Tutor profile: Fahim A.
Big Bad Wolf (BBW) deals with three types of housing materials under three separate departments: straws, sticks, and bricks. BBW is considering dropping (i.e. blow away) the bricks department. Recent financial data are shown below: Straws: Sales = $2,280,000; Variable costs = $1,368,000; and Fixed costs = $336,000 Sticks: Sales = $2,760,000; Variable costs = $1,932,000; and Fixed costs = $450,000 Bricks: Sales = $840,000; Variable costs = $672,000; and Fixed costs = $270,000 If dropped the bricks are blown away, the following changes are expected to occur: 1. The vacated space will be transformed as an addition to sticks at a cost of $148,800. 2. Sales of sticks are expected to increase by $600,000; the Stick’s contribution margin will increase by 6% on this incremental revenue. Should bricks department be dropped by BBW?
Loss of Bricks contribution margin = $(168,000) [$840,000 Sales - $672,000 Variable costs] Remodelling costs = $(148,800) [Given] Contribution margin on increase in sales of Sticks = $216,000 [36% x $600,000 increased sales obtained from 30% ($828,000 contribution margin/$2,760,000) + 6% increase (given), where Contribution Margin is calculated = $2,760,000 Sales - $1,932,000 Variable costs] Income/(loss) from closure of Bricks = $(100,800) Given that closure of Bricks results in a loss of $100,800, BBW shouldn’t close the Bricks department
Baba Black Sheep Ltd. (BBS) is a sheep farm that is aiming to provide quality sheep products to its Canadian clients. Currently, its products include wool (3 bags per sheep), mutton (35 kg), milk (3 litres), and sheepskin. Its current clients are Master, Dame and Little Boy (who lives down the lane). Joint costs include feed, housing, labour and management, and other fixed and variable overheads. Which joint costing method would be most suitable in the allocation of joint costs, and make a profit for BBS?
Under the physical output method, joint costs are allocated based on physical measures such as weight (in kgs), volume (in litres), and so on. Considering the types of units produced (like wool, mutton, milk, and sheepskin) it makes the most sense to use the physical output method for allocating the joint cost. In addition, it is simple, easy to understand, and the least costly method of allocating cost. Therefore, for BBS the physical output method is the most suitable method for allocating joint costs.
Hickory Dickory Dock (HDD) is a manufacturer of a special clock which is known for its special led lights that go around the clock, depicting a mouse running over the clock every hour. Due to a recent surge in demand for its clock, HDD has grown into one of the largest clock manufacturers in the country that sells through local retailers. Its senior executives are now considering entering the US market. What are the potential issues that HDD is most likely to face? And, how will HDD solve those issues?
HDD is most likely to face two major obstacles when entering the US market. 1. Lack of an established brand as American customers are not familiar with HDD quality and function. 2. Absences of an effective distribution system as HDD needs to find local retailers to sell its clock. HDD can solve these issues by: 1. Entering into agreements with leading retail chains like Kroger, Walmart, and The Home Depot to give HDD's clock some retail space. 2. Through the partnership with these retailers, conducting surveys to create consumer profiles of their customers and understanding what kind of products they purchased and providing customer value propositions. 3. Focusing on building HDD brand image reflecting specifically on product innovation and quality as this is what will attract the local customers. 4. Opening a local design center in the US and hiring a local team to re-design the clocks that would satisfy the local customers' needs.