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UV1767
July 8, 2009

BW MANUFACTURING COMPANY

In mid-December 2008, Inez Wallace and Oliver Blanchard were almost through with the
2009 operating budget for their company, BW Manufacturing Company (BW). BW produced
gas grills in three primary models (Grills A, B, and C). The industry was dominated by Weber,
Ducane, Coleman, Sunbeam, and Holland, which together made dozens of types of grills,
smokers, and cooking kettles. BW was a small player in the industry, but business had been
good, and it was expecting another profitable year. A draft of the companys operating budget is
shown in Exhibit 1. Standard costs for the three products are explained in Exhibit 2. Selling,
general, and administrative (SG&A), other costs, interest income, and interest expense were
likely to remain the same no matter which product-line combinations the company produced.
Before calling it a day, the two owners asked their assistant, Justine Richardson, to
determine the impact of several options on income before tax. They agreed to meet the following
day, and Richardson hurried off to look at what these latest ideas would mean. She had four
questions to address and was asked to consider each option independent of all other options.
1. Should BW drop Grill A? The owners wanted to know the impact of dropping Grill A
from their line of products. Richardson was told to assume that the volumes and selling
prices of the other two products would be the same whether or not the Grill A product
line was dropped.
2. Should BW lower the price of Grill C? The owners wanted to know the impact if they
lowered the price of Grill C to $75 and if doing so led to a 20,000-unit increase in sales of
Grill C.
3. Should BW change its advertising focus? The owners wanted to know the impact of a
10,000-unit increase in Grill C volume and a related 10,000-unit decrease in Grill A
volume because of a shift in advertising emphasis.
4. Should BW lower the price of Grill C and change its advertising focus? The owners
wanted to know the impact of lowering the price of Grill C to $75 and shifting the
advertising focus more to Grill C, thereby decreasing Grill A volume by 10,000 units and
increasing Grill C volume by 30,000 units.

This case was prepared by Professor Brandt R. Allen. It was written as a basis for class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. Copyright 2009 by the University of
Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to
sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying,
recording, or otherwisewithout the permission of the Darden School Foundation.

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Richardson and the owners met the following morning to review her work. After
considerable discussion, Wallace and Blanchard chose Option Two, lowering the price of Grill C
for 2009. Then, they asked Richardson to prepare a revised 2009 budget incorporating this
decision. The budget was completed by noon, and Richardson found herself a bit bemused by the
results. Having finished her duties, she left for an early weekend getaway. She didnt give the
budget another thought.
Early in January 2010, Richardson prepared a rough draft of the actual 2009 financial
results (Exhibit 3); happily, they were better than had been expected. Prices on each grill were as
planned, and volume was as shown in Table 1.
Table 1.Actual 2009 volumes.
Grill

Volume
(number of units)

A
B
C

115,000
110,000
225,000

Richardson began to wonder if the bottom line was as high as it should have been.

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Exhibit 1
BW MANUFACTURING COMPANY
Operating Budget 2009: Draft 12/18/2008

Sales
Less: costs of products sold
Gross margin
SG&A
Other costs
Operating income
Less: Interest expense
Plus: Interest income
Income before tax
Income taxes
Net income

$41,200,000
22,800,000
$18,400,000
9,350,000
2,100,000
$6,950,000
420,000
150,000
$6,680,000
2,338,000
$4,342,000

Source: Created by case writer.

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Exhibit 2
BW MANUFACTURING COMPANY
Standard Costs

Planned Volume (units)

Grill A

Grill B

Grill C

80,000

120,000

200,000

$150

$110

$80

17
21
$38

10
16
$26

7
4
$11

directly related to production volume

directly related to production volume

7
10
8
12
22
12
11
$82
$120
$30

2
8
3
6
7
6
2
$34
$60
$50

1
4
1
4
5
3
1
$19
$30
$50

directly related to production volume

one-half varies with direct labor; the rest is fixed
unrelated to production volume
one-half varies with direct labor; the rest is fixed
unrelated to production volume
corporate office allocation*
unrelated to production volume

Per unit:
Sales price
Direct costs:
Materials
Labor
Subtotal
Indirect costs:
Supplies
Labor
Supervision
Energy
Depreciation
Head office support
All other
Subtotal
Total product cost
Product-line profitability

Notes

* This category comprises accounting, IT, human resources, legal, and others supporting the production of these products.
Allocations were made using multiple drivers. Corporate office budgets are unrelated to production levels.
Source: Created by case writer.

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Exhibit 3
BW MANUFACTURING COMPANY
2009 Operating Results: Draft 1/19/2010

Revenue
Variable costs:
Materials
Direct labor
Supplies
Indirect labor
Energy
Total variable cost
Fixed costs:
Indirect labor
Supervision
Energy
Depreciation
Head office
All other
Total fixed cost
Total cost
Gross margin
SG&A
Other costs
Operating income
Less: interest expense
Plus: interest income
Income before tax
Income taxes
Net income

$46,225,000

4,800,000
5,200,000
1,300,000
1,500,000
1,600,000
$14,400,000
1,300,000
1,200,000
1,350,000
3,660,000
2,300,000
1,380,000
$11,190,000
$25,590,000
$20,635,000
9,350,000
2,100,000
$9,185,000
420,000
150,000
$8,915,000
3,120,250
$5,794,750

Source: Created by case writer.

This document is authorized for use only in Finanzas Corporativas MBA 17 by Carlos Paredes , Universidad del Pacifico from August 2015 to October 2015.