Chapter 10- Solved Problems
Problem 1
Cox Industries produces sporting goods. Cox posted the following yearly earnings and expenses for 200X:
Earnings and Expenses / (in millions)Sales / 22,327
COGS / 17,596
Pre-tax Earnings / 3,404
Selected Balance Sheet Items
Merchandise Inventory / 3,722
Total Assets / 13,754
Calculate:
a. Profit margin
b. Return of assets
c. The impact of a 7% reduction of COGS and merchandise inventory on Profit margin
d. The impact of a 7% reduction of COGS and merchandise inventory on ROA
e. How much additional sales would Cox need to generate in order to achieve the same impact as a 7% reduction in merchandise cost?
Answer Problem 1
a. Profit margin = 100% (Earnings/Sales)
PM = 100% (3404/22327) = 15.25%
b. ROA = 100% (Earnings/Assets)
ROA = 100% (3404/13754) = 24.75%
c. New Matrix
Earnings and Expenses / OLD / NEWSales / 22,327 / 22,327
COGS / 17,596 / 16,364
Pre-tax Earnings / 3,404 / 4,636
Selected Balance Sheet Items
Merchandise Inventory / 3,722 / 3,462
Total Assets / 13,754 / 13,494
Profit margin = 100% (Earnings/Sales)
PM = 100% (4636/22327) = 20.76%
d. Using the matrix from above
ROA = 100% (Earnings/Assets)
ROA = 100% (4636/13494) = 34.36%
e. (Pre-tax new – pre-tax old)/Profit margin = (4,636 – 3,404)/15.25% = 8,079
Problem 2
Cox has decided to assess the feasibility of outsourcing a portion of their in-house production. A reputable supplier has bid $.72 per product on 400,000 products over a 3- year period. Shipping will cost a fixed $.007 per unit. Additionally, we must consider the cost of additional quality control at receiving, estimated at $1,667.67 per month and the additional cost associated with ordering, estimated at $8,000 per year. Current manufacturing costs for in-house production include one supervisor at $26,800 per year, three part-time employees at $6,000 per year, direct materials at $.13, equipment depreciation on a machine that will have no salvage value at the end of 3 years with a current value of $13,200, and overhead allocated to the product at the rate of $260,000 per year. Using total costing, which option is best?
Answer Problem 2
Direct labor and benefits / $ .045 = (3*6,000) / 1,200,000Indirect labor and benefits / $ .067 = 26,800/1,200,000
Direct materials / $ .13
Equipment depreciation / $ .011 = 13,200/1,200,000
Overhead / $ .65 = (3*260,000)/1,200,000
TOTAL / $ .903
The outsourcing option has the following costs associated with it:
Purchase price / $ .72Shipping and handling / $ .007
Ordering cost / $ .02 = (8,000*3)/1,200,000
Quality control / $ .05 = (1,667.67*36)/1,200,000
TOTAL / $ .797
Over the life of the product, outsourcing production will result in a $127,200 increase.
(.903-.797) * 1,200,000 = $127,200
Problem 3
Having selected outsourcing as a viable option, Cox now must choose between two competing bids. Both Blackstone Production and Williams Widgets have made competing offers at similar prices. The summary data for the two contract manufacturers is given below:
Performance Dimension / Blackstone / WilliamsPrice / $ .72 per unit / $ .75
Quality / 7% defective / 2% defective
Dependability / 95% on time / 91% on time
Lead time / 10 days / 3 days
Based on a traditional five-point scale (5 being the highest), the following weights and rankings were given to both organizations.
Performance Dimension / Weight / Blackstone / WilliamsPrice / .2 / 5 / 4
Quality / .4 / 3 / 4
Dependability / .25 / 4 / 3
Lead time / .15 / 2 / 4
Using the weighted point evaluation system, which contract manufacturer should Cox award the business to?
Answer Problem 3
Blackstone Score = (.2*5) + (.4*3) + (.25*4) + (.15*2) = 3.5
Williams Score = (.2*4) + (.4*4) + (.25*3) + (.15*4) = 3.75
Award the business to Williams Widgets.