What's the Current Situation at Gg Toys?

Q#0 What's the current situation at GG Toys?  

What are some of the strategic actions Robert Parker is considering and why is he considering them? 

GG Toys is having a decline in the profit margin of their product (Geoffrey doll) from 25% to 9% and they assuming that happened due to the raising in the production costs. Also, the specialty dolls that they produce have a high price, and a 34% margin.

Some of the strategic actions that Parker is considering:

• Shifting the company’s product mix towards specialty dolls that carried a higher margin (34%); accepting many orders for specialty-branded dolls even if this meant that the company had to lower production of the standard Geoffrey dolls.
• Producing holiday reindeer dolls in the Chicago plant during July, August, and September and to be able to do that they expanded the production capacity, but this capacity would be with no benefit from October through June.
• Producing a hand-made stuffed “Romaine Patch” doll made of a soft-cloth body in the Chicago plant, all units of this doll would be produced by hand, using the scrap material from production of all doll pajamas which is around 20% of the material ordered for the doll pajamas that was disposed at no additional cost.  

Q#1: Explain how GG Toys existing costing system has worked.

What might be some of the implications this scheme has for the apparent cost of their different products?

GG Toys’ existing costing system:

Fixed costs are direct labor and direct material costs

Overhead costs are allocated based on production-run direct labor cost for both Chicago and Springfield plants.

The company do not allocate selling, general, and administrative costs to products.

According to this existing costing system, the overhead costs are not allocated based on the activity (specially in Chicago Plant), so it is showing costs lower than the real ones; the specialty dolls need away more setup work, and packaging and shipping than the Geoffrey dolls, and this allocation method is giving GG Toys management the false higher profit margin for the specialty dolls and false lower margin for the Geoffrey dolls.  

Q#2: Describe the cost study GG Toys undertook.....

What prompted them to do this?

What might be some of the implications this new knowledge might have for a choice of cost allocation scheme to replace their current approach?

How might utilizing some of the insight of the cost study impact the apparent cost of their different products?

GG Toys had an internal cost study for both of the plants (Chicago and Springfield), they collected the data based on operations in March 2000 and felt that this month was typical of ongoing operations with the plant producing at practical capacity. They did the study to investigate and calculate the overhead costs for both the plants.

The study collected data on the standard Geoffrey doll, the specialty-branded doll #106, and the cradle activities. The study found that the workers in Chicago plant operate several machines at the same time which would make the allocation of machine related expenses to the machine hours more reliable.

The study also investigated the setup work which is required each time a modification to the dolls was made especially for the specialty dolls which needed additional setup time.

The receiving and production-control departments of the Chicago plant ordered, processed, inspected, and moved each batch of raw materials for each production run, they found that work required the same amount of time regardless of the production run length in Chicago plant, but in Springfield plant they receive materials on a JIT bases.