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Seminar: Performance and Cost Analysis

Seminar: Performance and Cost Analysis. Author: Manuel Fritsch Patrick Wild Christian Hellwig. Company & Value Chain. German Family Enterprise (1916) Producing high performance chains 3 different locations (Munich, Landberg, Strakonice). Value Chain. Research and

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Seminar: Performance and Cost Analysis

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  1. Seminar: Performance and Cost Analysis Author: Manuel Fritsch Patrick Wild Christian Hellwig

  2. Company & Value Chain • German Family Enterprise (1916) • Producing high performance chains • 3 different locations (Munich, Landberg, Strakonice) Value Chain Research and Development Design Supply Marketing Distribution Customer service PRODUCTION Dominated by functionality Core Process • B2B • Exhibitions Account-Manager / customer Receiving steel sheets • Outsourcing • JIT Developing chains Course book: Chapter 1, 2

  3. Costs, Cost Hierarchy and Costing Systems Examples for Direct Costs at Iwis Chains: Direct Labor: machine and quality control workers Direct Material: steel, stamps, machines Examples for Manufacturing Overhead Costs: Indirect Labor: steel purchase manager Indirect Material: power supply for whole plant Examples in Cost Hierarchy: Unit Level: steel Batch Level: stamps Product Level: stamp design Customer Level: IT, key account managers Facility Level: building area • Income Reporting: Absorption, Variable, or Throughput Costing? • Absorption: „Hide a bad year in the inventory“ or promoting long-term view? • Variable: Understating the real costs or preventing fixed costs to seem variable? • Throughput: Oversimplifying costs or avoiding incentives to produce excess inventory? Choice of Product-Costing System: Job-Order: Not senseful, as chains mutually resemble Operational: Matches chains‘ medium product differences within comparable processes Process: Disregards differences in production ABC: Elaborated approach: Getting inside view of costs and enabling outlook by simple variations of cost drivers Conclusion: • JIT environment – little inventory • Decision unimportant and • dependent on management‘s • individual attitude Our favourite: ABC Course book: Chapters 2, 3, 8

  4. ABC Approach • What if costs are considered too high? • Identify costly production steps; ask „Why?“ repeatedly until the reason is found • Determine value-added/non-value-added activities • Take action to reduce primarily non-value-added activities (but consider the implications!) Course book: Chapter 4, 5

  5. Costs Real costs: 191.450 € Calculated costs: ~ 160.330 € 191450 153160 114870 76580 38290 # chains 10000 15000 20000 25000 5000 Cost Volume Profit & Break-Even Point Sales Volume of the new Renault Chains Fixed cost: 1.039.988,89 € (Machines, Use of Factory…, including partial each SG&A and Manufacturing Overhead) Variable costs per unit: 15,33 € Steel: 7,67 € / unit (unit level cost) Production of stamps: 6,80 € / unit (Batch level cost! 1 Batch = 5000 units) Stamp Exchange: 0,14 € / unit (Batch level cost!) Production QC Workers: 0,72 € / unit (Batch level cost!) Selling Price: 65 € Break-Even Point: 20.936 chains But: We must consider step-wise growing batch-level costs! We calculated the Break-even point by breaking down the batch-costs to a single unit. 20.936 units  produce 5 batches including 25.000 units  Results in a sales revenue of -31.119,96 € Solution: Produce other 543 chains chains * 65 € (selling price) - chains * 7,67 € (steel/unit) = 31.119,96 € chains = 31.119,96 € / (65 € - 7,67 €) chains ≈ 543  Final Break-Even Point: 21.479 chains Break-even point Difference: ~ 31.120 € Course book: Chapter 11, 12

  6. Quality & Time • Total Quality Management (TQM) • Failures are not accepted, because one defective chain could destroy the whole engine • JIT Manufacturing • JIT Manufacturing = “pull” manufacturing • produce and deliver products just when needed • Customer-response time • Because of flexible working hours, iwis has a very short customer-response time Course book: Chapter 7

  7. By-Products & Investment Decisions Scrap metal as by-product Because of the increasing metal prices, it is nowadays profitable to sell the scrap metal Break-even point Investment Decisions Is it for iwis profitable to expand their business to bicycle chains? No Yes No, because of the expected competition is the probability for losses very high Yes No Course book: Chapter 9, 14

  8. Decision Making Should iwis improve or outsource its distribution? Decision: Outsourcing of the distribution Course book: Chapter 13

  9. Selling, General, and Administrative Expense Budget • SG&A expense budget shows the planned amounts of expenditures for selling, general, and administrative expenses for a future budget. • It is a helpful key tool for planning, control, and decision making Course book: Chapter 15

  10. Thank you for your attention! ? ? ? We will gladly answer your questions! ? ? ?

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