarter 9.8 quarters are rueeded to gain $a per unita i Aytes 9.8 quarters, The-porice can. Decline by $1 4) ) The Difference exists in long and sholt rom run perspectivega. The managen has strategic Plientation, =) It can be Noticed from the coft value In filmation especially from quality coff Information, ende9 - Strategic decision making, -) Indeed, the consideration on Identification of several quality costs and over au quality control drives the Decision.