Case
#3 – Performance Drinks -A further study of:
Regression
Analysis
Contribution
Margin Reporting
Cost-Volume-Profit
Analysis
Differential
Analysis
Capital
Budgeting
Written
by:
Tim
Bergsma, CMA, CFE
Assistant
Professor – Accounting
Davenport
University
Donald
W. Maine – College of Business
Background:
Performance Drinks, LLC is owned by
Dave N. Port. Performance Drinks
produces a variety of sports centered drinks.
They began operations in 1993 shortly after Mr. Port graduated with his
M.B.A. from Davenport University. The
company saw early success as sports and fitness nutritional products gained new
popularity in the 1990’s. Financially
the company is sound and has been wise in controlling their growth over the
years. However, within the last 18
months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that
the company has continued to experience top-line growth. Mr. Port and his management team have been
considering developing a new product line.
However, those plans have been put on hold until they can figure out why
their profits are shrinking.
Performance Drinks makes four
different kinds of sports drinks. Those
drinks are as follows:
·
Basic
·
Hydration
·
Intensity
·
Post-Workout
Each
of these drinks contains a slightly different nutritional profile and is
targeted for different users and uses.
The Basic drink has the least nutritional benefit and is targeted for
general consumption. The Hydration
product targets endurance athletes and specializes in hydration
replacement. The Intensity product was
designed with energy enhancement in mind. It serves the needs of extreme
athletes who need long durations of sustained energy. Lastly, the Post-Workout product is a
nutritional replacement product that is generally used following exertion.
Information Related to Case #2(this section is the same as you received when you were assigned
Case #2):
You
are the Controller for Performance Drinks.
You feel as though you have a good handle on the financial reporting and
the overall company performance.
However, admittedly, your accounting information system has been
designed to serve the needs of external users from an aggregate perspective. To that end you utilize absorption costing
exclusively within the organization. You
recall studying the concept of Activity Based Management (ABM) and Activity
Based Costing (ABC) while taking a managerial accounting course. You wonder if applying those ideas to your
business would help to uncover the mystery of the disappearing profits.
You recall from your Management
Accounting class that product costs are comprised of:
·
Direct Materials
·
Direct Labor
·
Manufacturing Overhead
You
don’t suspect that anything strange is going with your direct costs. You do wonder, however, if a more thorough
understanding of your indirect costs may be in order. Over a series of weeks you talk with a
variety of employees, representing a multitude of functional areas, from within
the company. During those conversations
you take careful note on what activities might be consuming resources and how
those activities might be measured. You
sharpen your pencil and begin to unpack what you’ve learned. You start with reviewing last month’s
Product-Level Profit Report. That report
is following: