ACCT6273: Identifying Strategic Implications in Accounting Data

Week 1 Interactive Case Exercise 1: Lille Tissages

Directions: To begin to understand whether Lille Tissages should maintain its price at FF 20, or
reduce it to FF 15, you will need to examine what total contribution you think is likely for Lille
Tissages at the difference prices. At the end of the day today, your estimates for Lille Tissages
total contribution will be combined with those of the other students in the section. These
combined estimates will be made available for you to review tomorrow (Day 4) before you
begin Discussion 1, Choosing the Price. To be able to estimate the total contribution, you must
first identify which costs are variable, and which costs are not variable.

Which of the following are variable costs?

75,000 100,000 125,000 150,000 175,000 200,000

Direct Labor 4.00 3.90 3.80 3.70 3.80 4.00
Material 2.00 2.00 2.00 2.00 2.00 2.00
Material Spoilage 0.20 0.20 0.19 0.19 0.19 0.20
Department Expense
0.60 0.56 0.50 0.50 0.50 0.50
Direct

Department Expense
4.00 3.00 2.40 2.00 1.71 1.50
Indirect
General Overhead 1.20 1.17 1.14 1.11 1.14 1.20
Factory Cost 12.00 10.83 10.03 9.50 9.34 9.40
Selling &
administrative 7.80 7.04 6.52 6.18 6.07 6.11
expense
Total Cost 19.80 17.87 16.55 15.68 15.41 15.51

Here you can see the total variable cost at each volume of production. You will note that these
variable costs are not identical at each volume. They are slightly U-shaped higher at both
ends, and lower in the middle. This is fairly typical. At high volumes, companies may pay
overtime, thus slightly increasing the variable costs. At low volumes, workers may take it a bit
easy, which creates slack and increases costs. Now that you have identified the variable costs,
they can be used to estimate the total contribution.

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ACCT6273: Identifying Strategic Implications in Accounting Data
Variable Costs for Lille Tissages:

75,000 100,000 125,000 150,000 175,000 200,000

Direct Labor 4.00 3.90 3.80 3.70 3.80 4.00
Material 2.00 2.00 2.00 2.00 2.00 2.00
Material Spoilage 0.20 0.20 0.19 0.19 0.19 0.20

Department Expense
0.60 0.56 0.50 0.50 0.50 0.50
Direct
Variable Cost 6.80 6.66 6.49 6.39 6.49 6.70

In order to consider whether Lille Tissages should lower its price to FF 15, you should
first examine the effect this will have on Lille Tissages total contribution. You will be
asked to fill in a table where you select Lille Tissages price (use only FF15 or FF 20;
do not use any intermediate prices). Then, given your choice for Lille Tissages, you
must decide whether the competitors will stay at FF 15, or will increase their price to FF
20. Once youve selected the two prices, estimate what you think Lille Tissages
volume would be. Be realistic in your estimate; use historical data to guide your choice.
After you enter a price for Lille Tissages and the competitors, and the estimated
volume in the appropriate columns, the contribution margin per unit and the total
contribution will be calculated automatically.

Since these are estimates, you may want to try more than one volume: What is most
likely? What is the best case (realistically)? You may also want to try more than one
price for Lille Tissages, or for the competitors, to examine: What if Lille Tissages
stayed at FF 20? What if they decreased the price to FF 15? And the same for the
competitors. (Note: a Lille Tissages price of FF15 combined with the competitors price
of FF 20 is unrealistic.)

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ACCT6273: Identifying Strategic Implications in Accounting Data
Contribution Analysis (choose option)

LT Vol % SOM Comp LT Price VC/M CM/M Total

@700,000 Price Contribution
50,000 15 15
75,000 15 15
100,000 15 15
125,000 15 15
150,000 15 15
175,000 15 15
200,000 15 15
250,000 15 15
50,000 15 20
75,000 15 20
100,000 15 20
125,000 15 20
150,000 15 20
175,000 15 20
200,000 15 20
250,000 15 20
50,000 20 20
75,000 20 20
100,000 20 20
125,000 20 20
150,000 20 20
175,000 20 20
200,000 20 20
250,000 20 20

Note: A typical completed table with volumes most students consider realistic at the various
price combinations is found on the following page.

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ACCT6273: Identifying Strategic Implications in Accounting Data
Back to the table

Contribution Analysis

% SOM Comp LT
LT Vol VC/M CM/M Total Contribution
@700,000 Price Price

100,000 14 15 15 6.66 8.3 $834,000

125,000 18 15 15 6.49 8.5 $1,063,750
150,000 21 15 15 6.39 8.6 $1,291,500
175,000 25 15 15 6.49 8.5 $1,489,250
200,000 28 15 15 6.70 8.3 $1,660,000
75,000 11 15 20 6.80 13.2 $990,000
100,000 14 15 20 6.66 13.3 $1,334,000
125,000 18 15 20 6.49 13.5 $1,688,750
150,000 21 15 20 6.39 13.6 $2,041,500
175,000 25 15 20 6.49 13.5 $2,364,250
100,000 14 20 20 6.66 13.3 $1,334,000
125,000 18 20 20 6.49 13.5 $1,688,750
150,000 21 20 20 6.39 13.6 $2,041,500
175,000 25 20 20 6.49 13.5 $2,364,250
200,000 28 20 20 6.70 13.3 $2,660,000
250,000 36 20 20 6.70 13.3 $3,325,000