This analysis examines the income and cost information presented by Berkshire Threaded Fasteners Company from historical and projected perspectives to justify two major decisions: withdrawal of a product line, and reduction of the selling price of another. Furthermore, these decisions will lead into suggestions about the overall strategic approach of the firm.
At the beginning of 1974, Berkshire leadership advocates withdrawal of the 300 Series product line. First glance at the income statement for the period ending December 31, 1973 appears to reveal that production of the 300 Series causes substantial overall losses to the firm. However, this is a relevant cost decision. Table 1 illustrates that the withdrawal of the 300 Series product line will affect labor, raw materials, power, and repairs. It will have no affect upon the other costs as they are either allocated across the three product lines or historical costs with no relevance. The result based upon period-end numbers for first six months of 1974 would project an operating income loss of $693,000 instead of $110,000 loss. To withdraw the 300 Series would be a poor decision.
Table 1.
300 Series - Selling price $2.75 Drop 300 Series
labor $349.00 $0.00
raw materials $404.00 $0.00
power $15.00 $0.00
repairs $5.00 $0.00
rent $95.00 $95.00
Other Factory costs $56.00 $56.00
Total $924.00 $151.00
Selling Expense $239.00 $239.00
General Administration $90.00 $90.00
Depreication $186.00 $186.00
Interest $27.00 $27.00
Total Cost $1466.00 $693.00
Sales(net) $1355.00 $0.00
Profit(loss) -$111.00 -$693.00
Unit Sales 501276 0
As the profit and loss statement for June 30, 1974 indicates, the r ...