Sippican Case Study Scm - 1385 Words

1. Given some of the problems with Sippican’s cost system, should executives abandon overhead assignment to product entirely and adopt a contribution margin approach? Why or why not? The overhead spending is greater than the direct labour costs or the direct material costs for all three product lines- Valves, Pumps and Flow Controllers (Exhibit 2). Overheads are simply charged at 185% constant for three diverse products. The fact that there is huge variance in the number of units produced per production run- it is 375 for valves and 18 for flow controllers per production run. This shows the reason for high overheads cost too. Hence it calls for checking the cost allocation system of the company. Since Sippican produces three†¦show more content†¦b) Overheads were first segregated into certain categories like Direct Indirect etc. The reason for this were different costs and different activity on which they are based. Then the time taken for each activity was computed and the costs were allocated based on that. c) The method showed that the pricing that was being used for the three products were not correct. The price at which the pumps were being sold was low were high whereas flow controllers were low. Because of which the most profitable product was coming out to be flow controllers whereas it was actually the least profitable. 4. Based on the revised costs and profitability estimates, what action should Sippican’s management team take to improve company’s profitability? Ans: a) Increase number of units per production run for flow controllers Setup for the machine is done for one batch of items. If we look at the the batch size of valves, it will be 375 units(=7500 units/ 20 production runs)