G.G TOYS

G.G. Toys Introduction G.G Toys is one of the renowned manufacturers of high quality, durable dolls which is popular for its distinctive designs in U.S. It has two different manufacturing plant, The Chicago and the Springfield plant. With it’s signature product, “Geoffrey Doll”, the company built a strong foundation in the U.S market. However, due to the rising production cost of Geoffrey Doll, G.G toys were experiencing diminishing margins. To maintain their market stability in the competitive market, they again expanded their line by producing “Specialty dolls” customized by their customers in retail store. With this, they were able to make more revenues by charging higher price, however, time and effort it required was also high for this which increased their cost by the time. Problem Statement What approaches should G.G. Toys take to deal with rising production costs and boost their gross profit margin? Questions Do you recommend that G.G. Toys change its existing cost system in the Chicago plant?

In the Springfield plant? Why or why not? Do you recommend that G.G. Toys change its existing cost system in the Chicago plant? In the Springfield plant? Why or why not? Do you recommend that G.G. Toys change its existing cost

OVH cost pool Unit Total Cost (exhibit 1) Capacity (Exhibit 4) Cost/Unit Machine Related Machine hrs 112000 112000 10 Plant Management and Facilities Production Hrs 40000 27000 1.48 Set up Labour Related No. of Production setup 13333 160 83.33 Production order Related No. of Production runs 63000 161 391.3 Packaging & Shipping No. of shipments 53000 350 151.42 Allocation of OVH cost to the Products. OVH costs Geoffrey Doll Specialty Branded Doll Cradles Machine Related 37500 12000 0 Plant Management and Facilities 11250 6000 4500 Set up Labour Related 833 8330 0 Production order Related 3913 39130 391.3 Packaging & Shipping 1514 33308 7570 Total Allocated OVH 55010 98768 12461.30 Unit Produced 7500 4000 3000 Cost of OVH per Unit 7.33 24.692 4.15 Currently, the company use production run direct labor costs to drive the total cost. This is appropriate when there is a single product as like Springfield plant. However, since the Chicago Plant manufacture two different products, Activity Based Costing would be the appropriate costing method for Chicago. This is because each activity would require the different machine

time, setups, and labor costs. So, each type of doll receives a different allocation of manufacturing overhead using ABC, resulting in different contribution margins. Calculate the cost of a Geoffrey doll, the specialty-branded doll #106, and a cradle using the cost study conclusions. Calculate the cost of a Geoffrey doll, the specialty-branded doll #106, and a cradle using the cost study conclusions. Calculate the cost of a Geoffrey doll, the

costs, what actions would you recommend the company consider to enhance its profitability? What additional information would you like to have to make these recommendations Compare and contrast the profitability of each doll under the new and old systems. Based on your recomputed product

costs, what actions would you recommend the company consider to enhance its profitability? What additional information would you like to have to make these recommendations 3. Compare and contrast the profitability of each doll under the new and old systems. Based on your recomputed product costs, what actions would you recommend the company consider to enhance its profitability? What additional information would you like to have to make these recommendations. Computation of Gross Margin using ABC Geoffrey Dolls Specialty branded Dolls Cradles Total Cost Per Unit 15.34 34.44 23.65 Selling Price 21 36 30 Gross Margin $ 5.66 1.56 6.35 Gross Margin % 26.95% 4.33% 21.17% Computation of Gross Margin under Old system Total Cost Per Unit 19.19 23.74 23.72

doll and the specialty- branded dolls in question number 2? Explain your method and its impact. 4. How should G.G. Toys account for the excess capacity created to produce the holiday reindeer dolls? Qualitatively, how will this impact your calculated cost of the Geoffrey doll and the specialty-branded dolls in question number 2? Explain your method and its impact. G.G Toys can account the extra capacity created to manufacture the holiday reindeer dolls for the purpose producing more Geoffrey dolls and Specialty dolls. This will result in efficient resource use, increased productivity, and a reduction in fixed costs, which will lower overall overhead costs. Adding more product line and using the same allocated cost as before would again result in false outcome. So, opportunity cost needs to be taken into consideration in order to find the actual cost of unused capacity. To determine the cost of producing a single reindeer doll, you need to calculate the cost driver for each cost pool by multiplying the cost per driver unit with the driver units. By adding up all the cost drivers, you can determine the total cost. Finally, you can find the per-unit overhead cost of the reindeer doll by dividing the total cost by the number of dolls produced. 5. What explains the difference between forecasted and actual revenue for the Chicago plant during March of 2000? What other information would you collect to help explain this difference? The major difference occurred in the forecasted revenue and the actual revenue is because of the differences in the cost of labor, amount of raw materials, and also the inappropriate way of deriving cost while anticipating overhead cost. Moreover, the actual production unit is fewer than anticipated, while the actual revenue is more than expected one. This might be the result of dolls

being sold for more than was planned or because dolls with higher prices were bought more frequently than dolls with lower prices. 6. Do you recommend G.G. Toys produce the Romaine Patch doll? Why or why not? Although the Romaine Patch doll is expected to run at a loss considering $8 as setup price with total of $9 overhead cost( material cost- $6 and labor cost- $3) , I would recommend G.G toys to produce the Romaine Patch doll because the production can use the 20% scrap material obtained from Pajamas material to manufacture the doll and reduce the material cost by almost 80%. This will lead the company to gain profit from the production of Romaine Patch doll. Conclusions and Recommendations Given its wide range of products, G.G. Toys must use the Activity-Based Costing Method to determine its true overhead costs for its Chicago operation. The corporation should prioritise creating more Geoffrey dolls because they have a better profit margin than other dolls. In a same vein, given the increased market need, they also shouldn't stop making specialty dolls. Also, the extra capacity generated by the Reindeer doll can be completely utilised by creating more Geoffrey and Specialty dolls, and the scrap goods can be used to make Romaine Patch dolls in order to fully utilize the available resources and increase profitability.