Sippican Case

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SIPPICAN CORPORATION
CASE ANALYSYS
20229 Cost Management System

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Executive Summary
 Company Overview
 Accounting method
 Production process  Activities performed

 Q1. Should Sippican use a contribution margin approach? Explanation  Q2. Capacity cost rates for resources

 Q3.
 a. Revised costs and profits  b. Product costs and profitability analysis with the new allocation method. Cause of the

shifts in values.
 Q4. What actions should the management take to improve Sippican’s profitability?

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Company overview
• Sippican is a company manufacturing hydraulic control devices:

valves, pumps and flow controllers
• Recent trends (March 2006)  Valves: margin remained at standard 35%  Pumps: Sippican’s main business, gross margin fell to 5% (below expect. 35%)  Flow controllers: price increase by 10% with no effect on demand • Issue

Sippican had to react to competitors pumps price reductions to maintain volumes

Decline in profitability: pre tax margin to less than 2%

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Competitive scenario
Sippican
• High quality • Unique design • Loyal customer base • Major supplier • High volumes • Commodities • Major presence • Customized • Various types

Industry
Able to match Sippican’s quality, but no bids for market share with price cuts

Sippican’sReaction
Stable 35% gross margin

Valves

Pumps

Price reduction

Price reduction & consequent decline in profitability More production runs and shipments to meet demand + 10% Price increase w/o affecting demand

Flow Controllers

Much variety of types in the industry

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Accounting method
• Simple cost accounting system , full cost method:
 DM costs= price of components (annual agreement)  DL= 32.5$/h (fringe benefits are included); charged on std run times for each product  OH allocated as % of production-run DL cost (185% current OH rate)

• Variable costs are only DL and DM

Meeting to consider the possibility of adopting a contribution