Case 18-4: Sippican Corporation (A)

Monthly Production and Operating Statistics (Mar 2006)

Valves Pumps FC Total
Production (units) 7,500 12,500 4,000 24,000
Machine Hours (run time) 3,750 6,250 1,200 11,200
Production runs 20 100 225 345
Setup Hours (labor and machines) 100 600 2,700 3,400
Number of Shipments 40 100 200 340
Hours of engineering work 60 240 600 900
Production units/run 375 125 18
Units shipped/shipment 188 125 20

Sippican Corporation: Operating Results ( Mar 2006)

Sales $1,847,500 100%
Direct Labor Expense $351,000
Direct Materials Expense $458,000
Contribution Margin $1,038,500 56%
Manufacturing OH
Machine Related Expenses $334,800
Setup Labor $117,000
Receiving and Production $15,600
Engineering $78,000
Packaging and Shipping $109,200
Total Manufacturing OH $654,600 35%
Gross Margin $383,900 21%
SGA Expenses $350,000 19%
Operating Income (pre-tax) $33,900 1.8%

Resource Utilization (Mar 2006)

Valves Pumps FC Total Units
Direct labor 2,850 6,250 1,600 10,700 45
Machines 3,750 6,250 1,200 11,200 62
Setup 100 600 2,700 3,400 15
Receiving and Production 25 125 281 431 2
Engineers 60 240 600 900 8
Packing and Shipping 1,033 1,750 700 3,483 14

OH Allocation based on ABC framework

Total Costs Total Units Cost/Unit Valves Pumps
Machines $334,800 11,200 $29.89 $112,098 $186,830
Setup $117,000 3,400 $34.41 $3,441 $20,647
Receiving and Production $15,600 345 $45.22 $904 $4,522
Engineers $78,000 900 $86.67 $5,200 $20,800
Packing and Shipping $109,200 340 $321.18 $12,847 $32,118
Total $654,600 $134,491 $264,917
OH costs/unit $18 $21

Profitability of the Product Mix

Valves Pumps FC Total
Sales $592,500 $875,000 $380,000 $1,847,500
Direct Labor Expense $92,625 $203,125 $52,000 $347,750
Direct Materials Expense $120,000 $250,000 $88,000 $458,000
Contribution Margin $379,875 $421,875 $240,000 $1,041,750
Contribution Margin (%) 64.1% 48.2% 63.2% 56.4%
Manufacturing OH
Machine Related Expenses $112,098 $186,830 $35,871 $334,800
Setup Labor $3,441 $20,647 $92,912 $117,000
Receiving and Production $904 $4,522 $10,174 $15,600
Engineering $5,200 $20,800 $52,000 $78,000
Packaging and Shipping $12,847 $32,118 $64,235 $109,200
Total Manufacturing OH $134,491 $264,917 $255,192 $654,600
Gross Margin $245,384 $156,958 -$15,192 $387,150
Gross Margin (%) 41.4% 17.9% -4.0% 21.0%
SGA Expenses $350,000
Operating Income (pre-tax) $37,150

Inferences
1. Based of the profitability analysis, Valves have the highest GPM with 41%, followed by Pumps with a GPM of 18%. Flow con
2. Comparing the GPM and the CPM for the product mix, it is overserved that both flow meters and pumps incurr heavy overh
3. It can be observed from the resource utilization table, that machines are utilised to only 75%, and receving and production i
At present scenario, Sippican can achieve its production with 47 machines. They should consider to decrease the no of machin
4. With 10% increase in the Selling Price of Flow Controllers there weren't and affect in the demand. This may be due to the in
Sippican should consider to increase the selling price of flow controllers to $152 (for 35% GPM), or at least to $99 to stay at br
5. The flow controllers incurr 67% of the total engineers expense.
Sippican should consider to reduce the number of its engineers working with flow controllers.
They should also consider to incentivise the orders of flow controllers. Customers ordering with larger lot or shipment size can
As this will reduce the OH costs for FCs, as larger order size means lower setup times and aslo fewer shipment packages.
6. The Flow Controllers are incurring almost 2.5 times of setup time than the machine run time.
Sippican should consider to run the production for Flow controllers for longer duration.
This will reduce the setup costs for flow controllers and increase profitability.

Total Costs Total Units Cost/Unit Valves Pumps

Machine hrs (run time) $ 334,800 11200 $ 29.89 $ 112,098 $ 186,830
Production runs $ 15,600 345 $ 45.22 $ 904 $ 4,522
Setup hrs (labor & machine) $ 117,000 3400 $ 34.41 $ 3,441 $ 20,647
# of shipments $ 109,200 340 $ 321.18 $ 12,847 $ 32,118
Hrs of engineering work $ 78,000 900 $ 86.67 $ 5,200 $ 20,800
Total $ 654,600 $ 134,491 $ 264,917
OH costs/unit $ 18 $ 21
Product Data Data
Valves Pumps FC Receiving and Production
Materials per unit 4 comp 5 comp 10 comp Activity
2x$2=$4 3x$2=$6 4x$1=$4 Packing and Shipping
2x$6=$12 2x$7=$14 5x$2=$10 Activity
1x$8=$8 Packing and Shipping
Material cost per unit 16 20 22 Activity
DL hours per unit 0.38 0.50 0.40
Machine hours per unit 0.50 0.50 0.30
Setup hours per run 5 6 12

Product Profitability Analysis (Mar 2006)

Valves Pumps FC
Direct Labor Cost $12.35 $16.25 $13.00
Direct Material Cost $16.00 $20.00 $22.00
Mfg. OH (@185%) $22.85 $30.06 $24.05
Standard Unit Costs $51.20 $66.31 $59.05
Target Selling price $78.77 $102.02 $90.85
Planned Gross Margin (%) 35% 35% 35%
Actual Selling Price $79.00 $70.00 $95.00
Actual Gross Margin $27.80 $3.69 $35.95
Actual Gross Margin (%) 35% 5% 38%

Shifts Prod. Hrs Days Availability Utilization

2 6 20 10,800 99%
2 6 20 14,880 75% 46.7
2 6 20 3,600 94%
2 6.5 20 520 83% 3.3
1 6 20 960 94%
2 6.5 20 3,640 96%

FC Valves Pumps FC
$35,871 33.5% 55.8% 10.7%
$92,912 2.9% 17.6% 79.4%
$10,174 5.8% 29.0% 65.2%
 $52,000 6.7% 26.7% 66.7%
$64,235 11.8% 29.4% 58.8%
$255,192
$64

Costing as per ABC Framework

Particulars Valves Pumps FC
DL Cost/unit $12.35 $16.25 $13.00
DM Cost/unit $16.00 $20.00 $22.00
OH Cost/unit $18 $21 $64
Standard Cost/unit $46.28 $57.44 $98.80
GPM (%) 35% 35% 35%
Selling Price/unit $71.20 $88.37 $152.00

mps with a GPM of 18%. Flow controllers have a negative GPM of -4%.
ers and pumps incurr heavy overhead costs which reduces their profitability by a large margin.
5%, and receving and production is utilised till 83%.
ider to decrease the no of machines, or else increase its production depending on market demand.
emand. This may be due to the intricacies involved in producing flow meters.
M), or at least to $99 to stay at break even for the flow controllers.

with larger lot or shipment size can be given a discounted rate.

o fewer shipment packages.

FC
$ 35,871
$ 10,174
$ 92,912
$ 64,235
$ 52,000
$ 255,192
$ 64

Valves Pumps
Direct Labor Cost $12.35 $16.25
Direct Material Cost $16 $20
New OH Cost $18 $21
Standard Unit Cost $ 46.35 $ 57.25
Target GPM (%) 0.35 0.35
New Target Selling Price $ 71.31 $ 88.08

Valves Pumps
Direct Labor Cost $12.35 $16.25
Direct Material Cost $16.00 $20.00
Mfg. OH (@185%) $22.85 $30.06
Standard Unit Costs $51.20 $66.31
Target Selling price $78.77 $102.02
Planned Gross Margin (%) 35% 35%
Actual Selling Price $79.00 $70.00
Actual Gross Margin $27.80 $3.69
Actual Gross Margin (%) 35% 5%
1.25 hrs/run
hrs/packa
0.83 ge

0.13 hrs/item
 FC
$13
$22
$64
$ 99.00
0.35
$ 152.31

FC
$13.00
$22.00
$24.05
$59.05
$90.85
35%
$95.00
$35.95
38%