STRATEGIC COST MANAGEMENT BERKSHIRE THREADED FASTNERS COMPANY CASE

PRESENTED BY ANJANI MANURI NARESH PRADHAN VIJAY JAYABAL ABHIROOP SEN

CASE ANALYSIS
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 the 300 series. Reduction of the selling price of the 200 series. Furthermore, these decisions will lead into suggestions about the overall strategic approach of the firm.

1. Analysis regarding the withdrawal of the 300 series

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.

Company's profit if it had dropped 300 Series

300 Series (in 000s) Retain Drop Variable Labor Raw Material Power Repairs Total Fixed Selling Expense General Admin Rent Other Fact Costs Depreciation Interest Total 239 90 95 56 186 27 693 239 90 95 56 186 27 693 349 404 15 5 773 0 0 0 0 0

Total Cost Unit Sales Sales Contribution Margin Profit Profit from Series 1 and Series 2 Total Profit for firm Hence dropping series 300 is not advisable

1466 501276 1355 582 -111 35 -76

693 0 0 0 -693 35 -658

Verdict regarding the withdrawal of the 300 series

The excel worksheet 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 a loss of $693,000 instead of $110,000 loss. To withdraw the 300 Series would thus be a poor decision.

2. Analysis regarding the reduction of the selling price of the 200 series
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.

However, Berkshire must take into account the forecasting for the entire period.

Whether to lower the price of series 100 from $2.45 to $2.25 Lowering prices will increase the volume from 750,000 to 1,000,000 Seling Price 2.42 2.25 Unit Sales 750,000 1,000,000 Total Sales 1815000 2250000 Variable Cost per unit sales (100 pcs) Labor Raw Material Power Repairs Total Variable Cost Contribution Fixed Cost Selling Expense General Admin Rent Other Fact Costs Depreciation Interest Total Fixed Cost per unit sales (100 pcs) Total 426000 161000 88000 65000 264000 25000 1029000 426000 161000 88000 65000 264000 25000 1029000 0.61 0.63 0.01 0.01 1.26 945000 870000 0.61 0.63 0.01 0.01 1.26 1260000 990000

1.372

1.029

Total Cost per unit sales Profit

2.632 -0.212

2.289 -0.039

Hence, to reduce prices is a good option

Verdict regarding the reduction of the selling price of the 200 series
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. As shown in the previous slide 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 profit from the first half, though the overall losses would be reduced.

Thus, Berkshire should reduce the unit sales price of the Series 100 product to $2.25.

Most Profitable Product Line Selling Price per unit sales Variable Costs per unit sales ( 100 pcs) Labor Raw Materials Power Repairs Total Variable Cost Total Contribution Margin Fixed Costs Rent Depreciation Other Factory Cost Selling Expense General Admin Interest Allocated fixed cost Fixed Cost per unit sales (100 pcs) Contribution Margin per 100 piece lot Contribution Margin Ratio Profit(loss) per unit sales ( 100 pcs) 88,000 109,000 95,000 264,000 296,000 186,000 65,000 76,000 56,000 426,000 317,000 239,000 161,000 90,000 90,000 25,000 28,000 27,000 1,029,000 916,000 693,000 1.032 1.286 1.382 1.16 1.15 1.15 0.4793388 0.4563492 0.4259259 0.128 -0.136 -0.232 0.61 0.63 0.01 0.01 1.26 2,494,000 0.59 0.75 0.02 0.01 1.37 1,174,000 0.7 0.81 0.03 0.01 1.55 1,145,000 100 Series 200 Series 300 Series 2.42 2.52 2.7

Hence, 100 Series is the most profitable one

The Verdict
Berkshire is one of the 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 increase operating income and contribute to a healthy bottom line.

Continued
This should also 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.