Gg Toy Case Study

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Geoffrey Doll

Specialty Branded # 106

Cradles

Traditional cost model

9%

34%

21%

Activity-based cost model

27.07%

4.37%

21.21%

Below are the recommendations to G.G. Toys to enhance its profitability:

- Implement activity-based cost system in the Chicago plant, and traditional cost model in the Springfield plant.

- Based on the new margin, G.G. Toys should change its sales mix with dominating the Geoffrey Doll and Cradles, and their margins are much higher than that of the Specialty branded #106 dolls.

- Machine setup costs for the Specialty branded #106 is 10 times than that of the Geoffrey doll. As listed in the case, it is because of frequent, but less quantity orders from retailers forced the manufacturing to run the machine at below its capacity and increasing the setup and run cost. G.G. Toys should investigate model to increase batch size (to reduce setup cost) and replace with more efficient machine (to reduce run time) to increase margin.

- How should G.G. Toys account for the excess capacity created to produce the holiday reindeer dolls? Qualitatively, how will this impact your calculated cost of the Geoffrey doll and the specialty-branded dolls in question from number 2? Explain your method and its impact. (Answer qualitatively. Do not recompute any of your product costs from question 2.)

G.G. Toys produce the holiday reindeer dolls in July, August, and September creates excess capacity leads to a significant level of volume variances and thus increases overhead rate. The company should use opportunity cost model to account of lost profit margins due to unused capacity – including machine cost and its depreciation expenses.

The production cost for all the three doll models will affect if the reindeer dolls use any resources such as machine setup, production runs, or shipping, impacting overhead cost. Using the activity-based cost model, G.G. Toys should recalculate the production cost based on cost drivers, as shown in question 2.

- What explains the difference between forecasted and actual revenue for the Chicago plant during March of 2000? What other information would you collect to help explain this difference?

Forecasted revenue = $765,000

Actual revenue = $786,000

Production units = 24,000

Actual price (AP)

$ 32.750

Actual quantity (AQ)

24000

Standard price (SP)

$ 30.723

Standard quantity (SQ)

24900

Price variance

$ 48,651

Quantity variance

$ (27,651)

Total variance

$ 21,000

AP = Actual revenue/actual quantity (AQ)

SP = Forecasted revenue/standard quantity (SQ)

Price variance = (AP – SP) x AQ

Quantity variance = (AQ – SQ) x SP

Due to favorable price variance, the Chicago plant generated higher revenue despite producing less units than budgeted. It would have been better explained, if the plant generated budget by each doll model, because it likely that the plant sold greater price dolls more or increased the price of the dolls from when budgeted.

- Do you recommend G.G. Toys produce the Romaine Patch doll? Why or why not? (Ignore manufacturing overhead costs including packaging, shipping, and receiving and production control.)

Per unit

Material purchased

Use scrap material

Sale price

$8.00

$8.00

Direct material cost

$6.00

$0.00

Direct labor cost

$3.00

$3.00

Contribution margin

($1.00)

$5.00

From the above margin analysis, it is evident that G.G. Toys should produce the Romaine Patch doll using scrap materials, provided is in reusable condition, including the leftover material from making pajamas for the dolls. In case, the scrap material is not reusable, then it should increase the unit sale price to $14 to generate same level of contribution margin, likely justify the high price by advertising that the dolls are eco-friendly and reusable.