Inspired by the iconic Renaissance gardens and the castle of Villandry in the Loire region of...

 

 

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Inspired by the iconic Renaissance gardens and the castle of Villandry¹ in the Loire region of France, Villandry Floral Fences (VFF) produces and sells two types of exterior floral fences: the Steel model and the Wood model. Yue Chan, VFF's General Manager, is pleased that sales volumes have been steadily increasing over the past couple of years. However, she is both concerned and confused about the fact that profitability has been decreasing. She has hired your team of consultants to help her make sense of this paradox. For 2021, VFF compiled the following data for its two products: Sales in units Direct material and direct labor costs per unit Manufacturing overhead costs per unit Pricing coefficient el Steel 5,000 $3,600 $1,800 2.2 Wood 40,000 $2,600 $2,400 1.9 The pricing formula consists of applying a coefficient to each product's total cost per unit to determine each product's selling price per unit. (For example, if the product's total cost is $100 and the pricing coefficient is 2.0, then the product's selling price will be $200.) The pricing coefficient used to be 2.0 for each product, which allowed a gross profit margin of 50%, but it was changed to take into account the fact that VFF purchased an expensive robotics system in 2020 to allow for more complex products in the Steel line. The costing approach at VFF is traditional costing, with direct labor hours as the allocation base for overhead costs. Geneviève Tremblay, the Sales Manager, has provided you with the following information for 2021: Customer 1 placed an order for 54 Steel fences and 25 Wood fences. Customer 2 placed an order for 230 Steel fences and 420 Wood fences. Customer-related costs were $90,000 for Customer 1 and $1,310,000 for Customer 2. Part B Accounting Director Arun Kumar suggested last week that an activity-based costing approach could be valuable to help evaluate and determine a product mix and promotion strategy for the next sales campaign. He obtained the following information for 2021: Activity Setup Fabrication Packing Cost Driver # setups # of machine hours # shipments Cost $1,350,000 $61,800,000 $98,010,000 FO Steel Wood 400 100 300,000 300,000 52,000 190,000 Total 500 600,000 242,000 11) Give two explanations as to why profits have been shrinking while sales volumes have been increasing. [0.5 marks] 12) Give two recommendations specific to VFF's situation that could help improve the company's profitability. [0.5 marks] 13) Identify two considerations that VFF should examine when determining a sales mix strategy and explain why they should be considered. [0.5 marks] Inspired by the iconic Renaissance gardens and the castle of Villandry¹ in the Loire region of France, Villandry Floral Fences (VFF) produces and sells two types of exterior floral fences: the Steel model and the Wood model. Yue Chan, VFF's General Manager, is pleased that sales volumes have been steadily increasing over the past couple of years. However, she is both concerned and confused about the fact that profitability has been decreasing. She has hired your team of consultants to help her make sense of this paradox. For 2021, VFF compiled the following data for its two products: Sales in units Direct material and direct labor costs per unit Manufacturing overhead costs per unit Pricing coefficient el Steel 5,000 $3,600 $1,800 2.2 Wood 40,000 $2,600 $2,400 1.9 The pricing formula consists of applying a coefficient to each product's total cost per unit to determine each product's selling price per unit. (For example, if the product's total cost is $100 and the pricing coefficient is 2.0, then the product's selling price will be $200.) The pricing coefficient used to be 2.0 for each product, which allowed a gross profit margin of 50%, but it was changed to take into account the fact that VFF purchased an expensive robotics system in 2020 to allow for more complex products in the Steel line. The costing approach at VFF is traditional costing, with direct labor hours as the allocation base for overhead costs. Geneviève Tremblay, the Sales Manager, has provided you with the following information for 2021: Customer 1 placed an order for 54 Steel fences and 25 Wood fences. Customer 2 placed an order for 230 Steel fences and 420 Wood fences. Customer-related costs were $90,000 for Customer 1 and $1,310,000 for Customer 2. Part B Accounting Director Arun Kumar suggested last week that an activity-based costing approach could be valuable to help evaluate and determine a product mix and promotion strategy for the next sales campaign. He obtained the following information for 2021: Activity Setup Fabrication Packing Cost Driver # setups # of machine hours # shipments Cost $1,350,000 $61,800,000 $98,010,000 FO Steel Wood 400 100 300,000 300,000 52,000 190,000 Total 500 600,000 242,000 11) Give two explanations as to why profits have been shrinking while sales volumes have been increasing. [0.5 marks] 12) Give two recommendations specific to VFF's situation that could help improve the company's profitability. [0.5 marks] 13) Identify two considerations that VFF should examine when determining a sales mix strategy and explain why they should be considered. [0.5 marks]

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11 Explanations for Decreasing Profits Despite Increasing Sales Volumes Impact of Pricing Coefficient Change The change in the pricing coefficient esp... View the full answer