Question

Winnebago Industries, Inc. is a leading manufacturer of recreational vehicles (RVs), including motorized and towable products. The company designs, develops, manufactures, and markets RVs as well as supporting products and services. The RVs are sold to consumers through a dealer network. On the August 29, 2015, balance sheet, Winnebago reported inventory of approximately $112 million. Of this amount, approximately $12 million, about 11%, was Finished Goods Inventory (Notes to Consolidated Financial Statements, Note 3). Suppose Winnebago motor homes have an average sales price of $96,000 and cost of goods sold is 89% of sales. Thor Industries, Inc., a major competitor, has an average cost of goods sold of 86% of sales. For year ending August 29, 2015, Winnebago sold 9,097 motor homes (Form 10-K, Item 1 Business).
Requirements

1. Why would the Finished Goods Inventory be such a relatively small portion of total inventory?

2. What is the average cost of goods sold (in dollars) for a Winnebago motor home? What is the average gross profit?

3. If Winnebago could reduce production costs so that the average cost of goods sold is equal to their competitor’s average cost of goods sold, how much more profit would Winnebago earn on each motor home sold?

4. Based on 2015 sales, how much would operating income increase if the company reduced the average cost of goods sold to equal their competitor’s average cost of goods sold?

5. How could managers at Winnebago use managerial accounting to reduce costs and increase profits?

Answer 1

1. Solution: The finished Goods Inventory of Winnebago’s will be a relatively small portion of total inventory because it manufactures the product and afterwards sells RVs to dealerships for reselling it to final consumers. A large part of the inventory is in Raw Materials Inventory which will be consumed in the process of manufacturing and Work-in-Process Inventory started however not completed yet.

　

2. Solution:

Average cost of goods sold = Average sales price * COGS(%)

Average cost of goods sold = $96,000 * 89%

Average cost of goods sold = $85,440.

Average Profit -Gross = Average sales price - Average cost of goods sold

Average Profit -Gross = $96,000 - $85,440

Average Profit -Gross = $10,560

　

3. Solution:

Average cost of goods sold = Average sales price * COGS(%)

Average cost of goods sold = $96,000 * 86%

Average cost of goods sold = $82,560

　

Average Profit -Gross = Average sales price - Average COGS

Average Profit -Gross = $96,000 - $82,560

Average Profit -Gross = $13,440.

Profits would increase by $2,880 ($13,440 – $10,560) per motor home sold

　

4. Solution:

Total increase in operating income = Increase in average profits per motor home * Total Number of motor homes

Total increase in operating income = $2,880 * 9,097

Total increase in operating income = $26,199,360

　

5. Solution: Managerial accounting gives detailed and disseminated information about the operation of the company with a proper analysis of each individual line of products, facility, operating activity, etc. It assists management to know where actual costs is more than expected costs and then consider options to reduce such costs