Berkshire Bear Co

Introduction

The case of the Berkshire Toy Company illustrates the "behind the scenes" causes of a net loss despite record sales. We approached this problem from each departmental perspective and, where appropriate, attempted to reconcile the cause-and-effect relationship between the Marketing, Purchasing and Production areas.

Production

Berkshire Toy Company faced a number of labor and manufacturing setbacks during FY98 that led to poor overall production. Of particular interest are the direct labor variances for the fiscal period. Berkshire had a net labor rate variance (LRV) of $76,329 (see Table 3) which can be attributed to the "last minute" hiring of several replacement employees at a rate higher than the budgeted average of $8.00 per hour. In fact, the overall average labor rate was $8.17 per hour. The net labor efficiency variance (LEV) was even more startling at $903,976 (see Table 4A). This difference in quantity of labor hours contributed heavily to Berkshire's 36% overage in budgeted (static) direct labor. This gross difference in direct labor hours was reflected by increased production time on all four parts of unit production, increasing overall production time (on average) by nearly 15%. This difference was most likely the result of hiring less skilled replacement workers but also due (in part) to the necessity of in-house accessory production to meet increased sales demand. It is important to note that an increase in direct labor hours was unavoidable given the increased order volume generated by the Marketing department.

Labor and workforce issues were not the only problems faced by the Production department. For FY98, Berkshire's net material usage variance (MUV) was $288,066 (see Table 2A). Unforeseeable circumstances such as a freak thunderstorm, machinery outages, stock-outs of imported accessories, and an accidental dismissal of parts to refuse led to unfavorable material usage variances as Berkshire required more material than originally budgeted.

Purchasing

After comparing actual outcomes and figures to budgeted amounts it appears as though the Purchasing department was on target with estimated sales volume and had a relatively good year. The net material purchasing variance was -$73,164 (see Table 1) reflecting below-budget amounts on several unit components. As Ms. McKinley pointed out, Mr. Hall was able to purchase several materials at a discount of 7-10%. The material purchasing for acrylic pile fabric, acrylic eyes, plastic joints, polyester fiber filling, woven labels and our designer boxes were all favorable.

The one unfavorable variance that we found was for the accessories (see Table 1). This variance of $26,946 can be attributed to the special Mothers' Day Bear and other holiday sale bears that were offered. These bears appeared to be more elaborate in dress, thus creating a need for extra accessories. This added expense can be seen in both purchasing and production time per unit. The standard cost of accessories in the budget was computed as an average based on historical costs, and since these holiday bears were brand new there was no way for their added accessory expenses to be taken into account when preparing the budget. Monthly and/or quarterly re-forecasting would monitor and address these increases on a more continuous basis.

Also worth mentioning were a few difficulties encountered in the Purchasing department that in turn affected the Production department. There were a number of eyes that were the wrong size and/or shape and could not be used, as well as fabric that was not the right color. In order to avoid these problems in the future it may be a good idea institute a type of control system to check the material after purchasing and before it is sent to production. Alternatively, "bad material" could also be factored into the budget.

Marketing

At first glance, FY98 appears to be quite successful for the Marketing department. Unit sales were 16% above budget and sales revenue was more than $1.4 million higher than expected. Such great numbers were a direct result of the newly implemented Internet sales strategy. Internet selling was highly advertised and generated nearly $4.5 million for Berkshire. But a closer look at the numbers reveals an underlying problem.

Before the inception of Internet sales, the budgeted sales mix was 85% retail/mail order and 15% wholesale. With the implementation of Internet sales, however, actual sales mix percentages were closer to 54% retail/mail order, 32% Internet, and 14% wholesale (see below).

BUDGET Price

Sales Mix Units Per Unit Revenue

Retail/Catalog 85% 238,000 $49.00 $ 11,662,000

Internet -0- -0- -0-

Wholesale 15% 42,000 $32.00 $ 1,344,000

Total 280,000 $ 13,006,000

ACTUAL Price

Sales Mix Units Per Unit Revenue

Retail/Catalog 54% 174,965 $49.00 $ 8,573,285

Internet 32% 105,429 $42.00 $ 4,428,018

Wholesale 14% 45,162 $32.00 $ 1,445,184

Total 325,556 $ 14,446,487

While unit sales increased by just over 16%, sales revenue increased disproportionately at only 11%. This difference is due to the discounted price of bears sold on the Internet. Notice that wholesales remained relatively the same, but retail/catalog sales decreased from 85% to 54% as Internet sales accounted for the remaining 32%. This shift would be negligible if not for the $7.00 discount customers receive by ordering via the Internet. This discount caused the average cost per bear to drop from $46.45 (budgeted) to $44.37 (actual)--a $2.68 decrease! Although, the decision to sell over the Internet was a huge success for sales numbers, the discount price offered for the Berkshire Bear was a poor decision. With the ease of Internet shopping today, a discount as an incentive is unnecessary to entice customers to buy online. In order to balance the increase in unit sales with an increase in revenue, the Internet price of a Berkshire Bear must be adjusted.

Finally, the new marketing technique featuring the Berkshire Bear in special seasonal costumes (Christmas, Valentine's Day, and Mothers' Day) was an

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