TRIM-Inc

1TRIMInc.ByAudreyTaylorWesternWashingtonUniversityBellingham,WA.AbstractAfictionalexampledemonstratesthedangerofusingfullyallocatedcosts,evenABC,todeterminetheprofitabilityofanewproposedproductline.Usingmarginalcostingimprovesthesolution,butdoesnotfullyconsidertheoptionofincreasingcapacity.Inordertodeterminewhethercapacityshouldbeincreasedadditionalanalysismustbedonethatfocusesonthebestwaytouseconstraintsandsimultaneouslybalancedemandagainstrisk.Themainfocusofthecaseisthebehaviorofstep-fixedcosts.Capacityusuallymustbepurchasedinlumpsthatarerarelydivisible.Studentsseldomhavetheopportunityincasestodealwithstep-fixedcostsandchangingcapacity.Thiscaseallowsthemtodoboth.Keywords:activity-basedcosting,targetcosting,constraints,step-fixedcosts,capacitychoices,profitabilityanalysis.IntroductionTaylor’sReductionImprovementMachinesInc.,(TRIM),producesexerciseequipment.Thecompanyhasamaturemarketlineofreliableproducts.However,recentlythedemandforrobustexerciseequipmentforhomeandclubusehasdramaticallyincreased.TRIMInc.hasmaintainedtheirsalesvolumebuttheyhavebeengraduallylosingmarketshareofaneverexpandingmarketforexerciseequipmentasclubsandindividualsturntonewerinnovativemachinesoutsideofTRIMInc.’srepertoire.Thereforethecompanypresident,SummerTaylor,aformerswimsuitmodel,MissAmericafirstrunnerup,andSmithCollegealumhasdecidedtotryanddevelopnewprofitableproductsforthemarket.Summer’sResearchandDevelopmentteam,headedbyEdwardSmith,haverecentlydevelopedanewproductthattheyfeelwillbewellreceived.Theproductisanewexercisemachinethatinthetestingphasedramaticallyreducedwaistlinesinaslittleas14days.Theinitialmarketingresultshaveindicatedthatthemarketisfirmforthisproductandthatapriceof$100wouldbewellreceived.Atthatprice,TRIMInc.believesthat7,500machinescanbesoldeachyearforthenexttwoyears.Thematerialcostforeachunitis$60.Oneofthemajorbenefitsofthenewproductlineisthatthenewproductcanbeproducedontheexistingequipment.Summercalledameetingofthemanagementteam.DuringthemeetingSummerandEdwarddiscussedtheproductionneedsandsalespotentialoftheWaistLineReductionMachine,(WLRM),withChrisKelly,theheadofproduction,MontgomeryBradford,theVicePresidentofMarketingandJoshuaSears,theController.Edwardstatedthatgiventheflexibilityofthecurrentequipment,andtheskillofthesetuppersonnel,theexistingequipmentcouldbeusedtoproducethenewmachines.Infact,Edwardstatedthathehaddesignedthenewproductsothatitcouldbeproducedusingtheexistingprocessesandmachines.Theskillsetofthecurrentlaborforceisconsideredtobesufficienttoproducethisnewproduct.Duringthemeetingthefollowingdiscussiontookplace:Summer:“Ed,thismachinelookswonderful,andthemarketingresultslookverypositive.Iamreallyimpressedwithyouringenuityandyourpracticalityatthesametime.Developingamachinethatwecouldmakeonourexistingresourcesisincredible.”“You’vedonethemarketanalysisMontgomery.WhatdoyouthinkofEd’sinvention?“2Montgomery:“Iloveit.Sodoourcustomers.Thecurrentclientsareveryinterestedandhavemadesolidcommitmentsforpurchasesifwecangetittothemfast.Hopefullythecompetitionhasnotcaughtwindofthis.Youknowhowclientstalk.Itwon’tbelongbeforetheusualsuspectscomeoutwithaclone.EveniftheydohearabouttheWLRM,Ithinkwecanholdourleadforthenexttwoyearsandsell7,500unitsataminimum.Wemayevenbeabletoincreasethatto10,000unitsifwedecideto.IdonotknowifIcanpromisemuchmorethanthat.YouknowthatIwouldliketosaythat“theskyisthelimit”,butIwouldratherbeconservativeandmakesurethatwedonotbuildmorethanwecansell.Wewanttokeepthepricehighuntilthecompetitioncatchesup.Chris:IlikethatconservativeoutlookMontgomery.Iknowthatwecanhandle7,500unitsnow.IhavedeterminedourcurrentcapacityutilizationwithourcurrentproductlinesandIprojectedhowmuchofourcapacitywewoulduseforthisnewproduct.IfyouwillreviewExhibit1,Ithinkthatmyprojectionsareclear.InsertExhibit1Itlookslikewecanhandlethe7,500unitsrightnow.Ifwedodecidetogoabovethat,wewillneedtoexpand.Doyouwanttodothatrightnow?Ed:Beforeyouanswerthat,IprobablyshouldinformyouthattheWaistreductionmachineisnottheonlyproductmyteamhasdeveloped.Theyalsocreatedasmallermachinegreatforbuildingbiceps.ThereforeIcallittheBicepBuilder.Catchyisn’tit?Montgomery:Edgavemeafewprototypesandwehavedonesomepreliminaryresearch,andagainhehasawinner.ThismachineshouldsellforalotlessthanourWLRM,butitshouldcostlesstobuildtoo.Summer:EdandMontgomery,thisiswonderfulnews.MakesurethatChrisseesitandgivesyouherinputonwhatshethinksitwillcosttobuild.Inthemeantime,IwouldlikeadecisionontheWLRM.Idonotthinkthatwecanaffordtoletourproductslagbehindourcompetitors.IwouldliketoseesomeprojectionsofthefullcostoftheWLRMforthelowervolumelevelof7,500unitsgivenChris’projectionsonhowmuchcapacityshebelievesthatitwilluse.Joshua:SincewearealreadyusingActivityBasedCostingforourproductlines,itshouldbesimpleformetodeterminetheABCcostoftheWLRMforyou.IwilllookoverChris’notesandgetthattoyourightaway.Iwouldalsoliketoconfirmwhetherweareaimingforaprofitmarginof25%ofsales.Arewe?IwouldliketodetermineiftheWLRMmeetsourTargetCostrequirements.Summer:GoodpointJosh.Wouldyoudothatplease?Montgomery,doyouthinkthattheW