ANAGENE | Vijai Kasthuri Rangan

ANAGENE
Case 4 Financial Management
Anagene is a genomics instruments company that operates in the confluence
of molecular biology and microelectronics. They manufacture workstations
and cartridges. The company is facing two problems:
1. Fluctuating profitability because of the varying production costs and
the fluctuating month-month gross margins.
2. Decreasing cartridge margins due to increased standard costs (by
about 40%)
One of the reasons for fluctuating sales margins is customers reusing
cartridges instead of purchasing new cartridges. The analysts in the
company use forecasting to budget their production volumes for future
periods. Therefore, budgeted volume adversely affects pricing and gross
margin stability because Anagene has fluctuating sales. If the projected
volume decreases the cost allocated to the products increases thereby
leading to increased prices of the products and lower discounts. This leads to
customers moving away from buying the product which in turn decreases the
volume - triggering a vicious cycle.
In order to overcome the issues that are affecting the margins of the product,
Anagene would have to identify the drivers for the cost so as to get a better
estimate of the costs involved in production of the product and the allocation
of overhead costs. Also the company must adopt the practical capacity
approach. This will help him correctly identify the true capacity utilization of
the process and provide a better estimate made of the product costs.
Currently, Anagene's assignment of overhead costs is based on budgeted
volume. However, by using practical capacity as the denominator volume,
Anagene reduces allocated fixed overhead costs per unit and increases gross
margin. Using budgeted volume allows managers to hide idle capacity, since
it is based on demand rather than production capacity. Overhead cost
assignment is important because it affects gross margin and shows idle
capacity. This method stabilizes their gross margins as well as increases their
margins by charging a more accurate and representative price for the
cartridges.