Archive for the ‘Blocher Ch 09’ Category

BlackBerry Torch & CVP/Breakeven Analysis

August 23rd, 2010 Comments off

There is a group of educators that closely watches Wall Street Journal articles related to different disciplines (accounting, international business, technology, economics, etc.) and that put together discussion questions based on a few articles each week.  I receive these emails and from time to time there is one that pretty much sums up what I like to do with this blog and I post it verbatim here.  This is one of those times.  The BlackBerry Torch was recently released and many are calling it Research In Motion’s answer to the Apple iPhone.  See the material below that relates the Torch to some concepts we cover in class including the value chain and cost-volume-profit (breakeven) analysis.

Piece by Piece: The Suppliers Behind the New BlackBerry Torch Smartphone
by: Jennifer Velentino-Devries and Phred Dvorak
Aug 17, 2010
Click here to view the full article on
Click here to view the video on

TOPICS: Cost Accounting, Cost-Volume-Profit Analysis, Managerial Accounting

SUMMARY: The article was written based on analysis and component price estimates by research firm iSuppli after dismantling Blackberry’s new Torch smartphone. The product was assembled in Mexico from parts made by at least 7 companies headquartered in the U.S., South Korea, the U.K., Germany, Japan, and Switzerland. Questions ask students to identify manufacturing cost components, determine gross profit, and consider what manufacturing costs are not separately identified when a company buys completed components for assembly.

1. (Introductory) What are the three components of cost for any manufactured product?

2. (Introductory) What is the total cost of the components of the new BlackBerry Torch as estimated by iSuppli?

3. (Advanced) Assuming that the cost shown in the article comprises all of the cost identified in your answer above, what is the gross profit earned on each sale of the Torch? What is the gross profit rate on this product? In your answer, define the difference between each of these amounts.

4. (Advanced) What other costs might be included in the cost of selling this product beyond the component costs shown in this article? What other costs will Research in Motion (RIM) incur in selling this product that are never included in product cost? In your answer, define the terms period cost and product cost.

5. (Introductory) View the video that is affiliated with this article. How many Torch smartphones were sold on the opening weekend for this product? What is the possible result of this sales level?

6. (Introductory) According to the related video, what is the lowest price at which this new phone is offered? Recalculate the answers you gave to question 4 above based on this selling price.

Reviewed By: Judy Beckman, University of Rhode Island

Alcoa Bets on Operating-Cost Cuts

June 25th, 2010 Comments off

Here is an article about Alcoa spending $1.5 billion to create a new low cost mine.  Sounds like an oxymoron, doesn’t it?  Imagine the analysis that goes into a decision like this…all of the information has to be boiled down to some of the basic things we have discussed including breakeven analysis, budgeting (including worst-case and best-case scenarios), pricing predictions, etc.

Alcoa Treks Into Jungle to Cut Costs. Robert Guy Matthews. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 22, 2010. pg. B.1

Caterpillar Looks Forward to Increased Production

January 29th, 2010 Comments off

I referenced this article in class last week when speaking about how companies have to plan for different scenarios in our discussion of “sensitivity analysis. ” It isn’t enough anymore to arrive at one long-term plan and ride it out to the end.  To be competitive today (or, in fact, to survive sometimes) companies need to engage in several “what if” plans so that they are being proactive when the inevitable surprises arise rather than scrambling to keep up.  Caterpillar is not only planning for their “most likely” scenario, but they are also planning in case other scenarios occur.

Caterpillar says that even if demand for its equipment is flat this year—an unlikely projection it calls its “Great Recession scenario”—it would still need to boost production in its factories by 10% to 15%, just to restock dealer inventories and meet ongoing customer demand.

Meanwhile, output at Caterpillar’s suppliers would have to rise 30% to 40% in this scenario, because Caterpillar would also be refilling its shelves.

Caterpillar is also expanding their planning process to be inclusive of their suppliers and their customers (including dealers) so that everyone is on the same page.  We no longer cover the “value chain” concept in as much depth as we have, but working beyond the legal boundaries of Caterpillar to engage these other participants is growing in importance and moves like should work in the favor of companies that make them.

Going forward, a big question is how well suppliers are positioned to ramp up production. Bottlenecks and other headaches may occur as spot shortages cause unexpected price hikes and hamper companies’ ability to meet demand.

That’s why Caterpillar took the unusual step late last year of visiting with key suppliers to ensure they had the resources to quickly boost output. In extreme cases, the equipment maker is helping suppliers get financing.

‘Bullwhip’ Hits Firms As Growth Snaps Back. Timothy Aeppel. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 27, 2010. pg. A.1

Sensitivity Analysis in Hard Times

July 7th, 2009 Comments off

One more WSJ piece from yesterday relates to our in-class discussions about Sensitivity (”what if”) Analysis.  The article refers to it as “Scenario Planning” and shows how useful it can be in allowing a company to quickly react to different market conditions if they concentrate on different possibilities when budgeting.  At the very least it prevents them from being blindsided by things that they didn’t consider.

Theory & Practice: Pendulum Is Swinging Back on ‘Scenario Planning’ — JDS Uniphase Prepares Responses for a Range of Business Situations, Helping Company React Quickly to Change. Cari Tuna. Wall Street Journal. (Eastern edition). New York, N.Y.: Jul 6, 2009. pg. B.6

Standing Room Only Air Travel?

July 3rd, 2009 Comments off

A low-fare carrier in China wants to squeeze 40% more passengers on its planes by offering tickets that don’t come with a seat.  They will sell these tickets for less than those for seated passengers so it could be a win-win for the airline and consumers, but I wonder what the practical limit is for flight length on something like this.  Also, I’m not sure what the safety considerations are but they do mention that standing passengers will still be belted in somehow.  Interesting to see where this goes…

Airline To Ask To Stand Passengers In Aisle. SKY News. Monday June 29, 2009

Fixed Costs Chafe at Steel Mills

June 12th, 2009 Comments off

Here is a real world example where the impact of having a structure of very high fixed costs, such as in steel production, can be very difficult to manage in tough economic times.  Normally when demand falls, prices also fall (recall the supply-demand curves from your Economics courses).  The problem for steel mills is that producing fewer units of steel causes them to have to spread their very high fixed costs over fewer units so they feel the need to actually raise prices so as not to lose money (or not to lose as much money at least).  Raising prices causes demand to fall further still and that could lead to some companies being eliminated from the marketplace which could cause prices to stabilize as the remaining producers are able to operate nearer to full capacity.

I think this is a great example of the impacts of fixed vs. variable costs structures that we have discussed in class.

“Unlike mill increases announced in recent years, this is obviously not driven by increasing global demand, but rather by fixed costs being proportioned across significantly lower demand,” the company said in a letter to customers.

Corporate News: Fixed Costs Chafe at Steel Mills — Capital-Intensive Producers Are Raising Prices Despite Weak Demand. Robert Guy Matthews. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 10, 2009. pg. B.1

Know Thy Costs…

April 19th, 2009 Comments off

A practical look at CVP analysis and Breakeven calculations.