Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.
Length
This case is
12 pages in length and its case teaching package is
8 pages.
Abstract
This heavily disguised case is very rich in cost analysis opportunities with a strong strategic dimension. We use it as the first case in a segment on cost system design in the required Managerial Accounting course at Tuck.
The setting is 1986 in a German manufacturer of snap fasteners (for garments) and of the machines which attach the fastener to garments. This is a classic example of a "bundled business"—the company's strategy is to sell or lease machines cheap and make it up from fastener profits. Business history is filled with examples of firms which have "bundled" their product offerings with explicit realization that profitability differed markedly across the bundle:
Gillette—razors and blades
Kodak—cameras and film
AT&T—local and long distance service
General Electric—steam turbines and maintenance service
In these cases, the less profitable segment was consciously used as a market entree. Individual component costing and profitability was not as important for the overall strategy as bundled profitability. For these firms, the strategy was very successful for many years.
Linkages to Textbooks or Journal Articles/Fit Within a Course
We use the case with three purposes in mind:
to demonstrate a very common way that flawed financial information arises in a firm.
to illustrate the potential dramatic impact on decision making of misperceptions about "cost."
to emphasize to students to make sure they know whether the accounting systems in use are helping solve management problems or, in fact, are part of management problems!
Study Questions
Note: Suggested answers to Questions 1 and 2 are included in the case to help students get started.
Break the 1986 profit of $9.5 million down between fasteners and attaching machines (rough approximation to the nearest million is sufficient). What inferences do you draw about the relative profitability of these two segments of the business?
One can view the production and leasing of an (automatic) attaching machine as a multi-period "annuity". Money is spent in year zero in order to generate a stream of cash flows (positive net cash flows, hopefully) over an average of ten years. After ten years, a machine is renovated and then generates positive cash flows again for another ten years, on average. Try to structure the time-phased cash flows for this annuity for an "average" automatic attaching machine using 1986 costs and prices. Estimate the Internal Rate of Return (Economic Rate of Return) for the annuity. How does this calculation change your thinking, if at all, about the profitability of the attaching machines segment of the business?
How would you characterize ML's business strategy in 1986? Is it reasonable?
Calculate profitability for the four products in Exhibit 4 (of the case) excluding the impact of attaching machines cost which is part of general manufacturing overhead. The calculations here require more thinking than crunching.
Following on from 4(A), what is your assessment of the overall relative profitability of the four product categories?
What is the annual attaching capacity for all the ML machines in the field? Compare this to ML's unit sales volumes for all four categories together. What inferences do you draw?
Consider the pricing issues and product line issues for fasteners and machines by focusing on Exhibit 5 and Question 5 of the case.
What specific recommendations do you have for management regarding "bundling," pricing for fasteners, and pricing for attaching machines?
The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.
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