29 Jun Question Background:
Question
Background:
Performance Drinks, LLC is owned by Dave N. Port. Performance Drinks produces a variety of sports centered drinks. They began operations in 1993 shortly after Mr. Port graduated with his M.B.A. from Davenport University. The company saw early success as sports and fitness nutritional products gained new popularity in the 1990’s. Financially the company is sound and has been wise in controlling their growth over the years. However, within the last 18 months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that the company has continued to experience top-line growth. Mr. Port and his management team have been considering developing a new product line. However, those plans have been put on hold until they can figure out why their profits are shrinking.
Performance Drinks makes four different kinds of sports drinks. Those drinks are as follows:
• Basic
• Hydration
• Intensity
• Post-Workout
Each of these drinks contains a slightly different nutritional profile and is targeted for different users and uses. The Basic drink has the least nutritional benefit and is targeted for general consumption. The Hydration product targets endurance athletes and specializes in hydration replacement. The Intensity product was designed with energy enhancement in mind. It serves the needs of extreme athletes who need long durations of sustained energy. Lastly, the Post-Workout product is a nutritional replacement product that is generally used following exertion.
You are the Controller for Performance Drinks. You feel as though you have a good handle on the financial reporting and the overall company performance. However, admittedly, your accounting information system has been designed to serve the needs of external users from an aggregate perspective. To that end you utilize absorption costing exclusively within the organization. You recall studying the concept of Activity Based Management (ABM) and Activity Based Costing (ABC) while taking a managerial accounting course. You wonder if applying those ideas to your business would help to uncover the mystery of the disappearing profits.
You recall from your Management Accounting class that product costs are comprised of:
• Direct Materials
• Direct Labor
• Manufacturing Overhead
You don’t suspect that anything strange is going with your direct costs. You do wonder, however, if a more thorough understanding of your indirect costs may be in order. Over a series of weeks you talk with a variety of employees, representing a multitude of functional areas, from within the company. During those conversations you take careful note on what activities might be consuming resources and how those activities might be measured. You sharpen your pencil and begin to unpack what you’ve learned. You start with reviewing last month’s Product-Level Profit Report. That report is following:
PERFORMANCE DRINKS – MONTHLY PROFIT REPORT
Basic Hydration Intensity Post Workout Total
REVENUE
Sales $ 125,000 $ 120,000 $ 74,250 $ 93,000 $ 412,250
COSTS
Direct Materials $ 40,000 $ 50,000 $ 31,000 $ 33,000 $ 154,000
Direct Labor $ 25,000 $ 20,000 $ 10,000 $ 18,000 $ 73,000
Fringe Benefits on Direct Labor $ 11,250.00 $ 9,000.00 $ 4,500.00 $ 8,100.00 $ 32,850.00
Manufacturing Overhead $ 43,750.00 $ 35,000.00 $ 17,500.00 $ 31,500.00 $ 127,750.00
TOTAL COST $ 120,000.00 $ 114,000.00 $ 63,000.00 $ 90,600.00 $ 387,600.00
GROSS MARGIN $ 5,000.00 $ 6,000.00 $ 11,250.00 $ 2,400.00 $ 24,650.00
GROSS MARGIN RATIO 4.00% 5.00% 15.15% 2.58% 5.98%
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