CASE ANAYLSIS G G TOYS
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2700
Subject
Industrial Engineering
Date
Dec 6, 2023
Type
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5
Uploaded by chovatiyabrijesh123
Case analysis of G.G TOYS
Submitted by brijesh chovatiya
Instructor
–
dorjana Nano
Subject
–
applied capstone ( CSAC 2070)
G.G. Toys, A Renowned Manufacturer Of High-Quality, Durable Dolls, Quickly Established Itself As A Prominent
Player In The Toy Industry. With Its Unique Designs And Two Separate Manufacturing Plants, The Company Gained
Market Recognition For Its Signature "Geoffrey Doll," Which Became A Top-Selling Product In The US. To Cater To
Specific Market Demands, G.G. Toys Introduced Customized Versions Of Their Geoffrey Dolls, Known As "Specialty
Dolls," Allowing Them To Command Higher Prices. Despite Rising Production Costs, The Company Maintained The
Original Geoffrey Doll Price, Leading To An Increased Focus On Its Core Product Line. This Case Study Delves Into
G.G. Toys' Current Situation And Provides Valuable Insights Into Product Retention, Strategic Cost Allocation, And
Diversification For Enhanced Profitability And Sustainability.
Problem statement
Given
the declining product margin and growing production expenses, what strategies might GG toys take to boost
profitability? Given that its profit margins are declining annually, can GG Toys afford to add more products to its
current lineup?
Case Analysis
1.
Do you recommend that GG Toys change its existing cost system in the Chicago plant? In the
Springfield plant? Why or why not?
Computation of OVH Cost per unit
OVH Cost Pool
Unit
Total
cost
Total capacity
Cost/Unit
Machine Related
Machine Hours
112000
11200
10
Plant Management and
facilities
Production units
40000
27000
1.48
Set up labor related
Nr. Of production set up
13333
160
83.33
Production order related
Nr. Of production runs
63000
161
391.3
Packaging and shipping
Nr. Of shipments
53000
350
151.42
Allocation of OVH cost to the products
OVH Cost
Geoffrey doll
Speciality branded doll
Cradles
Machine Related
37500
12000
0
Plant Management and
facilities
11250
6000
4500
Set up labor related
833
8330
0
Production order related
3913
39130
391.3
Packaging and shipping
1514
33308
7570
Total allocated ovh
55010
98768
12461.3
Unit produced
7500
4000
3000
Cost of OVH per unit
7.33
24.692
4.15
Currently, GG Toys utilizes a production-run direct labor cost approach to allocate overhead expenses, which may
not be the most effective method, especially for the Chicago facility. Given the diverse product range manufactured at
the Chicago plant, a more comprehensive method, such as activity-based costing (ABC), would be more suitable.
Since direct labor expenses constitute a significant portion of the company's overhead costs, and the production
requirements for different doll types vary in terms of machine hours, setups, manufacturing runs, and other factors,
ABC would provide a more accurate allocation of overhead expenses to each product. This would result in distinct
contribution margins for each doll type, reflecting the true cost structure and profitability of each product line.
In contrast, the Springfield plant, which produces only one product
–
cradles
–
may not benefit as much from adopting
ABC. Since the product range is limited and the production process is relatively straightforward,
the traditional
production-run direct labor cost approach may still be adequate for overhead allocation.
Overall, switching to ABC for the Chicago factory would provide a more accurate and transparent view of the company's cost
structure and product profitability. By assigning overhead costs based on the actual activities involved in producing each product,
ABC would enable GG Toys to make more informed pricing and product development decisions.
2.
Calculate the cost of a Geoffrey doll, the speciality-branded doll #106, and cradle using the cost
study conclusions
.
Computation of Gross margins using ABC
Costs
Geoffrey Doll
Speciality branded
doll
Cradles
Direct Labor cost
3
3.75
7.5
Direct Materials Cost
5
6
12
Manufacturing OVH
Cost
7.33
24.692
4.15
Total cost per unit
15.335
34.442
23.654
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Based on the calculations in the table, the cost to produce one Geoffrey doll is $15.335, the cost to
produce one specialty-branded doll is $34.442, and the cost to produce one cradle is $23.654.
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?
Cost ( old system)
Geoffrey Doll
Speciality-Branded
Doll
Cradles
Total cost per unit
19.19
23.74
23.72
Gross profit margin%
9%
34%
21%
Cost ( New system)
Geoffrey Doll
Speciality-Branded
Doll
Cradles
Total cost per unit
15.335
34..442
23.654
Gross profit margin%
27%
4.33%
21%
Under the traditional costing system, the gross margin for cradle production remains at 21%, indicating
that the current system is adequate for this product. However, for Geoffrey dolls and specialty-branded
dolls, the results under ABC costing differ significantly from those under the traditional system. The
traditional costing system shows a profit margin of 9% for Geoffrey dolls, while ABC costing reveals a
more accurate margin of 27%. This discrepancy arises from the overallocation of overhead resources to
Geoffrey dolls under the traditional system. In contrast, specialty-branded dolls, which were previously
perceived as highly profitable with a margin of 34%, are found to have an actual margin of only 4.33%
under ABC costing.
Given these findings, it is evident that Geoffrey dolls are more profitable than specialty-branded dolls.
Consequently, the company should focus on increasing the production of Geoffrey dolls. Additionally,
due to the significantly lower actual gross margins for specialty-branded dolls compared to the perceived
margins, discontinuing their production would be a profitable decision.
4.
How should GG 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 the
speciality branded dolls in question number 2? Explain your method and its impact.
During the production of holiday reindeer dolls in July, August, and September, G.G. Toys acquired excess
manufacturing capacity. This excess capacity could be utilized to increase the production of Geoffrey
dolls and specialty-branded dolls. By producing more dolls, the fixed cost per unit would decrease,
leading to a reduction in the overall cost of goods sold.
Alternatively, G.G. Toys could develop a new product line to capitalize on the excess capacity, further
reducing fixed costs through large-scale production. The opportunity cost method can be employed to
determine the total cost of underutilized capacity.
If Geoffrey dolls and specialty-branded dolls are grouped in the same cost pools as holiday reindeer
dolls, the overhead cost associated with these dolls will be impacted. The cost per driver unit for each
cost pool will be calculated and multiplied by the cost driver per unit of a specific doll with the
driver
units. The sum of these products will represent the total cost of each doll. To determine the per-unit
overhead cost for a particular doll, divide the total cost by the number of units 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?
One possible reason for the difference between the Chicago plant's projected revenue for March 2000
and its actual revenue could be that the company sold more units of a certain product than expected.
Additionally, a product with a higher price point may have sold in larger quantities. To determine the
exact cause of the discrepancy, it's necessary to compare the projected sales revenue for each product
line assigned to the Chicago plant with the actual sales data for each product line during the fiscal year.
6.
Do you recommend G.G. Toys produce the Romaine Patch doll? Why or why not?
We have 2 scenarios for the case:
If the company purchase materials for Romaine Patch doll or
If the company uses scrap materials from the production of other dolls.
Direct material purchased
Using scrap material
Sales price per unit
8
8
Direct material cost per unit
6
0
Direct labor cost per unit
3
3
Contribution Margin per
unit
-1
5
Therefore, company can consider the production of Romaine patch doll using the scrap material from
the production of other doll pajamas because the contribution margin is positive.
Conclusion
Due to the wide range of products produced at G.G. Toys’ Chicago plant, the activity-based costing
system is necessary to allocate overhead expenses. Since the company generates more revenue by
producing Geoffrey dolls than by producing other dolls, we recommend that the company changes the
mix of dolls that it sells. Furthermore, it is essential to utilise the idle capacity generated by the
production of the festive reindeer doll to increase profitability.