ACC202 case study 3-5




The Smell of Success

The Lovely Scent Perfume Company has recently suffered record
losses. Fredrick Fragrance, the CEO, has asked four of his top executives
to recommend a strategy to put the company back on a profitable track.

Wally Workshard, the Executive Vice President, suggested that the
company drop its price by 20% and predicts that this will increase sales by
85,000 units per year.

Lester Ledger, the Chief Financial Officer, suggested that the
company repackage the product in designer bottles. This would add $4.75
per unit to the production cost and fixed production costs would be increased
by $40,000 per year. Lester predicts this would increase annual sales
volume by 32%.

Buster Bumble, the Production Manager, suggested that the company
reduce the size of the standard bottle by 10%. This would save $2.65 per
unit in variable production costs. He predicts sales volume would drop by
only 4,500 units per year.

Gaylord Goodspeak, the Marketing Manager, suggested that the
company increase its marketing budget by 66% – this would add $527,000 per year
to fixed operating expenses. In addition, he recommend raising the price
by $4.90 per unit. He predicts that the combined impact would be a 17%
increase in annual sales volume.

Case assignment expectations:

Use the appended spreadsheet to evaluate each of these proposals
independently. You will need to fill in the inputs based on the numbers
above. The spreadsheet will then do the remaining calculations.

Utilize the spread sheet at this URL. Copy and past to your web browser:

LENGTH: 2 pages typed and double-spaced:

The following items will be assessed in particular:

Your recommendation of the
best strategy for Mr. Fragrance.

The support of your answer with
relevant numbers and arguments.



Denys C. began a manufacturing organzation, BFBS, LLC.,
in 2003. The firm specializes in natural hair care products. Most
clients are mid-sized national and international retailers who have
highly developed in-house marketing departments.

BFBS has proved to be highly successful in the past primarily
because of the strong personal attention given to the clients by the project
managers. Since inception, BFBS has expanded
into four regional segments; North/South America, Europe, and Asia. The home office is in North

However, in the current year losses have been
incurred. Each office is headed by an office manager who is responsible
for all activities in that office. The managers are paid a reasonable
salaries plus a bonus with two inputs. The first input is the net income
of the manager’s office and the second is the sharing of a portion of the
overall company profits. Managers have a high level of independence to
make decisions and are held accountable for the results.

Each office is allocated a portion of the non-traceable fixed
costs of the organization that are common to all offices.

The current year’s segmented operating results are shown in
this excel spreadsheet. Copy and
paste to your web browser:

Case assignment expectations:

Review the information from the modular background. Use the
appended spreadsheet to evaluate this organization. You will need to fill
in the inputs based on the numbers. The spreadsheet should be used
to do the calculations.

LENGTH: 2-3 pages typed and double-spaced:

The following items will be assessed in particular:

Note: Cost of Goods sold and Transportation Expenses are both
variable; all other costs are fixed.

Discuss the advantages and
disadvantages of the format present in the excel spreadsheet Responsibility
Segmentation Analysis.

Explain the allocation method
used to distribute corporate expense. Is this an effective allocation method?
Why or Why not?

Construct a contribution
statement showing each segment using the information from the spreadsheet.
Include percentages in a separate column for common size analysis
purposes. Also, add a total corporation column showing percentages in a common
size analysis format.

As the CFO (Chief Financial
Officer) of BFBS what suggestions would you make to Denys C. and
management to improve the performance of the organization.


Pecos Printers, Inc.

Pecos Printers, Inc. is a small manufacturing firm in Houston, Texas
that manufactures color ink jet printers for the small business market.
It has just launched the PP 7500.

A 50% markup is standard in this industry so that Pecos must
sell to distributors below $400 per printer to keep the retail price below
the industry top of $600 ($400 * 150% = $600). Paul Pecos, the founder
and CEO of Pecos Printers, wants to keep the
price to distributors as low as possible so he has carefully engineered his
manufacturing process to be as efficient as possible.

The model PP 7500 is an exceptionally desirable model with the
following features:

  • A monthly
    capacity of 10,000 copies
  • A print speed
    of 10 copies per minute for black and white and 5 copies per minute for
  • A lifetime
    capacity of 120,000 copies.
  • The ability
    to accept readily available HP ink cartridges.

Lester Ledger, the Pecos Controller has developed the following
cost sheet for the model 7500:

Cost Category

per Unit

Direct Materials (Variable)


Direct Labor (Variable)


Overhead (Variable)


Overhead (Fixed)*


Total Unit Costs


*This is determined on a per unit basis as followed.
Lester assumes that the annual fixed overhead costs for this product will be
$450,000 and that approximately 10,000 Model 7500’s will be produced during
the current year. Pecos has the
capacity to produce 20,000 units per year without increasing fixed costs.

Paul has determined that approximately 20% of the total
manufacturing costs are necessary for a decent profit.

Based on these data, Paul has developed the following pricing
rule for his sales staff: Accept any offer from distributors of $300 or
more and reject any offer below $300.

The sales staff is on salary with no commission paid for any
sale. The salesmen negotiate with distributors who make firm offers
which the Pecos salesmen then either accept
or reject. Last month the three salesmen reported the following offers
and results:

(per unit)

of Units


Sam Smoothtalk

Offer No. 1




Offer No. 2




Offer No. 3




Harry Hustler

Offer No. 1




Offer No. 2




Offer No. 3




Offer No. 4




Gary Giftofgab

Offer No. 1




Offer No. 2




Offer No. 3




In addition, Ms. Glenda Goodperson, the office assistant manager
received an offer from a new distributor for 700 units at $290. She
felt this would be advantageous for Pecos
and accepted the offer. When Paul Pecos found out about this transaction,
he was furious that Ms. Goodperson had violated his decision rule and fired
her on the spot. He then cancelled the order with the new distributor.

Overall, Paul was satisfied with the month’s sales
results. His sales staff had sold 925 units which translated to an
annual rate of over 11,000 units. This was 10% above his estimate of
10,000 annual sales.

Case assignment expectations:

Review the information from the modular background and the case
infomation above. Evaluate Paul Pecos’ decision rule. Evaluate Paul
Pecos’ reaction to Ms. Goodperson’s sale.

LENGTH: 2 pages typed and double-spaced:

The following items will be assessed in particular:

1. Prepare a contribution margin income statement for the month
with two columns: in the first column, show the results following
Paul’s decision rule. In the second column, show what the results would
have been if you chose to revise the decision rule and your revised decision
rule had been followed. For simplicity sake, ignore non-manufacturing
costs and taxes.

2. Do you have any other recommendations for Paul to improve his


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