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McMaster University

Advanced Management Accounting (570-930)

Supergrip Corporation Limited (SCL)

Supergrip Corporation Limited (SCL) located in Toronto manufactures and sells a variety of fasteners for
industrial applications since 2000. These fasteners are cast, finished and assembled in the plants located in
Western, Central and Eastern Canada. The products are then distributed to both wholesalers for sale to
retail outlets, automotive service shops and general manufacturing companies throughout Canada. SCL
produces different grades of fasteners with a multi-purpose master fastener used for many applications.

Milt Pearson is the president and CEO with 55% stake. Abdul Rahman, VP of Marketing, Diane Crombie,
CFO and Mark Schneider, VP of Operations own the balance of the controlling shares equally.

Milt, the president of SCL, was unhappy about the results just ended in 2014. He called a meeting of his
senior management team to discuss the result of the fiscal year ended in December 31, 2014.

Milt Pearson (CEO): “Let me start by saying that I am not happy with our 2014 results and the budget for
the coming year does not seem to show any improvement (Exhibit 1). The trend of declining profit over
the past two years is alarming. I need to know how we got into this mess despite our good planning”

Diane Crombie (CFO): “My analysis of product costs indicate that they are in line with our standard costs
but the problem seems to be with our pricing and product mix. I need more information before we can
identify the cause of each problem”

Milt Pearson (CEO): “Can either of you, Abdul or Mark provide information to Diane?”

Abdul Rahman (VP- Sales): “Yes, Milt. Although the products with the smallest market volumes are
selling well, we have been losing ground on the products with higher market volumes. The primary reason
is that we are not able to compete with two of our closest competitors. The price for both model B and C
fell last year. I did not want to risk losing our big customers and I had to drop the price as well. If we do
not keep the price low, we also risk losing another 20% drop in our sales of these product lines. I have
brought along some material to explain our standard pricing policy. (Exhibit 2)”

Milt Pearson (CEO): “What can we do to achieve at least 10% profit for this fiscal year 2015?”

Abdul Rahman (VP-Sales): “The budgeted sales volumes are the best we can expect using the budgeted
sales price. Our market research indicates that we should bring our prices more in line with our two main
competitors. Here are the details of marketing analysis. (Exhibit 3)

Milt Pearson: “Well, it appears that we will lose money on Model C and likely to just break even on
Model B if we do not cut our production costs. We also need to look at our other models in terms of
competition. Is our current product mix optimal?”

Mark Schneider (VP – Production): “I do not think there is any way we can reduce costs further. We
have acquired sophisticated computer-aided manufacturing equipment, which has virtually eliminated the
wastage and spoilage. I have cut the direct labour costs by 20% over the past three years. We have been
working to our capacity of 200,000 machine hours and the costs have been right on target”.

“Production planning and scheduling of work is becoming increasingly difficult because of the uncertainly
of sales volume. We have managed to keep up with the sales orders, but with increased sales, we end up
with many back orders. Not good for our image”

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Advanced Management Accounting
McMaster University
Advanced Management Accounting (570-930)

Abdul Rahman: “We may want to look at something else. I met with my senior sales people and they
suggested that we add another high quality line of fastener – Model F - to our product line. They say this
will make money. But the cost and profit projections do not look very good to me” (Exhibit 4)

“In addition, I feel I am not having enough information to predict the sales properly. We need to invest
some time and money to upgrade our management information system”

Mark Schneider: “Milt, in order to help solve our capacity problem - especially if we add another line –
my staffs has proposed to lease additional machinery. This will increase the capacity by another 5,000
machine hours per year. The net estimated lease cost is $60,000 per year.

Milt Pearson: “There are a lot numbers thrown here for us to look at. Diane, can you analyze our situation
for us to discuss our findings at our next meeting. Keep in mind that we have a good reputation in the
industry. I get the feeling that we need to revisit every aspect of our business – Sales, Marketing,
Operations, IT and existing internal resources”.

“As all of you know, our goal is to gain a solid market share in the industry. We need to grow steadily and
like to see our becoming a $10 million in revenues by 2020. Perhaps, we should look at our value
proposition, develop a new strategy, determine our critical value chain activities and rethink our planning,
control and performance evaluation system at SCL. Let me call it Focus 2020! Are we missing something
else here Diane?”

Diane Crombie: “Let me work with Abdul and Mark this week and we can jointly come up with a path
forward. Times are tough. We need to buckle up”. We are known for our quality products and our
customer service. We don’t want to be a target for takeover!”

Required:

Assume the role of Diane Crombie, identify all the key issues and develop a comprehensive management
planning and control system towards continued profitability, sustainability and growth for SCL.

Issues should relate to both short and long terms.

Your report should have the following elements:


 An Executive summary
 Discussion of issues (short and long terms)
 Analysis and recommendations based on both quantitative and qualitative considerations.

The report length will be approximately 8 to 10 pages including exhibits (quantitative analysis)

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Advanced Management Accounting
McMaster University
Advanced Management Accounting (570-930)

Exhibit 1
Supergrip Corporation Limited
Operating Budget for December 31, 2014

Models A B C D E Total

Unit Price $ 9.00 7.50 11.25 14.50 35.75

Sales Volume (units) 20,000 100,000 300,000 70,000 10,000 500,000

Required Machine hours/Unit 0.50 0.25 0.25 1.00 3.00

Revenue $ 5,677,500
Production Costs:
Direct Materials $ 1,285,500
Direct Labour 327,500
Overhead (Note 1) 3,275,000 4,888,000
Gross Margin $ 789,500
Selling & Administration
Variable Portion (Note 2) $ 299,000
Fixed Portion 195,000 $ 494,000
Operating Income $ 295,000

Note 1: Production overhead is 90% fixed


Note 2: Variable S & A are entirely composed of sales commissions.

Exhibit 2
Supergrip Corporation Limited
Standard Pricing & Unit Cost Summary
Year ended December 31, 2014

Standard Unit Cost: A B C D E

Direct Materials $ 2.13 1.10 2.75 3.35 7.34


Direct Labour 0.47 0.50 0.65 0.75 2.06
Overhead 4.70 5.00 6.50 7.50 20.60 (Note 1)
Total Production Costs 7.30 6.60 9.90 11.60 30.00

Sales Commissions: 0.55 0.35 0.55 1.10 1.10 (Note 2)


Fixed Selling &
Administrative 0.17 0.26 0.40 0.46 1.20 (Note 3)
Total Costs $ 8.02 7.21 10.85 13.16 32.30

Standard Price 9.00 7.50 11.25 14.50 35.75 (Note 4)

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Advanced Management Accounting
McMaster University
Advanced Management Accounting (570-930)

Explanations: (Notes to Exhibit 2)

1. Production Overhead: [Budgeted Overhead $ / Budgeted Direct Labour $] x Actual DL $


= $[3,275,000/327,500] x Actual Direct Labour $ = 10 times Direct Labour $.

90% of the overhead is composed of depreciation and other fixed production costs.

2. Based on negotiated commission per unit for each product, two years ago.

3. Based on the formula: [Fixed S & A / Budgeted total production costs] x total production costs

= 195,000 / 4,888,000 x total product manufacturing cost


= 0.04 times total product manufacturing costs.

4. Total cost x 10% mark up and rounded to nearest quarter. With an exception of Model B – that has
been adjusted downwards.

 Diane realized that allocations would need to be modified based on better cost drivers
leading to efficient costing system. She feels that she is not getting much cooperation
from Marketing and Production!
 She also made a mental note to prepare a revised income statement based on her analysis.

Exhibit 3 Memo to Milt Pearson from Abdul Rahman

To: Milt Pearson, CEO


From: Abdul Rahman, VP Marketing
Date: 3 January 2015

Subject: Product Pricing

Milt, our competitive position in the fasteners market has been steadily eroding over the past two years.
Market research indicates that the prices for all our products should be brought in line with our two main
competitors as follows:

Model A Model B Model C Model D Model E

Competitor A $ 12.25 6.90 9.00 24.50 67.00


Competitor B $ 13.00 7.40 9.50 23.00 65.00

The expected sales for this fiscal year with these prices are as follows:

Expected Sales (units) 4,000 120,000 480,000 39,000 3,000

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Advanced Management Accounting
McMaster University
Advanced Management Accounting (570-930)

Exhibit 4 Profit and Cost Data for the proposed new Model F

Estimated Annual Sales volume with probabilities:

Pessimistic: 36,000 (20%), Optimistic: 60,000 (30%), Most Likely: 46,000 (50%).

Machine hour required per unit = 0.25

Wholesale price per unit: $ 14.00


Direct Material 4.00
Direct Labour 1.00
Production Overhead - Note (a) 10.00
Commission 1.10
Fixed Selling & Administration - Note (b)) 0.52
Total Costs 16.62

Profit (loss) per unit $(2.62)

Notes
a) Overhead costs = 10 x estimated direct labour costs – mostly fixed.
b) Increase in Advertising costs/ minimum volume: $18,550 based on 36,000 units = $0.52/unit

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Advanced Management Accounting