Treasure

Trophy Company












Benjamin Hammer
Acct 442-101
Dr. Szendi

TREASURE TROPHY COMPANY

Treasure Trophy Company manufactured trophies for all kinds of sports, businesses
and events. Trophies are sold both to retailers and to event organizers directly. A
job-costing system has been used thus far due to the custom nature of the orders.
The production process of trophies has been broken down into three departments:
forming, for converting raw materials to finished parts; finishing, for putting custom
touches on the parts such as polishing, sanding, engraving; and assembly, for joining
parts together to form the trophy.

PURPOSE
The new general manager of Treasure Trophy Company, Bob Morden, has received
two new job orders and is trying to quote a price. This paper will investigate three
questions:
What is the cost of filling these job orders?
What price should be quoted?
What should be taken into account for pricing these orders?

SWOT ANALYSIS OF TREASURE TROPHY
Strengths
Compact manufacturing process - all three departments in the same building
save on shipping costs
Clear departmentalized cost structure direct costs are tracked by
department
Good accounting records management has a good idea of how indirect costs
should be allocated among departments

Weaknesses
Lack of administrative cost information lack of information prevents an
accurate distribution of administrative cost information
High overhead costs Treasure Trophy is spending more money on indirect
costs than on direct

Opportunities
Departmentalization opens up the possibility of outsourcing specific
processes
Similar competitor capabilities low barrier of entry enables Treasure
Trophy to gain market share more easily

Threats
Similar competitor capabilities low barrier of entry also makes Treasure
Trophy vulnerable to new competition
Foreign threats manufacturing companies are constantly threatened by
lower labor costs in foreign countries



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PORTERS FORCES
Threat of New Entrants (high)
Cost of capital helps prevent new entrants
Economies of scale are present but limited because of the custom nature of
the work
Low customer loyalty due to high competition by competitors with similar
capabilities
Threat of Substitute Products (high)
No switching cost for customers
Lack of differentiation despite custom products
Substitutes could include cheaper products such as ribbons or certificates
Bargaining Power of Customers (medium high)
Several competitors with similar capabilities
Substitutes are cheaper
Bargaining Power of Suppliers (low)
Suppliers sell undifferentiated raw materials
Substitutes available (multiple materials to make trophies from)
Intensity of Competitive Rivalry (medium - high)
Prices set within a narrow competitive range
Several competitors implies low - medium firm concentration
Strong competition through cost

WHAT IS THE COST?
While investigating the cost of filling the two job-orders, the costs will be split
between all three departments. The purpose of this is to determine an application
rate for the overhead with direct labor dollars as the base. This information can also
be used to measure the efficiency of the different departments for future
considerations.

Treasure Trophy has provided 2014 budgeted costs, which can be used to calculate
an overhead application rate. To do this the overhead will be split between factory
overhead costs, which can be directly associated with the manufacturing process,
and administrative costs, which are indirect and will be split between the
departments evenly.

Figure 1
Cost Allocation by Department

Total
Forming
Finishing
Assembly
Direct Costs

12,000
Direct Labor (Hours)
4,000
4,000
4,000
Direct Labor
$210,000
$56,000
$84,000
$70,000
Direct Material
140,000
140,000
0
0
Total Direct Costs
$350,000 $196,000
$84,000
$70,000





Factory Overhead Costs


Supervision
51,500
17,167
17,167
17,167
Supplies
42,000
0
21,000
21,000
Power
13,500
8,100
5,400
0
Factory Rent (2/3 of total)
36,000
14,400
10,800
10,800
Depreciation on Machinery
60,000
36,000
24,000
0
Insurance on Machinery
6,000
3,600
2,400
0
Repairs
6,500
3,900
2,600
0
Total Factory Overhead Costs
$215,500
$83,167
$83,367
$48,967





Administrative Costs

105,000
General Manager
35,000
35,000
35,000
Shipping and Receiving
30,000
10,000
10,000
10,000
Office Rent, Heat, and Light
24,000
8,000
8,000
8,000
Selling Expenses
70,000
23,333
23,333
23,333
Administrative Expenses
33,500
11,167
11,167
11,167
Total Administrative Expenses
$262,500
$87,500
$87,500
$87,500





Overhead Application Rates



1.4851

0.9925
0.6995
Factory Overhead
Application Rate






1.5625
1.0417
1.2500
Administrative Overhead
Application Rate





3.0476
2.0341
1.9495
Total Overhead Application
Rate


Overhead Allocations
For supervision costs, they were allocated evenly across the departments to match
the even distribution of labor hours. With more information about how much time
the supervisor spends on different activities, a more accurate distribution could be
made.

Depreciation on machinery was calculated based on an estimated life of 10 years

and no estimated salvage value. It may be worth investigating units of activity
method of depreciation. The purpose of this would be to have a more accurate cost-
volume-profit analysis.

Administrative costs, for lack of information, were distributed amongst the
departments evenly. To allocate these costs more accurately, these costs would need
to be broken into separate departments which could then have their costs allocated
based on use by other departments. It does not seem that the administrative costs
are high enough to warrant this at this time.

Job Cost Sheets
Using the overhead application rates calculated in Figure 1, the costs of the two jobs
can be estimated.

Figure 2
Job Cost Sheet

Treasure Trophy Company

Customer: Royal
Golf Club
Box 11258

Carstairs, Alberta



Order No. 3515


Material
Department
Hours
Cost



Forming
$301.00
10
Finishing
-
15
Assembly
-
10
Total
$301.00
35

Job Order No.: 35

No. of Units: 80

Labor Rate

Cost

$14.00
$21.00
$17.50

Date: April
6, 2014

$140.00
$315.00
$175.00
$630.00

Overhead
Total
Applied


$426.67
$891.67
$640.75
$991.75
$341.17
$543.67
$1,408.59 $2,427.09

Figure 3
Job Cost Sheet

Treasure Trophy Company

Customer: Sterling
Yacht Club
Date:
3585 W. Hastings Street

Vancouver, BC
Job Order No.:




Order No. 350
No. of Units:


Material


Department
Hours
Labor Rate
Cost
Cost





Forming
$665.00
15
$14.00
$210.00
Finishing
-
7
$21.00
$147.00
Assembly
-
20
$17.50
$350.00
Total
$665.00
42
$707.00

June
4, 2014

48

20

Overhead
Total
Applied


$640.00 $1,544.00
$299.02
$474.02
$682.33 $1,069.83
$1,621.35 $3,087.85

The costs of these two job orders are ultimately just an estimate. The application
rate has been calculated with budgetary information and overhead allocation is
estimation as well. This should be taken into consideration when using these costs
for pricing purposes. These estimates reflect an estimated cost of $2,427.09 and
$3,087.85 for the two job orders.

PRICING
Looking at industry average profit margins for the manufacturing industry,
Treasure Trophys profit margin should be around 5%. Looking at Porters forces,
there is a lot of competition in the market so it is possible that a lower profit margin
might be preferred. However, because the quote is being based on estimates a larger
cushion of budgeted profit margin will help prevent a loss.

There are three prices that would be valid depending on the goals of management.
There is the price with a built in 5% profit margin, the break-even point, and the
price for if the company is trying to minimize its loss and continue operations.

Industry Average Profit Model
To obtain the industry average profit margin, Bob Morden just needs to add the
desired profit to the cost of the job cost sheets. This would make the quote for the
golf and yacht clubs $2,427.09 and $3,087.85 respectively.

If these prices are competitive quotes, then Treasure Companys manufacturing
process is in good health. If these prices are materially higher than competitors

(more than 5%), then the price should be quoted at the break-even point until costs
can be reduced to resolve the problem.

Break-Even Model
In the event that the company cannot quote at the desired profit margin, the price
will need to be at least what the cost on the job cost sheets display as the cost. This
will hopefully prevent the company from losing money. Again, because the job cost
sheets were made from budgeted numbers and estimates, this is not guaranteed. If
quoting these two jobs at cost does not allow Treasure Trophy to compete in the
market, then they will need to consider the worst-case scenario.

Continuing Business
In the worst-case scenario that Treasure Trophy is considering operating at a loss to
minimize the deficit, Figure 4 shows an allocation of costs that must be covered to
justify continuing operations.

Figure 4
Cost Allocation for Continuing Operations

Total
Forming
Finishing
Assembly
Direct Costs

$210,000 $56,000 $84,000
Direct Labor
$70,000
Direct Material
140,000
140,000
0
0
Total Direct Costs
$350,000 $196,000
$84,000
$70,000





Factory Overhead Costs


Supervision
51,500
17,167
17,167
17,167
Supplies
42,000
0
21,000
21,000
Power
13,500
8,100
5,400
0
Insurance on Machinery
6,000
3,600
2,400
0
Repairs
6,500
3,900
2,600
0
Total Factory Overhead Costs
$119,500
$32,767
$48,567
$38,167





Administrative Costs

105,000
General Manager
35,000
35,000
35,000
Shipping and Receiving
30,000
10,000
10,000
10,000
Selling Expenses
70,000
23,333
23,333
23,333
Administrative Expenses
33,500
11,167
11,167
11,167
Total Administrative Expenses
$238,500
$79,500
$79,500
$79,500





Overhead Application Rates


2.0048
1.5246
1.6810
Total Overhead Application
Rate

The main costs that have been removed from the calculation are the rent expenses
and machinery depreciation. To enhance the effectiveness of this calculation, it
would be necessary to know if it is possible to terminate the rent contract early and
what price it would be possible to sell the machinery at.

The costs that remain on the cost allocation worksheet are costs that are incurred
by continuing operations and must be covered to justify continued production.
Using the lower overhead application rate, the resulting job cost sheets are shown in
figure 5 and 6.

Figure 5
Job Cost Sheet for Continued Operations

Treasure Trophy Company

Customer:



Order No.

Department

Forming
Finishing
Assembly
Total

Royal
Golf Club
Box 11258

Carstairs, Alberta

Job Order No.: 35

3515

No. of Units: 80

Material
Hours
Cost


$301.00
10
-
15
-
10
$301.00
35

Labor Rate

Cost

$14.00
$21.00
$17.50

Date: April
6, 2014

$140.00
$315.00
$175.00
$630.00

Overhead
Total
Applied


$280.67
$745.67
$480.25
$831.25
$294.17
$496.67
$1,055.09 $2,073.59

Figure 6
Job Cost Sheet for Continued Operations

Treasure Trophy Company

Customer: Sterling
Yacht Club
Date:
3585 W. Hastings Street

Vancouver, BC
Job Order No.:




Order No. 350
No. of Units:


Material


Department
Hours
Labor Rate
Cost
Cost





Forming
$665.00
15
$14.00
$210.00
Finishing
-
7
$21.00
$147.00
Assembly
-
20
$17.50
$350.00
Total
$665.00
42
$707.00

June
4, 2014

48

20

Overhead
Total
Applied


$421.00 $1,325.00
$224.12
$399.12
$588.33
$975.83
$1,233.45 $2,699.95

PRICING SUMMARY
After looking at the three models of target profit, break even, and continuing
operations, the following amounts are the benchmark prices for the two job orders.

Target Price Break Even
Minimum


(5% Profit)
Price
Price
Royal Golf
Order 3515
$2,554.83
$2,427.09
$2,073.59
Club
Sterling Yacht
Order 350
$3,250.37
$3,087.85
$2,699.95
Club

ADDITIONAL INNFORMATION
This section is to address information that if acquired, could provide better insight
for decision making.

Outsourcing Departments
More information on how much it would cost to, for example, purchase finished
parts from another company instead of having a forming department would be
useful. This would allow for calculations on whether certain departments should be
outsourced or not.

Outsourcing Administrative Costs

It may be possible to outsource administrative costs such as HR or Accounting. If
this cost to outsource these is lower than the cost of the staff for these departments
plus a portion of the rent, it may be worth outsourcing these activities. If space is not
required for these activities, the company may be able to cut cost by finding a
smaller factory space to rent without reducing output.

Machine Hours
If machine hours were tracked then alternative depreciation methods could be used
which could give more accurate overhead rates. Depreciation is a little over 10% of
the total overhead costs meaning a different allocation could result in a material
difference in target pricing.

Idle Machine Hours
If the companys idle machine times are tracked, it may be a possible source of
revenue. If there are enough idle machine hours Treasure Trophy Company may be
able to sell their machine time to another company.

Effect of Climate on Machinery
Again due to depreciation on machinery being a somewhat major cost, the climate of
the factorys location should be considered when calculating depreciation costs. This
may shorten the lifespan of the machinery and if this has already been considered
then the benefit of moving to a drier climate should be estimated.

Labor Utilization Ratio
It may be beneficial to track the idle time of the direct labor for a few periods to
estimate how much downtime each employee averages. If there is a lot of down time
then it may be possible to cut costs by improving the efficiency of the direct labor. A
problem like this might require a different plant layout to improve efficiency. If this
is determined necessary the cost can be estimated and compared to the expected
benefit to determine if it is necessary.

Raw Material Waste/Rework Costs
Unless Treasure Trophy Company is a flawless operation; they have also not
monitored how much of their direct material cost is due to waste or rework costs.
Given that direct materials are the second highest cost after direct labor, this is
definitely a cost that should be tracked and minimized.

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REFERENCES

http://www.inc.com/quarterly-financial-report/manufacturing.html

http://www.bls.gov/iag/tgs/iag31-33.htm#about

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