Anchor Glass

Question BYP1-3

What factors affect the costs of products sold at Anchor Glass Container Corporation (Anchor)?

Answer

From the management discussion given, cost of products sold as a percentage of net sales at Anchor had increased 1.7% to 89.3% from previous year 87.6%. Factors affect the cost of products sold at Anchor reflected the impact of operational problems during second quarter of the current year at a major furnace at one of company’s plant. Cost of products sold represented by direct labour cost, direct raw material cost as well as overhead costs. Increased in any of these component will directly lead to higher cost of products sold, thus lower the gross profit margin.

Inefficiency in operations will lead to higher cost per unit output. Anchor operates in industry where the profit margin is slim and highly relies on volume to enjoy better profit. Increment in costs due to inefficiency in operations with no corresponding selling price will inevitably affect the profit margin by relatively increase the cost of products sold.

Operational problems during second quarter at major furnace at one of Anchor’s plant reflected in increment of cost of products sold are as follows;

* Higher down time – One of the problems facing manufacturing company is the growing trend towards constant shut down of factory, which erodes business profit. Anchor is involved in a continuous manufacturing process with a high degree of fixed overhead cost. Higher downtime cause unabsorbed fixed overhead costs that negatively impacted results of operations and increase cost of products sold for the sales during that period.

* Cost and expenses associated with an increased number of scheduled capital improvement project – Capital improvement projects aim for long term benefit and not directly to sales for that particular year. However, cost and expenses (overhead) associates with capital improvement project will increase in tandem with number of improvement projects without...