Question

Question 2 Butterfly Inc. makes a single product, tennis balls. The company's only plant can produce up to 2.5 million cans of balls per year. Current production is 2 million cans per year. Annual manufacturing, selling and administrative fixed costs total $700,000. The variable cost of making and selling each can of balls is $1. Shareholders expect a 12% annual return on the company's $3 million of assets. Required: Maximum Word Count for this Question (all parts): 350 words

a) What is Butterfly Inc.'s current total cost of making and selling 2 million cans of tennis balls? What is the current cost per unit of each can of tennis balls?

b) Assume that Butterfly Inc. is a price-taker and the current market price is $1.45 per can of balls. (This is the price at which manufacturers sell to retailers.) What is the target cost of producing and selling one can of tennis balls?

c) Is the target cost per unit calculated in part (b) attainable under the current operating conditions?

d) If the cross-functional team believes that Butterfly Inc. cannot reduce its fixed costs, what is the target variable cost per can of balls?

e) Whether the cost reduction target is feasible or not, what can the cross-functional team do to further reduce cost? You can provide general or specific recommendations.

Answer 1

Butterfly Inc.
a) Current total cost of making and selling 2 million cans of tennis balls
	Amount ($)
Variable cost (2 million balls* $1each ball)	20,00,000.00
Annual manufacturing, selling and administrative fixed costs	7,00,000.00
Total cost (A)	27,00,000.00
Total cans of tennis balls (B)	20,00,000.00
Cost/unit of each can of tennis balls (A/B)	1.35
b) Target cost of producing and selling one can of tennis ball
Market price fixed @ $1.45	Amount ($)	Note
Selling Price (2000000*1.45)	29,00,000.00	A
Return expected on sale (3000000*12%)	3,60,000.00	B
Total cost (target)	25,40,000.00	A-B
Total cans of tennis balls	20,00,000.00	C
Target cost of producing and selling one can of tennis ball	1.27	(A-B)/C
c) Whether the target cost per unit calculated in part (b) attainable under the current operating conditions
Selling price is fixed @ $1.45 and profit needs to be maintained so cost is to be reduced and the same can be done by reducing the Annual manufacturing, selling and administrative fixed costs which is $700000. If the same is reduced by $160000($2700000-$2540000) to $540000 then the target cost calculated in (b) is attainable.
d) If the fixed costs can't be reduced then target variable cost should be:
	Amount ($)	Note
Total Cost [from (b)]	25,40,000.00	A
Annual manufacturing, selling and administrative fixed costs [from (a)]	7,00,000.00	B
Variable cost	18,40,000.00	A-B
Total cans of tennis balls	20,00,000.00	C
Target variable cost/can of tennis balls	0.92	(A-B)/C
e) Feasibility of cost reduction depends on the tools and techniques used for cost reduction. It includes Value Analysis, Inventory management (like implementing JIT), Business Reengineering, Kaizen Costing etc. Some methods which can be used are:
1) Non-value added cost should be reduced by doing value analysis.
2) Production process can be made more effecient. For example, by streamlining the process.
3) Substituting parts can be done to make it more efficient.
4) Process centering can be done by combining the steps that can be handled by fewer people.