UV1767 J uly 8, 2009 This case was prepared by Professor Brandt R. Allen. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2009 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. Toordercopies,sendane-mailto sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, usedinaspreadsheet,ortransmittedinanyformorbyanymeanselectronic,mechanical,photocopying, recording, or otherwisewithout the permission of the Darden School Foundation. BW MANUFACTURING COMPANY In mid-December 2008, Inez Wallace and Oliver Blanchard were almost through with the 2009 operating budget for their company, BW Manufacturing Company (BW). BW produced gas grills in three primary models (Grills A, B, and C). The industry was dominated by Weber, Ducane,Coleman,Sunbeam,andHolland,whichtogethermadedozensoftypesofgrills, smokers, and cooking kettles. BW was a small player in the industry, but business had been good, and it was expecting another profitable year. A draft of the companys operating budget is shown in Exhibit1. Standard costs for the three products are explained in Exhibit2. Selling, general,andadministrative(SG&A),othercosts,interestincome,andinterestexpensewere likely to remain the same no matter which product-line combinations the company produced. Beforecallingitaday,thetwoownersaskedtheirassistant,J ustineRichardson,to determine the impact of several options on income before tax. They agreed to meet the following day, and Richardson hurried off to look at what these latest ideas would mean. She had four questions to address and was asked to consider each option independent of all other options. 1.Should BW drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Richardson was told to assume that the volumes and selling prices of the other two products would be the same whether or not the Grill A product line was dropped. 2.Should BW lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of Grill C. 3.Should BW change its advertising focus? The owners wanted to know the impact of a 10,000-unitincreaseinGrillCvolumeandarelated10,000-unitdecreaseinGrillA volume because of a shift in advertising emphasis. 4.ShouldBWlowerthepriceofGrillCandchangeitsadvertisingfocus?Theowners wantedtoknowtheimpactofloweringthepriceofGrillCto$75andshiftingthe advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and increasing Grill C volume by 30,000 units. For exclusive use at Universidad del Pacico, 2015This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacico from August 2015 to October 2015.-2-UV1767 Richardsonandtheownersmetthefollowingmorningtoreviewherwork.After considerable discussion, Wallace and Blanchard chose Option Two, lowering the price of Grill C for2009.Then,theyaskedRichardsontopreparearevised2009budgetincorporatingthis decision. The budget was completed by noon, and Richardson found herself a bit bemused by the results. Having finished her duties, she left for an early weekend getaway. She didnt give the budget another thought. Early in J anuary 2010, Richardson prepared a rough draft of the actual 2009 financial results (Exhibit 3); happily, they were better than had been expected. Prices on each grill were as planned, and volume was as shown in Table 1. Table 1.Actual 2009 volumes. Grill Volume (number of units) A115,000 B110,000 C225,000 Richardson began to wonder if the bottom line was as high as it should have been. For exclusive use at Universidad del Pacico, 2015This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacico from August 2015 to October 2015.-3-UV1767 Exhibit 1 BW MANUFACTURING COMPANY Operating Budget 2009: Draft 12/18/2008 Sales$41,200,000 Less: costs of products sold22,800,000 Gross margin$18,400,000 SG&A9,350,000Other costs2,100,000 Operating income$6,950,000 Less: Interest expense420,000 Plus: Interest income150,000 Income before tax$6,680,000 Income taxes2,338,000 Net income$4,342,000 Source: Created by case writer. For exclusive use at Universidad del Pacico, 2015This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacico from August 2015 to October 2015.-4-UV1767 Exhibit 2 BW MANUFACTURING COMPANY Standard Costs Grill AGrill BGrill CNotes Planned Volume (units)80,000120,000200,000 Per unit: Sales price$150$110$80 Direct costs: Materials17107directly related to production volume Labor21164directly related to production volume Subtotal$38$26$11 Indirect costs: Supplies721directly related to production volume Labor1084one-half varies with direct labor; the rest is fixed Supervision831unrelated to production volume Energy1264one-half varies with direct labor; the rest is fixed Depreciation2275unrelated to production volume Head office support1263corporate office allocation* All other1121unrelated to production volume Subtotal$82$34$19 Total product cost$120$60$30 Product-line profitability$30$50$50 * This category comprises accounting, IT, human resources, legal, and others supporting the production of these products. Allocations were made using multiple drivers. Corporate office budgets are unrelated to production levels. Source: Created by case writer. For exclusive use at Universidad del Pacico, 2015This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacico from August 2015 to October 2015.-5-UV1767 Exhibit 3 BW MANUFACTURING COMPANY 2009 Operating Results: Draft 1/19/2010 Revenue$46,225,000 Variable costs: Materials4,800,000Direct labor5,200,000Supplies1,300,000Indirect labor1,500,000Energy1,600,000Total variable cost$14,400,000Fixed costs: Indirect labor1,300,000Supervision1,200,000Energy1,350,000Depreciation3,660,000Head office2,300,000All other1,380,000Total fixed cost$11,190,000Total cost$25,590,000Gross margin$20,635,000SG&A9,350,000Other costs2,100,000Operating income$9,185,000Less: interest expense420,000Plus: interest income150,000Income before tax$8,915,000Income taxes3,120,250Net income$5,794,750 Source: Created by case writer. For exclusive use at Universidad del Pacico, 2015This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacico from August 2015 to October 2015.