Question

The Plastics Division of the United Chemical Co. manufacture s and sells a line of raw materials used by plastic converters in the fabrication of components for durable goods manufacture. The Plastics Division has three manufacturing plants that employ a two-step process using 39 pro-duction lines. They manufacture 4,000 final product s (grade/color combination s) for sale to 3,600 customers. Figure 1 describes the production facilities. There are significant differences among the various production lines. Some grades of products can only be produced on certain lines. There are differences in equipment capacity that dictates the run size that is most efficient in each line (see Figure 2 for run size/cost relationships for the range of equipment sizes). These differences in the production lines require constant monitoring by production scheduling in order to match the mix and volume of sales orders with the production capabilities to achieve the most economic production results. The Plastics Division uses a standard cost system for evaluating the performance of the production facilities. The financial reports being routinely prepared for use by division management currently include: l) Income statement,balance sheet, and cash flow statement for the division as a whole. 2) Standard cost performance reports for manufacturing. Upon special request, individual product-cost estimates are made. These estimates are usually used in pricing considerations. The Current Environment The division has grown rapidly in the past several years. Consequently, the business has become more complex because of the large number of customers, products, and production lines. The marketing department views the market (3,600 customers) as being made up of five major segments and twenty sub segments. The controller, Bill Brown, has observed that the decisions being made by the manufacturing manager are quite different from the decisions required of the marketing manager. Brown concluded that the different decisions require different financial information. He believed that through financial analysis his staff could provide marketing with data that could be used to guide marketing strategy and improve the profitability of the division. Brown observed that the lowest unit selling price of a product was about 30 percent of the division's highest priced product, and that the lowest unit cost was about 25 percent of the highest unit cost. He therefore reasoned that there must be a wide variation in profitability from product to product, customer to customer, and transaction to transaction. He concluded that a system was needed that would clearly define the profitability of each sale in order to provide the basis for marketing emphasis and pricing. However, significant questions remained in his mind.

What are the critical information needs of the marketing manager, the manufacturing manager, and the general manager?

What changes should Brown recommend United consider making? Explain the advantages these changes would bring.

Answer 1

The critical information needs of the Marketing manager and Manufacturing manager.

1.Marketing manager and manufacturing manager should know product and segments wise

plant capacity accordingly they can give requirements to the marketing department as per plant capacity. The marketing department can take orders as per plants requirement. So that plant will run on a low-cost efficiency basis.

2. Manufacturing department and General Manager should be well aware of the plant's wise production capacity and profitability.

3. General Manager also should know product wise profitability. So they make the plant more profitable.

4. Whole team also wants to maintain a minimum product range and client.

5. Production manager also want a bulk order from the marketing department.

Mr. Brown recommendation as below:-

1.       Calculate the product-wise and plant wise capacity, so it helps the marketing department to

Take order accordingly and run the plant on maximum capacity at a low cost.

2.       Calculate the product wise profitability so it will help the management and marketing department to select the type of product order they should take. This will help them to reduce product range and plant become more profitable.

3.       Introduce customer wise profitability. It will reduce the number of customers and help the marketing department to focus on profitable customers.

4.       By removing standard costing and introducing product costing, it will help to calculate the actual cost of the product so that management can identify which product is more profitable.

5. The company should first maintain plant wise profit and loss account and cash flow. Sometimes loss-making plants may run with profit-making plants which may result in the reduction of overall profit. Some plant has a cash problem. It affects the overall cash flow and management may be unable to reach the root cause.

6. The company can also distribute the plant in different segments. It will help in reducing the workload of the production department.