Software Associates

G.G. TOYS

I. STATEMENT OF THE PROBLEM

Due to increasing production costs, what must G.G. Toys (the company) do to address the rapid decline in the last few years in margins on their popular Geoffrey doll products to less than 10%, far below their historical 25% margins?

II. OBJECTIVES

* To find out the cause of rising production costs.

* To assess whether using the current costs system is viable.

* To identify the company’s product mix that can provide the higher margin.

III. AREAS FOR CONSIDERATION

| HELPFUL | HARMFUL |

INTERNAL | Strengths * Leading supplier of high-quality dolls. * In Springfield plant, assembly line workers tested the quality of the finished components frequently. * Scrap material was disposed of at no additional cost. | Weaknesses * Misleading current costs system * New set-up and production run were required each time the clothing design was slightly changed for specialty branded doll #106. * Excess capacity in the Chicago plant from October through June. |

EXTERNAL | Opportunities * With loyal customer base among retailers. * Specialty-branded doll #106 made an extremely successful debut in the marketplace. | Threats * Retailers were conservative in their ordering patterns with specialty-branded doll #106. * Competition from other doll manufacturers. |

Current Costs System

The company uses traditional costing in determining the cost of its products in which manufacturing overhead is assigned as a percentage of production-run direct labor cost.

Internal Cost Study

The following information are gathered from the study made by the internal team and our group computed for the activity rates:

Activity Cost Pools | Cost Drivers | Actual Use of Drivers | Overhead Costs | Activity Rates |

Machine Related | Machine hours | 11,200 | $112,000 | $10.00 |

Setup Labor | Setups | 160 | 13,333 | 83.33 |

Receiving &...