Lipman Bottle Company Case Study
Lipman Bottle Company Case Study
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Here are the questions you need to answer for this case:
•Calculate the variable costs per thousand bottles for one-separation rounds, two-separation rounds, and two-separation ovals, assuming that all ovals are printed on the machine with the automatic feature for ovals.
•Do one set of calculations for the Albany area (scrap included) and another for New York–New Jersey (freight included, but not scrap).
•Only do one bottle size (the smallest) and assume the average order size is 10,000 bottles.
•Prepare a suggested price list for the Albany area. Consider only one-separation rounds and two-separation rounds or ovals, for only the smallest size bottle.
As a guide to completing this case you should consider the following questions:
•How did Mr. Lipman’s goal of a 30 percent margin (at capacity) affect your price recommendations?
•Which products should the company attempt to sell in New York–New Jersey? Explain.
SAMPLE ANSWER
Lipman Bottle Company Case Study
Summary
Lipman Bottle Company is located in Albany, New York and specializes in the distribution of bottles. The company operates in varied bottle sizes as well as printing, but printing is its main source of profits. The vive president of Lipman Bottle Company, Robert Lipman, aims to achieve a 30 (thirty) per cent revenue margin as well as expansion of their business in New York, New Jersey area. Hence, he requested for our services to carryout their costing information and product line review and provide suggestions on how they can increase company’s profitability as well as making a price list for their business which is located in the Albany area.
Analysis:
- The calculations are carried out in order to find variable costs that the company incurs per thousand bottles distributed for several combinations. The Albany area’s variable costs, where scrap is included are summarized in Table 1 shown below. Also the New York, New Jersey area’s variable costs, where shipping costs with exception of freight costs are included is summarized in Table 2 shown below. In addition, data for 0-1 oz. and 1732 oz. bottle sizes are analyzed, as well as 5,000-9,999 and 100,000-249,999 order quantity ranges. Full details as well as calculations are presented in Exhibits #1 to 8, while the price list for the business which is located in the Albany area is presented in Exhibit #9 and calculations to determine the greatest profitability potential for New York, New Jersey area is presented in Exhibit #10.
Table 1: Variable costs for the Albany area
Table 2: Variable costs for the New York, New Jersey area
- The goal of Mr. Lipman to attain 30 per cent revenue margin is illustrated in the calculations shown in Exhibit #9 presenting the break even, which implies that no loss or gain, the 30 per cent profit margin, and subsequently the calculation of price to enable the attainment of Mr. Lipman’s wanted margin of revenue. We subtracted the 30 per cent of obtained revenues; and the break even illustrated the remaining 70 per cent of the obtained revenues. As a result, we used the equation shown below:
Variable cost + Fixed cost/ Total machine-hours ($106,944/16,000 hrs) = Break even
Total price (Revenues) x (1-30 per cent) = Break even
Therefore, the prices that are suggested which were determined after calculations are presented in Exhibit #9. Through the price determination calculations, we found that the cost of 2 rounds separation was about two times more compared to cost 1 round separation. Through the price determination calculations it was also found that increases in bottle sizes was directly proportional to increases in cost (meaning bottle size increases were accompanied by cost increases) but order sizes were inversely proportional to cost (meaning the higher the size of an order the lower the cost).
- In order to make a decision on the products that are likely to sell in the New York, New Jersey area, the first step involved looking at the shipping costs and the gross margin. To accomplish this, assumption that, Mr. Lipman was also interested in the extension of the 30 per cent margin on revenue into this business area was made. At first glance, a major difference was not noted as a result of the shipping costs difference between smaller bottles and bigger bottles since per truck load the difference was only $2.42. Subsequently, we also considered the number of truck loads that the company could be shipping alongside computation of the gross margin as shown in Exhibit #10. Through the calculations presented in Exhibit #10, we found that the bigger the 2 Round Separations and the bottle size resulted in the greatest potential for profitability for the New York, New Jersey area.
Exhibit #1
Exhibit #2
Exhibit #3
Exhibit #4
Exhibit #5
Exhibit #6
Exhibit #7
Exhibit #8
Exhibit #9
Exhibit #10
*Setup time / Median order size * 1,000
**Hours per 1,000 bottles + Run time / 1,000 bottles
***Total time / 1,000 bottles * Variable cost per machine hours (14.63)
References
Farris, P. W., Bendle, N. T., Pfeifer, P. E., & Reibstein, D. J. (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, NJ: Pearson Education, Inc.
Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2009). Managerial Accounting, (13th ed.). New York, NY: McGraw-Hill Irwin.
McEachern, W. (2012). Economics: A Contemporary Introduction. Mason, OH: South-Western Cengage Learning.
Schwartz, R. (2010). Micro Markets: A Market Structure Approach to Microeconomic Analysis. Hoboken, NJ: John Wiley & Sons.
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