Republic of the Philippines

TARLAC STATE UNIVERSITY

COLLEGE OF BUSINESS AND ACCOUNTANCY
MBA / DBA DEPARTMENT
Tarlac City

CASE STUDY REPORT

TU PACKAGING GROUP
In partial fulfillment of the requirements of
MBA 509 - Management Accounting

Submitted by:

Potenciano J. Rendon Jr., CPA

MBA Student

Submitted to:

Dr. Henry D. Rufino, CPA

MBA/DBA Faculty

August 2023

I. EXECUTIVE SUMMARY
 This case study provides an analyses and evaluation of TUG’s financial
performance from Year 2016 to 2020. Specifically, this study will explain the
reason behind TUG’s slow profit growth despite their improving customer base.
Methods of analyses used includes horizontal (also called as trend analyses) and
vertical analyses. Results of data analysed shows that despite the extremely
increasing numbers of customers of TUG from years 2016 to 2020, the movement
of net profit percentage are slightly decreasing, reported at 7% to 5%,
respectively. Further analyses revealed that majority of customers they catered
from year 2020 are with negative profits due to huge amount of cost of goods sold
(COGS) and customer servicing costs, which contributed in the slowing of
company’s net profit growth.

In connection therewith, it is recommended and would be ideal for the CEO of

TUGs to: (1) have a deeper glance at its financial performance and profitability
prior to implementing/continuing the strategy of aggressively pursuing new
accounts; (2) analysed the factors that makes the costs so high and implement a
new costing method to address the same (such as but not limited to reduction
supplier’s costs, streamlining production process and controlling operational
costs) and (3) consider improving products that are currently less profitable or
those with negative profits.

II. INTRODUCTION

TU Packaging Group1 (“TUG”) is in the business of design, manufacture and

sales of corrugated paper packaging products. The company started as a small
family business selling cardboard boxes to shoes and clothing businesses in
Singapore in the 1970s. Today, TUG has manufacturing operations in both
Singapore and China. Their clientele has expanded to various industries,
including electronics and electricals, food and even pharmaceutical. The number
of customers has grown from 443 five years ago to 1,000 currently.

The CEO of TUG is concerned that while the group is expanding their customer
base, the growth in profits has been slowing. He has formed a cross functional
task force (including representatives from the accounting department) to examine
more carefully the current business operations, profits, and costs in a bid to
understand the slowing profitability growth.

Based on data files detailing individual customer information at TUG, the task
force suspects that individual customer profitability analysis could explain the
CEO’s concern of slowing profit growth. The task force has to put together a
report to be presented at the next board meeting. Said report is expected to
address the following issues:

 Whether Jason’s strategy of aggressively pursuing new business should be

continued; and
  Whether customer profitability analysis can explain TUG’s slowing profit
growth;

 Any other related operational issues.

III. ANALYSIS

a. Financial Analysis

Horizontal Analysis
2016 2017 2018 2019 2020
Particulars
(In $) (In $) (In $) (In $) (In $)
Sales Revenue 192,575,613 223,387,711 290,404,025 351,388,870 421,666,644
Cost of Goods Sold 127,099,905 147,659,277 192,828,272 233,673,599 281,475,023
Gross Profit 65,475,708 75,728,434 97,575,753 117,715,271 140,191,621
Other Operating Expenses 51,815,831 60,429,372 79,828,840 98,193,668 119,108,289
Net Profit 13,659,877 15,299,062 17,746,913 19,521,603 21,083,332
No. of Customer 443 508 661 826 1,000

% Change vs Prior Years

Sales Revenue 16.00% 30.00% 21.00% 20.00%
Cost of Goods Sold 16.18% 30.59% 21.18% 20.46%
Gross Profit 15.66% 28.85% 20.64% 19.09%
Other Operating Expenses 16.62% 32.10% 23.01% 21.30%
Net Profit 12.00% 16.00% 10.00% 8.00%
No. of Customer 14.67% 30.12% 24.96% 21.07%

 From Years 2017 to 2020, the percentage change in gross profit has been
relatively lower than the sales revenue due to a higher increase in the cost
of goods sold.

 During those years, TUG witnessed downward trend in their net profit due
to a higher increased in operating expenses particularly the cost of
servicing customers.

Vertical Analysis

2016 2017 2018 2019 2020

Particulars % % % % %
(In $) (In $) (In $) (In $) (In $)
Sales Revenue 192,575,613 100.00% 223,387,711 100.00% 290,404,025 100.00% 351,388,870 100.00% 421,666,644 100.00%
Cost of Goods Sold 127,099,905 66.00% 147,659,277 66.10% 192,828,272 66.40% 233,673,599 66.50% 281,475,023 66.75%
Gross Profit 65,475,708 34.00% 75,728,434 33.90% 97,575,753 33.60% 117,715,271 33.50% 140,191,621 33.25%
Other Operating Expenses 51,815,831 26.91% 60,429,372 27.05% 79,828,840 27.49% 98,193,668 27.94% 119,108,289 28.25%
Net Profit 13,659,877 7.09% 15,299,062 6.85% 17,746,913 6.11% 19,521,603 5.56% 21,083,332 5.00%

 While the total sales revenue increased from years 2017 to 2020, TUG’s
gross margin percentage decreased from 34% to 33.25%. While it would
be likely expect that the cost of goods sold to increase as the total sales
 amount increases, it can be inferred that the costs did not increased
proportionately to the increase in sales.

Products Grand Total

Particulars
Cor_Bo % Cor_Ca % Die_Bo % Ass_Ca % HD_Cor % In Amount %
Sales Revenue 39,694,689 100.00% 65,593,731 100.00% 76,973,680 100.00% 227,034,388 100.00% 12,370,156 100.00% 421,666,644 100.00%
Cost of Goods Sold 9,328,252 23.50% 28,205,304 43.00% 48,108,550 62.50% 185,714,129 81.80% 10,118,788 81.80% 281,475,023 66.75%
Gross Profit 30,366,437 76.50% 37,388,427 57.00% 28,865,130 37.50% 41,320,259 18.20% 2,251,368 18.20% 140,191,621 33.25%

 Likewise, TUG’s was not able to manage/control its other operating

expenses while trying to increase/maintain its sales revenue. There was a
significant increase in other operating expense approximately 67 million or
130% yield from Year 2016 to 2020.

COGS and Other OPEX Analysis - Year 2020

To further understand the factors affecting the increased in cost of goods sold
and other operating expenses, below analyses are presented:

 Huge percentage of COGS ranging from 62.5% to 81.80% was evident.

This was attributable to Die-Cuts Boxes, Assembly Cartoons, and Heavy
Duty Corrugated Paper Products.

 A high COGS number reduces the size of TUG’s sales revenue. And, in
turn, a small margin will start to have a negative impact on their gross
profit.

 Die-Cuts Boxes, Assembly Cartoons, and Heavy Duty Corrugated Paper

Products has the lowest gross profit margin sitting at 37.50% and 18.20%,
respectively.

Total No. of Cost Total Cost

Activity Activity Driver %
Activity Driver Per Activity Per Activity
Shipping No. of Shipments 186,828 7.00 1,307,796 1%
Order Administration No. of Orders 86,553 0.17 14,714 0%
Expedition Costs No. of Expedited Orders 100,646 267.00 26,872,482 26%
Customer Support No. of queries 1,042,318 33.00 34,396,494 33%
Design No. of design hours 601,841 70.00 42,128,870 40%

Total Customer Servicing Costs 104,720,356 88%

Total Sales Commission 14,387,933 12%

Total Operating Expenses 119,108,289 100%

 Total customer servicing costs is equivalent to 28% of the total sales

revenue for Year 2020;

 Around 99% of the total customer servicing costs are mainly from
 expedition costs, customer support costs, and design costs.

b. Marketing Analysis

Profitable vs Non Profitable Customers - Year 2020

2022 (In Amount)

Profitable Unprofitable
Particulars Grand Total
Customers % Customers %
(611) (389)
Revenue ($) 242,500,105 100.00% 179,166,540 100.00% 421,666,644
Cost of Goods Sold ($) 153,951,985 63.49% 127,523,038 71.18% 281,475,023
Gross Profit ($) 88,548,119 36.51% 51,643,502 28.82% 140,191,621
Other Operating Expenses ($ 47,587,007 19.62% 71,521,282 39.92% 119,108,289
Customer Servicing Costs (88%) 41,838,636 17.25% 62,881,720 35.10% 104,720,356
Sales Commission (12%) 5,748,371 2.37% 8,639,562 4.82% 14,387,933
Net Profit (Loss) ($) 40,961,112 16.89% -19,877,780 -11.09% 21,083,332
 TUG has a good track record of retaining customers. For the last three
financial years, about 70% of its sales are recurring business from
customers. The total number of customers have grown from 443 to 1,000
in the last five years.

 However, for Year 2020 alone, 389 out of these 1,000 customers (39%) of
TUG are with negative net profits. These customers contributed a negative
11.09% impact in the total company’s net profit for Year 2020.

c. Environmental Analysis

 Using corrugated cardboard boxes for your company’s packaging can

have a greater environmental impact.

 Corrugated cardboard packaging has long been one of the most

universally popular forms of packaging, boasting qualities of strength,
robustness and is lightweight.

 Corrugated cardboard is eco-friendly, meaning it is healthy for the

environment. It decomposes easily and can be recycled, making it a
preferable choice for companies that want to be more environmentally
ethical and lower their carbon footprint. Corrugated cardboard is also a
traditional type of packaging with many years of proven effectiveness as
packaging.

IV. ALTERNATIVE AND DECISION CRITERIA

ALTERNATIVES
 Profitability Analysis - This alternative considers the process of calculating or
analyzing the profits of a business. It helps businesses identify their revenue
streams and where they can reduce their expenses to generate maximum gains.

Ease of Implementation - This alternative considers the complexity of

implementing a particular option or decision, often in favour of the options that’s
easy to implement. A team can assess how well the proposed strategy or decision
fits into their current plans and activities. Use of this alternative may prefer option
that align with the structure and processes of the organization.

DECISION CRITERIA

Each of the aforementioned alternatives can be evaluated using the following

decision criteria (listed in order of importance and including the weighting of each
criterion):

 The recommendation must be able address whether Jason’s strategy of

aggressively pursuing new business should be continued (45%)

 The recommendation must be able address whether customer profitability

analysis can explain TUG’s slowing profit growth (45%)

 The recommendation must be able to address other operational issues

TUG is currently facing. (10%)

V. RECOMMENDATION AND IMPLEMENTATION PLAN

1. Jason’s strategy of implementing the new business growth model which

aggressively pursue new accounts should be revisit and restudy
considering the fact that 39% of the total customers catered by TUG in Year
2020 are not profitable.

2. The results profitability analyses shows that Cost of Goods Sold and
Other Operating Expenses are not properly controlled and managed
resulting to a negative impact on their profit margins from year 2017 to
2020. In order to address these concerns, Jason should consider the
following:

 Reducing suppliers costs - reduce the size of the purchases made to

produce goods. Try shopping around for cheaper suppliers, or
negotiating better prices with existing suppliers to bring down costs.

 Streamline production process - Taking a lean approach helps TUG to

continually its processes and remove the extraneous elements - cutting
costs while still delivering a quality product.
  Reducing operational costs - Streamlining operational costs by
considering outsourcing partner for secondary business functions
such as in customer support, design and expedition orders.

3. Consider improving the products that are less profitable. Review and
analyze the factors that makes the costs so high. If their Contribution Margin
is negative, some corrective action is required regardless of their price
levels.

VI. CONCLUSION

When implementing new business model, top management must do their due
diligence. Do not rush but explore options first, talk to as many people to gain a
clear understanding of the opportunity and look for the pros and cons.This was a
very simple advise to Jason as the new CEO of TUG. Rushing things around just
to solidify his leadership does not make any sense specially if the company will
suffer in the end.

VII. CITING SOURCES

 TU Packaging GroupUsing DataCSFINAL.pdf

 https://www.forbes.com/sites/forbesbusinesscouncil/2021/02/24/13-key
considerations-before-expanding-the-business/?sh=76585a192906
 https://dfklv.com.au/our-blog/is-your-cost-of-sales-affecting-your-gross-
profit/#:~:text=A%20high%20COGS%20number%20reduces,for%20any
%20product%2Dbased%20business.
 https://stratpricing.com/fire-lowmargin-customers/
 https://customboxesnow.com/blog/environmental-advantages-using-
cardboard-boxes/