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Case 17-2: Lipman Bottle Company

Oland Amaja-Marquell Sexton

Course ID: MBA 621

Financial and Managerial Accounting

Faculty: Dr. Thomas F Gross

Herzing University

Date: September 27, 2015

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Abstract

As a leading bottle distributor, the Lipman Bottle Company (“Lipman”) of Albany, New York

established business of distributing pre-manufacturing bottles in 1909. As time passed, Lipman

reestablished business with the dual service of distributing pre-manufactured bottles with printed,

at clients’ request, labels on the bottles. This dual service necessitated the implementation of

price lists as this related to the company’s printing operation.

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Case 17-2: Lipman Bottle Company

Introduction

As a leading bottle distributor, the Lipman Bottle Company (“Lipman”) of

Albany, New York established business of distributing pre-manufacturing bottles in

1909. As time passed, Lipman reestablished business with the dual service of

distributing pre-manufactured bottles with different shapes and sizes. Logos or labels

were printed on the bottles that were provided to clients who took advantage of the

convenience of these two services Lipman offered. This dual service necessitated the

implementation of price lists as this related to the company’s printing operation..

Objective

The objective of this case study is to determine the appropriate pricing strategy for

the Lipman Bottle Company (“Lipman”) that will ensure that the company will remain

profitable or break-even, specifically by achieving the company’s goal of reaching a 30%

margin.

Statement of the Problem

Lipman must determine the prices for printing in order to achieve the company’s goal of

30% margin (at capacity).

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Analysis and Solution

Lipman must begin to look at variable costs to reach a 30% margin capacity. This

will assist the company in remaining profitable or finding a break-even point that is

defined as “total revenues and total costs are equal in which there is no profit but also no

loss made” (Garret, 2015). Insofar as variable costs are computed per 1,000 bottles based

on the different combinations given in the case, Lipman can develop and implement a

pricing strategy through managerial accounting formulation. Using full cost information

“to set printing prices” (Barber, n.d.) by analyzing the printing prices charged by industry

leaders is a pricing strategy Lipman can implement.

Lipman’s consultant, Thomas Shull, determined a variable cost analysis would be part of

the pricing strategy to determine the printing prices. This will enable Lipman to continue to be

profitable plus estimate the break-even volume for each bottle combination. Desiring a 30%

margin in printing labels, Lipman would have to consider per volume, the size of the bottles, and

separations herein.

30 % Margin

Lipman must apply effective methods to achieve the company’s goal of a 30% margin.

Methods to remain profitable as well as calculating a break-even point are as follow:

1. The equation method is “simple math that can answer numerous cost-volume-profit

questions” (Garret, 2015). This can help determine “selling prices, costs, or volume to

analyze cost behavior via scrap or shipping costs and the operating cost information”

(Galbreath, Caldwell, Booker, and Rooney, 2013). This method uses profits equals unit
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contribution margin (CM) times quantity sold (Q) minus fixed expenses or profit equals

CM ratio times sales minus fixed expenses.

2. To solve for the break-even point, the formula method can be used as a unit of sale to

break-even equals fixed expenses divided by CM per unit.

3. The margin of safety in dollars equals total sales minus break-even sales.

4. Finally, operating leverage calculation is done by the degree of operating equals CM

divided by net operating income.

Surely, a break-even analysis is an approach in developing price lists. This enables

Lipman to foresee “how many units of their products must be sold to ensure that total revenues

and total costs are equal in which there is no profit but also no loss made” (Garret,, 2015; Bala,

n.d.).

Pricing Strategies

Inasmuch as Lipman’s signals of distress were when “unit-sales volume growth slowed

down, discounts fail to drive incremental volume, competitors introduce new offerings, lower-

cost competitors entered the market, and competitors started their numbers” (Ryan, 2009, pgs.

49-52), the company developed a variable costs analysis to implement price lists for their

printing operation. The price lists calculation is done by computing the variable costs per

thousand bottles for one-separation and two-separation rounds; therein, a “cost-plus pricing or

target costing analysis is performed, which strategies are done through the use of markups”

(Davis and Davis, n.d.).

Due to the fact that a variable costs analysis is widely used as a managerial accounting

tool, it is a perfect utility when forming a price strategy in addition to “understanding pricing
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concepts and issues because a variable costs analysis examines the financial impact of changing

pricings on operating profits” (Id.). In all, because this analysis includes changes in pricing (e.g.

sales price), each pricing method can be analyzed effectively in regards to the buyer and seller.

In support of this case study, tables below have been provide to illustrate variable costs

per thousand bottles for one-separation and two-separation rounds. Herein, is a brief discussion

that concerns the aforementioned tabulations.

1. Lipman’s order size at one-separation round range from 5000 – 9999 with median order

being 7, 500 and bottle size being 0-1 oz. variable costs are calculated for the Albany,

New York area (Table 1) as operating cost/thousand is $18.58, direct variable cost for

printed per-manufactured bottles is $21.21, scrap $1.40 with total direct cost being

$22.61.

2. The New York-New Jersey area (Table 2) order size for one-separation round ranged

from 5000 – 9999 with median order being 7, 500 and bottle size being 0-1 oz. variable

cost calculated as operating cost/thousand is $18.58, cost per thousand passes is $2.63,

direct cost to manufacture is $21.21, and shipping cost is $1.06 with total direct cost

being $22.27.

3. The two-separation round in the Albany, New York (Table 1) area with median order size

being 175,000 with order range of 100,000 – 249,999 and bottle size of 17-32 oz.

calculated variable costs are operating cost/thousand is $35.40, cost per thousand passes

is $5.26, direct cost to manufacture is $40.66, and scrap cost is $6.30 with total direct

cost being $46.96.

4. The two-separation round in the New York-New Jersey (Table 2) area with median order

size being 175,000 with order range of 100,000 – 249,999 and bottle size of 17-32 oz.
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calculated variable costs are operating cost/thousand is $35.40, cost per thousand passes

is $.26, direct cost to manufacture is $40.66, and shipping cost is $26.19 with total direct

cost being $66.85.

5. Ultimately, Table 3 shows that it is more profitable for Lipman to sell large size bottles at

small volumes under two separation rounds. This is seen via Lipman’s profit margin.

For example, one-separation round profit margin (order size range 5000 – 9999) with

bottle sized being 0-1 oz. is $15.34 while bottle sized at 17-32 oz. profit margin is $22.90

marking the profit margin gain as $7.56.

Conclusion

Conclusively, the Lipman Bottle Company goal is to gain a 30% margin (at capacity) by

cost-plus or target costing pricing. This should enable the company to remain profitable or

break-even. However, Lipman must meditate per volume, the size of bottles, and via

separations.

Recommendation

Further, in recommendation is that Lipman should sell large size bottles at small volumes

under the two separation rounds reflected in Table 3: Per Volume, Bottle Size, and Separations

calculations below, insomuch as this is more profitable.

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Table 1: Variable Cost – Albany

Particulars One Separation Rounds Two Separation Round Two Separation Ovals

Order Size 5,000-9,999 100,000-249,999 5,000-9,999 100,000-249,999 5,000-9,999 100,000-249,999

Median Order 7,500 175,000 7,500 175,000 7,500 175,000

Size (MOS)

Bottle Size (BS) 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32

Set-up time (SUT) 2 hrs 2 hrs 2 hrs 2 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs

Hours per .27 .27 .01 .01 .53 .53 .02 .02 .53 .53 .02 .02
thousand bottles
(HTB=SUT/MOS)

Run 1.00 1.00 1.00 1.00 2.4 1.76

time/thousand 2 2 2 1 1 1

.4 .4 .4 .76 .76 .76

Total 1.27 1.27 1.01 1.01 2.93 2.93 2.42 2.42 2.29 2.29 1.78 1.78
time/thousand
(TT=HTB+RT)

Operating $18.58 $18.58 $14.78 $14.78 $42.87 $42.87 $35.40 $35.40 $33.50 $33.50 $26.04 $26.04
cost/thousand
(TT x $14.63)

Cost per 2.63 2.63 2.63 2.63 5.26 5.26 5.26 5.26 5.26 5.26 5.26 5.26
thousand passes

Direct cost to $21.21 $21.21 $17.41 $17.41 $48.13 $48.13 $40.66 $40.66 $38.76 $38.76 $31.30 $31.30
manufacture

Scrap $ 1.40 $ 2.90 $ 1.40 $ 2.90 $3.30 $6.30 $3.30 $6.30 $3.30 $6.30 $3.30 $6.30

Shipping

Total direct cost $22.61 $24.11 $18.81 $20.31 $51.43 $54.43 $43.96 $46.96 $42.06 $45.06 $34.60 $37.60

(Escarro, n.d.).
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Table 2: Variable Cost – New York New Jersey

Particulars One Separation Rounds Two Separation Round Two Separation Ovals

Order Size 5,000-9,999 100,000-249,999 5,000-9,999 100,000-249,999 5,000-9,999 100,000-249,999

Median Order 7,500 175,000 7,500 175,000 7,500 175,000

Size (MOS)

Bottle Size (BS) 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32

Set-up time (SUT) 2 hrs 2 hrs 2 hrs 2 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs 4 hrs

Hours per .27 .27 .01 .01 .53 .53 .02 .02 .53 .53 .02 .02
thousand bottles
(HTB=SUT/MOS)

Run 1.00 2.40 1.76

time/thousand 1 1 1 2 2 2 1 1 1

.00 .00 .00 .40 .40 .40 .76 .76 .76

Total 1.27 1.27 1.01 1.01 2.93 2.93 2.42 2.42 2.29 2.29 1.78 1.78
time/thousand
(TT=HTB+RT)

Operating $18.58 $18.58 $14.78 $14.78 $42.87 $42.87 $35.40 $35.40 $33.50 $33.50 $26.04 $26.04
cost/thousand
(TT x $14.63)

Cost per 2.63 5.26

thousand passes 2 2 2 5 5 5 5 5 5 5

.63 .63 .63 .26 .26 .26 .26 .26 .26 .26

Direct cost to $21.21 $21.21 $17.41 $17.41 $48.13 $48.13 $40.66 $40.66 $38.76 $38.76 $31.30 $31.30
manufacture

Scrap

Shipping $1.06 $26.19 $1.06 $26.19 $1.06 $26.19 $1.06 $26.19 $1.06 $26.19 $1.06 $26.19

Total direct cost $22.27 $47.40 $18.47 $43.60 $49.19 $74.32 $41.72 $66.85 $39.82 $64.95 $32.36 $57.49

(Id.)
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Table 3: Per Volume, Bottle Size, and Separations

Particulars One Separation Round Two Separation Rounds Two Separation Ovals

Order Size 5,000-9,999 100,000-249,999 5,000-9,999 100,000-249,999 5,000-9,999 100,000-249,999

Median Order Size 7,500 175,000 7,500 175,000 7,500 175,000

(MOS)

Bottle Size (BS) 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32 0-1 17-32

Price – New 37.64 70.30 32.70 65.36 72.63 105.3 62.92 95.59 60.45 93.12 50.75 83.42
York/New Jersey

Total direct cost – $22.27 $47.40 $18.47 $43.60 $49.19 $74.32 $41.72 $66.85 $39.82 $64.95 $32.36 $57.49
Variable Cost New
York New Jersey
Profit Margin 15.34 22.90 14.23 21.76 23.44 30.98 21.2 28.74 20.63 28.17 18.39 25.93

(Id.).
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References

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