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Societe Bonlieu Vincent G. Tenchavez m987z251 Julia Vassiljeva m987z202

Outline. BackgroundCarpentry ShopThe ProductsAccounting SystemJob Order SystemIncome StatementCalculation of CostsConsultant's AdviceNew Accounting System. Outline. Accounting System New vs. OldNew System Pros and ConsChange Prices?12 More StaircasesOur AdviceFinancial Situation. Ba

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Societe Bonlieu Vincent G. Tenchavez m987z251 Julia Vassiljeva m987z202

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    2. Outline Background Carpentry Shop The Products Accounting System Job Order System Income Statement Calculation of Costs Consultants Advice New Accounting System

    3. Outline Accounting System New vs. Old New System Pros and Cons Change Prices? 12 More Staircases Our Advice Financial Situation

    4. Background This case is set in a carpentry shop in Grenoble, France in 1956. It was during the midst of the post WWII construction boom. The owner of the business was Mr. Bonlieu and he specialized in producing and selling desks and staircases.

    5. The Carpentry Shop The plant consisted of a lumber warehouse, a kiln (drying oven) a drafting room, a machine shop, and an assembly shop.

    6. The Products Desks Mr. Bonlieu felt he was in danger of losing sales of desks. Desks made up half of the business. The prices of the desks were too high. But the margin on these desks was really low.

    7. The Products - Staircases Mr. Bonlieu was accused of selling staircases below cost. Yet the margin on staircases was apparently good.

    8. The Accounting System These anomalies in the high price of desks and low price of staircases, when compared to margin, led Mr. Bonlieu to have concerns regarding his accounting system. The accounting system then in use was a simple job order system.

    9. Job Order System

    10. Income Statement In the quarter ended September 1956: Direct Labor 1,266,000 Other Wages & Salaries 1,734,000 Total Wages & Salaries 3,000,000 Other Expenses 1,932,000 Total Costs 4,932,000

    11. Income Statement In the quarter ended September 1956: Total Cost 4,932,000 Selling Price 5,472,000 Profit 540,000 Profit Margin 9.8%

    12. Calculation of Costs The overhead costs were significantly high in relation to labor costs, Labor was carefully recorded and assigned, but overhead expenses which were very large, were allocated with very basic and simple rules. This caused distortions in the charging of costs to various jobs. It also made a lot of discrepancies in the prices.

    13. Consultants Advice Set up eight cost centers: Five Production Centers Warehouse Drying Oven Drafting Shop Machine Shop Assembly Shop

    14. Consultants Advice Two Overhead Centers Administration Indirect Labor One Selling Expense Center

    15. Consultants Advice Where possible, costs would be assigned directly to the center in which they were incurred.

    16. Consultants Advice Allocation of cost are as follows:

    17. Consultants Advice

    18. Consultants Advice

    19. Consultants Advice Costs were also assigned in the remaining 6 cost centers based on the activity measures:

    20. Accounting system NEW vs OLD Old system: DESKS STAIRCASES price - too high price - too low margin - too low margin - too high New system: DESKS STAIRCASES margin - high enough margin - negative

    21. Accounting system NEW vs OLD

    22. New system pros and cons Pros Reveals the products that actually bring loss Allocates costs quite equally and fairly Cons Is not that simple in use as the job order system Mr. Bonlieu should adopt the new accounting system as it seems to allocate the costs more fairly than the old system. Moreover, it brings product costs closer to the market level (Mr. Bonlieu was accused of selling staircases below the cost).

    23. Change prices? Mr. Bonlieu should increase price for the staircases, as profit margin is too low (negative) and competitors sell it at a much higher price. Mr. Bonlieu should keep desks prices the same, as there is market demand for such price. However, he is afraid of losing sales because of a too high price. In this case he could either provide some discounts for loyal customers/big size orders or lower the price a bit if he is sure it will increase the demand.

    24. What if... ... Mr. Bonlieu had the opportunity to sell 12 more staircases at the same unit price. Should he accept or not? YES! He should Assuming that fixed costs for 16 staircases are the same as for 4, and the capacity can be accommodated, the profit margin will significantly increase.

    25. 12 more staircases...

    26. Advice Mr. Bonlieu is a sub-contractor for furniture dealers and manufacturers. He could put some expenses onto the customers (such as delivery) Also, instead of buying new equipment, he could consider renting it, as interest on equipment loans and depreciation are quite high (19% of total costs). This will help keep some liquid assets (bank deposit, stocks, etc) that would earn some interest and could be easily converted into cash if needed. He should search for the opportunities to use the total capacity of the equipment in order to increase profitability of his products.

    27. Financial situation The data presented in the case study is not sufficient to talk about Mr.Bonlieus financial situation However, we can assume, that it is good enough as: Mr. Bonlieu was able to take a bank loan, which shows his credibility Total profit margin is 9.8% for this quarter.

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