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G.G.Toys
Thedecline margins our popular
in on Gtoftry doIIproduct become
has intolerable.
Increasingproduction
costs haae our
dropped pretaxmarginto lessthan10%, below historical
far our 257omargins, wearegoing
If
to increase margins, need consider
our we to drasticallyshiftingour productiontowardssfecialtydolts aie
that
earning large
a prnniumin priceoaer standard line.
our doll
-Robert Parker,President, G.G.Toys
Background
Robert Parker, president of G.G. Toys, was discussing last month's operating results with Audrey
Hausner, G.G.'s conkoller, and David Morehouse, G.G.'s manufacturing manager. The meeting was
taking place in an atmosphere tinged with apprehension because margins on thelr most popular
product, the "Geoffrey doll," had been declining rapidly in the last few years due to rising
production costs (summary operating results for the previous month, March 2000, arc shown in
Exhibits 1 and 2). Parker saw no choice but to shift the company's product mix towards specialty
dolls that carried a high price premium, and thus, a 34% margin.
G.G. Toys was a leading supplier of high-quality dolls to retail toy stores throughout the U.S, The
comPany had started with a unique design for molding highly durable dolls using vinyl and resin
materials. G.G. quickly established a loyal customer base among retailers because of the high quality
and popularity of its manufactured dolls. It soon established a major presence in the market with its
high-volume Geoffrey doll product line. The company operated two separate plants. The Chicago
plant was used for the production of various dolls. The Springfield plant was used solely to assemble
doll cradles to complement the company's dolls.
The Geoffrey doll was designed to be a replica of an infant boy or girl clothed in a simple pajama
outfit with movable acrylic eyelids and jointed, movable arms and legs. Boy and girl versions of the
doll were produced to almost identical specifications with minor differences in the face and length of
hair. The early popularity of the Geoffrey doll allowed the company to produce both versions of the
doll in high volumes using the same production process. While prices for the standard Geoffrey doll
line remained steady, rising costs of production had eroded gross margins in this product line from
well over 25%to9%.
Competition from other doll manufacturers and demand from retailers prompted G.G. Toys to
complement its existing product line with higtrly specialized versions of the Geoffrey doll that
105-005 G.G.Toys
retaiierscould brand as their own line. G.G. Toys beganproducing customizeddolls for retailers
under their "specialty-branded" product line. Under this product line, retailers placed orders for
dolls with their own customizedspecifications hair color,skin tone,and pajamastyle to reflectthe
for
of
tastes the customer segments they served.
Chicago Manufacturing Plant
G.G. Toy's production processfor dolls started with the purchase of raw materials, such as vinyl
and resin for the doll bodies and wool and other fibers for doll hair and pajamas, from several
suppliers. ln its modern Chicago manufacturing facility, the company machine-molded the vinyl and
resin into doll bodies, hand- and machine-sewed the various fibers into pajamas and hair for the
dolls, and assembledthe final product.
Doll bodies for the specialty-branded line were produced to the same specifications as the
standard Geoffrey doll in terms of shape and size. However, the pajama outfit of this line was often
more ornate than the simple pajama outfit of the standard Geoffrey doll. Thus, more specialized
material cuts and hand assembly were required. Also, because of the customized nature of the
specialty-branded product, there was much more variety in skin tone, eye color, hair color, and hair
length for these dolls than there was for the standard Geoffrey doll.
The same equipment and labor were used for all doll product lines, and production runs were
scheduled to match customer shipping requirements, Products were packed and shipped as
completed.
The Chicago plant had fallen short on production in the current year. While it had planned for
production of 24,900 units, only 24,000 units were produced. However, overall revenue during
March was $785,000 (seeExhibit 1), which exceededforecastedrevenue of $765,000.Although huppy
with the overperformance, plant management did not know how to explain these conflicting results.
Springfield Assembly Plant
Cradles were assembledin the company's small Springfield assembly plant. The plant produced
only one model of the cradle and purchased all of the product's finished components from several
local manufacturers. The cradles were assembled from these finished components completely by
hand. Cradles contained several components ranging from the cradle bed and rocking cradle legs to a
small speaker that played preset music. To ensure the quality of the finished components coming
from G.G.'s multiple suppliers, assembly line workers tested the components frequently during the
assemblyprocess.
Current Costs System
system charged each unit of product for direct material and direct labor.
G.G.'s cost accor.rnting
Material cost was based on the prices paid for raw materials under annual purchasing agreements.
Labor rates, including fringe benefits, were $15 per hour and were charged to product based on the
standard rurr times for each product (see Exhibit 3). Overhead costs in the Chicago plant were
allocatedto Geoffrey dolls and specialty-brandeddolls as a percentageof production-run direct labor
cost. The Springfield plant also used production-run direct labor cost to allocate its overhead costs to
G.G.Toys
the production of cradles. The company elected not to allocate selling, general, and administrative
coststo products.
Internal Cost Study
G.G. Toys had recently commissioned a smail internal team to study its overhead costs in both
plants. The study revealed the following information:
1. Workers in the Chicago facility often operated several machines simultaneously once they
were set up. Thus, machine-related expensesmight relate more to the machine hours of a
product than to its production-run labor hours.
2. A setup was performed in the Chicago facility each time a modification to the dolls was made.
For example, to switch from a batch of girl dolls to a batch of boy dolls, a setup was required.
Additionally, each time a specialty-brandeddoll was produced, a separatesetup was required
to process the raw materials to the required specifications. As the cradles were assembled
entirely by hand, there were no setupsin the Springfield plant.
3. For each production run, people in the receiving and production-control departments of the
Chicago plant ordered, processed,inspected, and moved each batch of raw materials. This
work required the same amount of time regardless of the production run length. The
Springfield plant received materials on a just-in-time basis and continuously inspected and
moved thesematerials.
4. The work in the packaging and shipping areas of both plants had increasedduring the past
couple of years as the company increased the number of customers it served. Each time
products were packaged and shipped, about the same amount of work was required,
regardlessof the number of items in the shipment.
The team had collected the data shown in Exhibit 4 based on operations in March 2000 and felt
that this month was typical of ongoing operations with the plant producing at practical capacity.
The team decided that plant management and facilities-relatedcosts should continue to be allocated
to products in the same way they had been under the old system, as a percentageof production-run
direct labor cost.
The team collected data on the standard Geoffrey doll, the specialty-branded doll #106, and the
cradle (Exhibits 2-4). Specialty-brandeddo1l #106had been ordered by several of G.G. Toy's largest
customers and made an extremely successfuldebut in the marketplace. \A/hile the Chicago plant
produced many different specialty-brandeddoll models, this particular doll concernedmanagement.
Because each retailer required slight alterationsto the doll's clothing (e.g.,retailer logo on pajamas),a
new setup and production run were required each time the clothing design was changed. Because
the doll was fairly new, retaiiers were conservative in their ordering patterns; most ordered fewer
the
units more frequently, Due to these concerns,G.G. managementwanted to assess profitability of
the specialty-brandeddoll #106.
Current Situation
Becauseof their high margins, Parker was willing to accept many orders for specialty-branded
dolls even if this meant that the company had to lower production of the standard Geoffrey doll. In
105-005 G.G.Toys
the meeting, Parker would discuss this issue with Hausner and Morehouse. Additionally, Parker
wanted to discusstwo additional product lines.
G.G. Toys had decided to produce holiday reindeer dolls in the Chicago plant during luly,
August, and September. The Chicago plant expanded its production capacig (i.e., machines and
leasedspace)and reserved the additional capacity for production of the holiday reindeer. Thus, this
capacity would sit idle from October through |une. Parker was unsure about how this excess
capacity would affect the results of the internal cost study in the Chicago plant and overall plant
performance.
Additionaliy, G.G. Toys was considering producing a hand-made "Romaine Patch" doll. This doll
would be a simply constructed doll made of a soft-cloth body stuffed with the same soft-cloth
material. Becauseof the simple construction of the doll, G.G. Toys felt that it would be low cost to
produce but was confused by its estimated negative contribution margin. Based on management
estimates,the expected sales price per doll was $8.00,the expected direct labor cost per doll was
$3.00,and the expecteddirect material cost per doll was $6.00. The latter material cost was based on
two facts: new material cost the Chicago plant $2 per yard, and each Romaine Patch doll would use
three yards of material. This doll would be produced in the Chicago plant, and G.G. felt that it could
produce all units of this doll by hand, using the scrap material from production of all doll pajamasat
the Chicago plant. Currently, the production of pajamas resulted in significant amounts of scrap
material. This material was disposed of at no additional cost to G.G. Toys. Approximately 20% of
the material ordered for the doll pajamas resulted in scrap; all of this material would be used in
RomainePatch production.
Toys
G.G. 10t005
Questions
1'. Do you recommend that G.G. Toys change its existing cost system in the Chicago plant? In
the Springfield plant? Why or why not?
Vl Calculate the cost of a Geoffrey doll, the specialty-branded doll #106, and a cradle using the
cost study conclusions.
(3J Compure and contrast the profitability of each doll under the new and old systems. Based on
your recomputed product costs, what actions would you recorunmd the company consider
to enhance its profitability? \{hat additional information would you like to have to make
these recommendations?
4. How should G.G. Toys account for the excesscapacity created to produce the holiday reindeer
dolls? Qualitatively, how will this impact your calculated cost of the Geoffrey doll and the
specially-branded dolls in question number 2? Explain your method and its impact. (Answer
qualitatively . Do not recompute any of your product costs from question 2.)
5. \{hat 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?
Do you recommend G.G. Toys produce the Romaine Patch doll? Why or why not? (Ignore
manufacturing overhead costs including packaging, shipping, and receiving and production
control.)
G.G.Toys
Exhibit 1 G.G.Toys:OperatingResults(March2000)
Corporate Chicago Springfield
Level Facilitv Facilitv ToTAL
Sales $786,000 $'125,400 $911,400
Direct
labor 72,000 22,500 94,500
materials
Direct 144,000 36,000 180,000
ManufacturingOverhead
Machinerelated 112,000 112,000
Plantmanagement facilities-related
and costs 33,333 6,66; 40,000
Setuplabor 13,333 13,333
Receiving production
and control 60,000 3,000 63,000
Packaging shipping
and 50,000 3,000 53,000
Totalmanufacturing
overhead $268,666 $12,667 $281,333
general, administrative
Selling, and 296,650 296,650
income(pretax)
Operating $ 58,917
Source: Casewriter.
Exhibit 2 Product Profitability Analysis (March 2000)
Specialty-
Branded Doll
Geoffrev Doll #105 Cradles
laborcost ($)
Direct 3.00 3.75 7.50
Direct cost ($)
material 5.00 6.00 12.00
Manufacturing ($)
overhead' 11 . 1 9 13.99 4.20
Standard cost ($)
unit 19.19 23.74 23.70
price($)
Selling 2't.00 36.00 30.00
Margin($) 9% 34% 21V"
Source: Casewriter. XIo Z% u"lo
aChicago overhead aliocation percentage of direct labor cost = 373"/.(8268,666/$72,000);
Springfield overhead allocation percentage of direct labor cost = 56V. ($12,667
/$22,500).
G.G.Toya 10H)0s
Exhibit 3 Product Data
Specialty-
Product Lines Geoffrev Doll Branded Doll Cradlee
Materials perunit
cost $s $6 $12
Production-run laborperunit
direcl .20DLhours .25DLhours .50DLhours
Production-run labor
direct hours
$/unit@$1S/DL
(lncludlng
employee benefils) $3.00 $3.2S $7,50
Machlne per
hours unit 0.5 0.3 0.0
Sourcr: Caaewriter.
Exhibit 4 Monthly Production and Operating Statistics(March 2000)
ChicagoPlant Sprinqfiel{ Plalt
Other
Specialty- Specialty-
Geoffrey Branded Branded
Doll Doll {t106 Dolle Total Cradler Total
(units)
Productlon 12,500 24,000 3,000 3,000
Machinehours 3,750 1,200 6,250 11,200 0 0
Setups 10 100 50 ( G f , . . r o o
\fr.
runs
Productlon 10 100 50
w 1 1
Number shipments
of 10 220 70 300 50 50
Source: Casewrite!.
