A small producer of gas grills is finalizing the changes to its 2009 operating budget and thinking about a number of alterations in pricing, promotion, and product supply. This short case looks at the theme of contribution analysis as a simple means of evaluating profit planning challenges, which include adding or doing away with a product or service; altering a price; increasing or loweringpredicted volumes; or working for a profit budget. In this case there are three differentproducts, where each has varying amounts of variable and fixed costs. The product thathas the highest profit/unit on a full cost basis has the least contribution/unit on a variable cost basis, and vice versa. Four varying marketing plans are chalked out before one is chosen in the end for annual implementation. With the year’s closing, the real results can be put against the budget and the latter can be changed to incorporate the real product volumes experienced through the year. The figures are easy and the students will be able to understand the advantage of variable costing.
Scenerio 1- No change
Scenario 2- Production of Grill A dropped
Scenario 3- Price of Grill C reduced
Scenario 4-Shift of advertising focus
Scenario 5- Lower Price of Grill C and Shift in Advertising Focus
Comparison of Budgeted and Actual Income
Should BW drop Grill A? The owners wanted to know the impact of dropping Grill A from their line of products. Richardson was told to assume that the volumes and selling prices of the other two products would be the same whether or not the Grill A product line was dropped.
Should BW lower the price of Grill C? The owners wanted to know the impact if they lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of Grill C.
Should BW change its advertising focus? The owners wanted to know the impact of a 10,000-unit increase in Grill C volume and a related 10,000 unit decrease in Grill A volume because of a shift in advertising emphasis.
Should BW lower the price of Grill C and change its advertising focus? The owners wanted to know the impact of lowering the price of Grill C to $75 and shifting the advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and increasing Grill C volume by 30,000 units