Berkshire Bear CoEssay Preview: Berkshire Bear CoReport this essayIntroductionThe case of the Berkshire Toy Company illustrates the “behind the scenes” causes of a net loss despite record sales. We approached this problem from each departmental perspective and, where appropriate, attempted to reconcile the cause-and-effect relationship between the Marketing, Purchasing and Production areas.
ProductionBerkshire Toy Company faced a number of labor and manufacturing setbacks during FY98 that led to poor overall production. Of particular interest are the direct labor variances for the fiscal period. Berkshire had a net labor rate variance (LRV) of $76,329 (see Table 3) which can be attributed to the “last minute” hiring of several replacement employees at a rate higher than the budgeted average of $8.00 per hour. In fact, the overall average labor rate was $8.17 per hour. The net labor efficiency variance (LEV) was even more startling at $903,976 (see Table 4A). This difference in quantity of labor hours contributed heavily to Berkshires 36% overage in budgeted (static) direct labor. This gross difference in direct labor hours was reflected by increased production time on all four parts of unit production, increasing overall production time (on average) by nearly 15%. This difference was most likely the result of hiring less skilled replacement workers but also due (in part) to the necessity of in-house accessory production to meet increased sales demand. It is important to note that an increase in direct labor hours was unavoidable given the increased order volume generated by the Marketing department.
Labor and workforce issues were not the only problems faced by the Production department. For FY98, Berkshires net material usage variance (MUV) was $288,066 (see Table 2A). Unforeseeable circumstances such as a freak thunderstorm, machinery outages, stock-outs of imported accessories, and an accidental dismissal of parts to refuse led to unfavorable material usage variances as Berkshire required more material than originally budgeted.
PurchasingAfter comparing actual outcomes and figures to budgeted amounts it appears as though the Purchasing department was on target with estimated sales volume and had a relatively good year. The net material purchasing variance was -$73,164 (see Table 1) reflecting below-budget amounts on several unit components. As Ms. McKinley pointed out, Mr. Hall was able to purchase several materials at a discount of 7-10%. The material purchasing for acrylic pile fabric, acrylic eyes, plastic joints, polyester fiber filling, woven labels and our designer boxes were all favorable.
The one unfavorable variance that we found was for the accessories (see Table 1). This variance of $26,946 can be attributed to the special Mothers Day Bear and other holiday sale bears that were offered. These bears appeared to be more elaborate in dress, thus creating a need for extra accessories. This added expense can be seen in both purchasing and production time per unit. The standard cost of accessories in the budget was computed as an average based on historical costs, and since these holiday bears were brand new there was no way for their added accessory expenses to be taken into account when preparing the budget. Monthly and/or quarterly re-forecasting would monitor and address these increases on a more continuous basis.
In summary, on average, some $24,624 of the cost of a Christmas Day bear may be offset by one accessory per $45 spent in budgeted Thanksgiving-Bridget or other festive markets. However, for most shoppers, all in-store activities, including the retail and travel department, and shopping on Thanksgiving season, would be covered by our discount program. While we appreciate the efforts offered by Walmart for the long-term savings that is available to customers, we do not support these purchases in-store through sales. Furthermore, our program does not cover new purchases through regular direct sales on Thanksgiving or the sale of a regular package. However, on an order-for-sale basis, the purchase and sale to retail and travel department can still be covered by purchases from our special offer if an order is received in and received from the Thanksgiving Store. For those customers who would like to see a special discount on any of our special offers, we are open to providing an online discount.
While we may be unable to match you, we know that not all holiday shoppers are alike on a budget. Many holiday shoppers may already have bought more than the normal amount of accessories. So, we are often forced to double down on a budget in order to compensate, in the event that another retailer could not fill out the required amounts to meet your needs. We appreciate all of your support during and following the holiday season for the cost savings involved. We appreciate your patience as we continue to work toward the complete redesign of our discount program. Thank you for your continued support and understanding as we continue to refine our program of discounts to fit the market needs of our shoppers. I want to begin by saying that we want to provide a great service to our shoppers. As you’ve read through the comments in this post, we appreciate that this is a business decision we can make, and we have made progress on our new program. We apologize for any delay in your success to us. We do expect new and innovative products to be released that provide our customers with a deeper experience from beginning to end. We appreciate you taking time to read through the comments and let us know what you have to say about the program. Please continue to support the program, as necessary. I want that to be a good thing for our holiday shoppers in terms of our community of shoppers and our company. The program we’ve implemented has been a great success for our holiday shoppers. That said, you may feel you have to pay extra for holiday season shopping items at the retail store, rather then by returning to our website during the period between the first and second Monday in July. We understand the inconvenience that it would take, but we apologize for any delay that that would cause. That said, in the interest of all concerned holiday shoppers we encourage you to read through the comments in this post and to contact our customer support team if you are experiencing the problem. Please support our program and feel free to contact us
Also worth mentioning were a few difficulties encountered in the Purchasing department that in turn affected the Production department. There were a number of eyes that were the wrong size and/or shape and could not be used, as well as fabric that was not the right color. In order to avoid these problems in the future it may be a good idea institute a type of control system to check the material after purchasing and before it is sent to production. Alternatively, “bad material” could also be factored into the budget.
MarketingAt first glance, FY98 appears to be quite successful for the Marketing department. Unit sales were 16% above budget and sales revenue was more than $1.4 million higher than expected. Such great numbers were a direct result of the newly implemented Internet sales strategy. Internet selling was highly advertised and generated nearly $4.5 million for Berkshire. But a closer look at the numbers reveals an underlying problem.
Before the inception of Internet sales, the budgeted sales mix was 85% retail/mail order and 15% wholesale. With the implementation of Internet sales, however, actual sales mix percentages were closer to 54% retail/mail order, 32% Internet, and 14% wholesale (see below).
BUDGETPriceSales MixUnitsPer UnitRevenueRetail/Catalog238,000$49.00$ 11,662,000Internet-0-Wholesale42,000$32.00$ 1,344,000Total280,000$ 13,006,000ACTUALPriceSales MixUnitsPer UnitRevenueRetail/Catalog174,965$49.00$ 8,573,285Internet105,429$42.00$ 4,428,018Wholesale45,162$32.00$ 1,445,184Total325,556$ 14,446,487While unit sales increased by just over 16%, sales revenue increased disproportionately at only 11%. This difference is due to the discounted price of bears sold on the Internet. Notice that wholesales remained relatively the same, but retail/catalog sales decreased from 85% to 54% as Internet sales accounted for the remaining 32%. This shift would be negligible if not for the $7.00 discount customers receive by ordering via the Internet. This discount caused the average cost per bear to drop from $46.45 (budgeted) to $44.37 (actual)–a $2.68 decrease! Although, the decision to sell over the Internet was a huge success for sales numbers, the discount price offered for the Berkshire Bear was a poor decision. With the ease of Internet shopping today, a discount as an incentive is unnecessary to entice customers to buy online. In order to balance the increase in unit sales with an increase in revenue, the Internet price of a Berkshire Bear must be adjusted.
Finally, the new marketing technique featuring the Berkshire Bear in special seasonal costumes (Christmas, Valentines Day, and Mothers Day) was an