CVP case opener
Dator & Noble
Jaime Dator and Oscar Noble own Dator Company and Noble Company. They manufacture and sell the same product, and competition between them has always been friendly. Cost and profit data have been freely exchanged. Uniform selling prices have been set by market conditions.
However, Dator and Noble differ markedly in their management thinking. Operations at Dator are highly mechanized, and the direct labor force is paid on a fixed-salary basis. Noble uses hourly-paid manual labor for the most part and pays incentive bonuses. Dator’s salesmen are paid a fixed salary, whereas Noble’s salesmen are paid small salaries plus commissions. Noble takes pride in his ability to adapt his costs to fluctuations in sales volume and has frequently chided Dator on his “inflexible overhead.”
Last year, the companies reported similar profits on PHP 100,000 sales. However, when comparing results for this year, Noble was startled by the following results (money figures in pesos):
DATOR COMPANY NOBLE COMPANY
Last Year
This Year
Last Year
This Year
Sales
Cost of goods sold & expenses
Net income
Return on sales
100,000
90,000 10,000
10%
120,000
94,000 26,000
21 ⅔%
100,000
90,000 10,000
10%
150,000
130,000 20,000
13 ⅓%
Suspecting that operating inefficiencies may have arisen, Noble and his accountant made a thorough investigation of costs. They did not uncover any evidence of costs that were out of line. At a loss to explain the lower increase in profits on a much higher increase in sales volume, they seek your help.
Prepare an explanation for Noble on why his profits for This-Year were lower than those of Dator despite Noble’s sales having been higher. Use only the back side of this paper for your explanation to Noble.
Jaime Dator and Oscar Noble own Dator Company and Noble Company. They manufacture and sell the same product, and competition between them has always been friendly. Cost and profit data have been freely exchanged. Uniform selling prices have been set by market conditions.
However, Dator and Noble differ markedly in their management thinking. Operations at Dator are highly mechanized, and the direct labor force is paid on a fixed-salary basis. Noble uses hourly-paid manual labor for the most part and pays incentive bonuses. Dator’s salesmen are paid a fixed salary, whereas Noble’s salesmen are paid small salaries plus commissions. Noble takes pride in his ability to adapt his costs to fluctuations in sales volume and has frequently chided Dator on his “inflexible overhead.”
Last year, the companies reported similar profits on PHP 100,000 sales. However, when comparing results for this year, Noble was startled by the following results (money figures in pesos):
DATOR COMPANY NOBLE COMPANY
Last Year
This Year
Last Year
This Year
Sales
Cost of goods sold & expenses
Net income
Return on sales
100,000
90,000 10,000
10%
120,000
94,000 26,000
21 ⅔%
100,000
90,000 10,000
10%
150,000
130,000 20,000
13 ⅓%
Suspecting that operating inefficiencies may have arisen, Noble and his accountant made a thorough investigation of costs. They did not uncover any evidence of costs that were out of line. At a loss to explain the lower increase in profits on a much higher increase in sales volume, they seek your help.
Prepare an explanation for Noble on why his profits for This-Year were lower than those of Dator despite Noble’s sales having been higher. Use only the back side of this paper for your explanation to Noble.