Felipe Calvette

200373708
MBA 780
Sippican Assigment

Sippican Case Analysis

The Sippican Corporation operating results are far from the historical 15% margin expected
due to the fact that the management choose to reduce the price accompanying the price reducing
made it by their competitors to maintain the market share and sales volume.
The price cut has affect Sippican profitability margins and draw attention to the operating
results. Sippican operating results are based in a simple cost accounting system that charges each
produced unit for direct labor and material cost, and allocated overhead cost to products as a
percentage of production-run direct labor. The huge impact that the overhead cost has on the results
(185% higher that the direct labor costs) lead Sippican controller Peggy Knight to form a task force to
study them.
Based on the data collect by this team I perform the bellow analysis.
Inittitialy, I calculate the practical capacity of the Sippican Corporation and the capacity cost
rates as show in the exhibit 1 and 2.
Exhibit 1
Pratical Capacity

Engineers
Assembly workers
Setup workers
Machines for component
processing
Receiving and Production
control workers
Packing and Shipping
workers

Total Capacity
(hours x
employees)

20
20
20

Monthly
Productive
Capacity
120
120
120

12

20

240

14880

6,5

20

130

520

28

6,5

20

130

3640

Number of
Employees
8
90
30

Productive
hours
6
6
6

Days

62

960
10800
3600

Exhibit 2
Capacity Cost Rates

Engineer
Assembly workers
Setup workers
Machines for component
processing
Receiving and Production
control workers
Packing and Shipping
workers
Material Cost
Total Cost

Individual Cost
per month

Total Cost per

month

20
20
20

$
$
$

Cost per
Productive
Hour
9.750,00 $
81,25
3.900,00 $
32,50
3.900,00 $
32,50

$ 78.000,00
$ 351.000,00
$ 117.000,00

12

20

5.400,00 $

22,50 $ 334.800,00

6,5

20

3.900,00 $

30,00 $

28

6,5

20

3.900,00 $

30,00 $ 109.200,00

Number of
Employees

Productive
hours

Days

8
90
30

6
6
6

62

15.600,00

458000
$ 1.463.600,00

Felipe Calvette
200373708
MBA 780
Sippican Assigment

The practical capacity and the cost rates are fundamental information to achieve the ABC
cost for the product lines but they were not enough because they didnt have enough information to
convert all the cost drivers. At least to drivers didnt have clear cost information, those cost drivers
are Number of Shipments and Production runs. To obtain a cost associate to those drivers it was
necessary to convert the activity into hours, so I turned to the Sippican case that describe the
activities and how much time they consume, then I create the table of activity consumption hours.
The formulas used were:
Pack and Shipping ((driver x 50 minutes) + (# of itens produced x 8 minutes)) divided by 60
minutes
Receiving and Control (drive * 75 minutes)
Exhibit 3

Valves

Activity consumption hours

Pumps
Flow Cont

Packing and Shipping

1033,33
1750
workers (hours)
Receiving and
25
125
Production control
workers (hours)
* Usage obtain in Exhibit 4 and discription of activity

Total

700

3483,33

281,25

431,25

These amounts in hours were used to convert cost of the activity into product cost. The
product cost by unit show in the exhibit 4.

Direct Labour
Material
Engineer

Product cost by line per unit

Flow
Pumps
Valves (7500)
Controller
(12500)
(4000)
$
12,35 $
16,25 $
13,00
$
16,00 $
20,00 $
22,00
$
0,65 $
1,56 $
12,19

Setup

0,43 $

1,56 $

21,94

Machine

11,25 $

11,25 $

6,75

Receiving & Production $

0,10 $

0,30 $

2,11

4,13 $
44,92 $

4,20 $
55,12 $

5,25
83,23

Pack & Shipping

Total Cost (unit)

$
$

Felipe Calvette
200373708
MBA 780
Sippican Assigment

Once we have the product cost developed with the Activity-based cost approach we
recalculate the Product Profitability and the Sippican Operating results. (Exhibits 5 and 6)

Exhibit 5
Product Profitability
Flow
Controllers
44,92 $
55,12 $
83,23
35%
35%
35%

Valves
Standart Unit cost
$
Planned Gross margin (%)
Actual Selling price

Actual gross margin

Actual gross margin (%)

79,00 $
34,08 $
43%

Pumps

70,00 $

95,00

14,88 $
11,77
21%
12%

Exhibit 6

Sippican Corporation: Operating Results (March 2006)

Valves
Pumps
Flow Controllers Total
Units Sold
7500
12500
4000
Sales
$ 592.500,00 $875.000,00 $ 380.000,00 $ 1.847.500,00
ABC Cost of Units Sold
$ 336.875,00 $689.000,00 $ 332.937,50 $ 1.358.812,50
Gross Margin
$ 255.625,00 $186.000,00 $ 47.062,50 $ 488.687,50
General, Selling & Adm Expensives
$ 350.000,00
Operating Income (pre tax)
$ 138.687,50

Conclusion: The previous analysis based on the simple account system adopted by the
Sippican Corporation that use overhead allocation evenly distributed among products and based on direct
labor cost were misleading the management into incorrect pricing and valuation of products. It is notable that
the nature of the Flow controller product that require more set ups and engineer to attend to the customer
specifications is consuming a high amount of the indirect resources and this a major effect on the product price.
The recent increase of 10% in the flow controller price didnt affects the demand for the product which may
indicate that the product was marked down under regular price.
Observing the profitability margin for products, Sippican Corporation should focus the efforts to reduce
the difference among the use of resources by their product lines. There are several opportunities for
improvement like reducing the variety of flow controllers, defining a minimum amount order or program the flow
controller manufacturing for a specific period and pile up all orders.
Another observation is that along with price reductions on the cost of flow controllers the actual margin
of the flow controller is way below the other products and a new increase on the product price may be
acceptable by costumers, but before deciding for that is necessary to analyze the competitors price and market
demand.

Anyway, a decision should be made about the product mix, either to adjust the impact of flow
controller over the indirect resources or to abandon the product line. The correct mix choice could
allow a better optimization of resources and even allow some reduction in the overhead costs that
are pressing the operating result.

100%
21%
19%
8%