Power Drill Case Study : Bonza Handtools Ltd
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Added on 2020-05-28
Power Drill Case Study : Bonza Handtools Ltd
Added on 2020-05-28
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Solution-1Bonza Handtools Ltd. manufactures a popular power drill suitable for the home renovator. The currentprofitability of Bonza for the last twelve months is as below:ParticularsExistingSales (in amount)$2,600,000 Variable manufacturing cost$1,000,000 Fixed manufacturing costs$400,000 Variable selling and administrative costs$600,000 Fixed selling and administrative costs$300,000 Advertisement expense$0 Profit$300,000 Now, the directors of Bonza Ltd. want to try to increase the profitability of this product and invited seniorstaff to suggest how this might be done. For this, three suggestions have been received. The analysis ofthese three suggestions is as below:Evaluation of Suggestions:Proposal- IThe first suggestion is of Jan Rossi, the accountant who believes that a price increase of $10 per unit isthe best way to boost profits. She would spend an additional $125000 on national advertising andcontends, that if this is done, sales volume would not drop appreciably from last year.The profitability after implementing above suggestion is as below:Jan RossiParticularsExistingProposal - ISales (in amount)$2,600,000 $2,800,000 Variable manufacturing cost$1,000,000 $1,000,000 Fixed manufacturing costs$400,000 $400,000 Variable selling and administrative costs$600,000 $600,000 Fixed selling and administrative costs$300,000 $300,000 Advertisement expense$0 $125,000 Profit$300,000 $375,000 % increase in profit25%Hence, the profit under this suggestion increases by $75,000 from the existing profit.Proposal- II
The second suggestion is of Tom Tune, the production manager. According to him, an improved qualityproduct could increase sales volume by 25% if accompanied by an advertising campaign costing $50000aimed at tradespeople as well as home renovators. The improved quality would add $5 per unit to thevariable cost. Mr Tune believes that the price should not be increased.The profitability after implementing above suggestion is as below:Tom TuneParticularsExistingProposal - IISales (in amount)$2,600,000 $3,250,000 Variable manufacturing cost$1,000,000 $1,375,000 Fixed manufacturing costs$400,000 $400,000 Variable selling and administrative costs$600,000 $750,000 Fixed selling and administrative costs$300,000 $300,000 Advertisement expense$0 $50,000 Profit$300,000 $375,000 % increase in profit25%Hence, the profit under this suggestion also increases by $75,000 from the existing profit.Proposal- IIIThe third suggestion is received from Mary Watson, the sales manager who wants to undertake apromotion campaign where a $10 rebate is offered on all drills sold during the three months beginning 1April. Normally 6000 units are sold during that period and Ms Watson believes that this could be boostedto 10000 units if an advertising campaign costing $40000 were launched late in March. The profit after her suggestion is as below:Mary WatsonParticularsExistingProposal - IIISales (in amount)$2,600,000 $3,020,000 Variable manufacturing cost$1,000,000 $1,200,000 Fixed manufacturing costs$400,000 $400,000 Variable selling and administrative costs$600,000 $720,000 Fixed selling and administrative costs$300,000 $300,000 Advertisement expense$0 $40,000 Profit$300,000 $360,000 % increase in profit20%So, the profit goes up by $60,000 after implementing Mary’s suggestions.
Variations due to above suggestionsThe variance analysis of above three suggestions with the existing position is shown below:Jan RossiTom TuneMary WatsonParticularsProposal - IProposal - IIProposal – IIISales (in amount)8%25%16%Variable manufacturing cost0%38%20%Fixed manufacturing costs0%0%0%Variable selling and administrative costs0%25%20%Fixed selling and administrative costs0%0%0%Profit25%25%20%Thus, from the above it is clearly evident that the profit is going up by 25% in Proposal I and II whereasprofit is increasing by only 20% in Proposal III.ConclusionIn the first proposal given by Jan Rossi, the company is able to generate excess profit by 25%. Under thisproposal, Jan Rossi wants to increase the sales price of the product. The positive point of this proposal isthat it does not involve any extra manufacturing cost and hence minimal efforts are required to increasethe sales. The negative point of this proposal is that by increasing the price of the product the product willbecome costlier as compared to the company’s competitors and thus the company may lose its customerbase.On the other side, the second proposal given by Tom Tune emphasis on enhancing the quality of theproduct and this will also boost the profit of the company by 25%. This proposal increases the volume ofthe sales which results in an $5 of additional variable cost to improve the quality. In addition, anadvertisement expense of $50,000 is also required. However, this will have positive impact in the longrun as improving the quality can be beneficial for the company and will build the customer satisfactionand long term customer relationship can be emerged out of it.The third proposal given by Mary Watson to increase sale involves giving discount, and this willincreases the profit of the company by 20% which is lowest amongst the 3 proposals. This proposalincreases the sales of the company by 16% and variable manufacturing and selling and administrativeoverhead by 20%. This proposal works best if the quality of product is good, as new customers can beattracted by offering discount and once they start using the product and likes it, they can become the longterm customers of the company.So, keeping in mind the above factors, it is suggested to implement the Proposal II.
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