Berkshire Threaded Fasteners Company Case

This analysis examines the income and cost information presented by Berkshire Threaded Fasteners Company from historical and projected perspectives to justify two major decisions: withdrawal of a product line, and reduction of the selling price of another. Furthermore, these decisions will lead into suggestions about the overall strategic approach of the firm. At the beginning of 1974, Berkshire leadership advocates withdrawal of the 300 Series product line. First glance at the income statement for the period ending December 31, 1973 appears to reveal that production of the 300 Series causes substantial overall losses to the firm. However, this is a relevant cost decision. Table 1 illustrates that the withdrawal of the 300 Series product line will affect labor, raw materials, power, and repairs. It will have no affect upon the other costs as they are either allocated across the three product lines or historical costs with no relevance. The result based upon period-end numbers for first six months of 1974 would project an operating income loss of $693,000 instead of $110,000 loss. To withdraw the 300 Series would be a poor decision. Table 1. 300 Series - Selling price $2.75 Drop 300 Series labor $349.00 $0.00 raw materials $404.00 $0.00 power $15.00 $0.00 repairs $5.00 $0.00 rent $95.00 $95.00 Other Factory costs $56.00 $56.00 Total $924.00 $151.00 Selling Expense $239.00 $239.00 General Administration $90.00 $90.00 Depreication $186.00 $186.00 Interest $27.00 $27.00 Total Cost $1466.00 $693.00 Sales(net) $1355.00 $0.00 Profit(loss) -$111.00 -$693.00 Unit Sales 501276 0

As the profit and loss statement for June 30, 1974 indicates, the reduction of the unit sales price of Series 100 from $2.45 to $2.25 would mean that the unit sales price would be below the total unit cost of $2.29. This should mean substantial losses to the bottom line. However, Berkshire must take into account the forecasting for the entire period. If projections are sound then as Table 2 shows, production of an additional 750,000 units at the current unit sales price would essentially cancel out the increase in forecasted operating income for the first half of 1974. Table 2 shows that reduction in unit sales price to $2.25 will indeed create a break-even production quantity of near one million units as projected. This reduction would not increase operating income from the first half, though the overall total for the year would at $92,000. Thus, Berkshire should reduce the unit sales price of the Series 100 product to $2.25. Table 2. 750000 unit sales at $2.45 1000000 unit sales at $2.25 sales 1,837,500.00 2,250,000.00 less Variable cost($1.42/unit) 1,065,000.00 1,420,000.00

Cont. Margine 772,500.00 830,000.00 Less Total Fixed Expense from 1st half. 876,000.00 876,000.00 Net Operating Income -103,500.00 -46,000.00

The decision to reduce the unit sales price of Series 100 is strategically sound. Furthermore, the contribution margin percentages show that 100 Series product line is clearly the most profitable. 100 series 200 series 300 series Selling price per unit $2.45 $2.58 $2.75 Variable cost per unit $1.42 $1.63 $1.85 CM per unit $1.03 $.95 $.90 CM Ratio 42% 37% 33% Berkshire is one eight competitors in a localized market in which demand is inelastic. This price cut should force the competition to either follow suit or get out of the market for this particular product line, depending upon the respective costs of each of their manufacturing processes. This should create additional outputs produced for Berkshire, which would result in new revenues. Furthermore, the firm should continue to work toward improving efficiencies with respect to its 200 and 300 Series, with the goal of increasing contribution margin for each product. This should increase operating income and contribute to a healthy bottom line.

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