# Deer Company case

Topics: Costs, Cost accounting, Cost Pages: 7 (1089 words) Published: March 19, 2014
﻿ DEERE COST MANAGEMENT
1. COMPANY INFORMATION

2. STATEMENT OF THE PROBLEM

Jim Elsey, cost management specialist at Deere & Company in Moline, Illinois has been reached by Glen Lowery, sales manager in the Agriculture Products Division.

Glen is concerned that the sales margin for the Conveyor System has decreased the last 3 years. Glen wants Jim look at the costs involved the gatherer chain, which is purchased from a single supplier (Saunders Manufacturing). According to information from Susan, from purchasing, the supplier is a tough negotiator, which is not interested in keeping the business with Deere otherwise than under the conditions given by them.

The Conveyor system is a product that has been established for several years leading to the experience allows the learning curve is reflected in the production of this product. This must help under the combination of factors like: the learning rate of labor, the motivation to increase output, development and improvement, substitution of better material, etc.

Deere also sells aftermarket products, including the gatherer chain, through its dealer network; the price is set under competition prices.

Profitability Analysis for Gatherer Chain. (Johnson)

Two years Ago
Last year
Current Year Budget
Aftermarket price
\$40.00
\$36.25
\$30.00
Purchase cost
\$21.25
\$22.61
\$24.12
Cost-price ratio
53%
62%
80%
Unit sale
475,000
410,000
350.000

3. ANALISIS

a. Current Situation
According to the below exhibit, we can calculate that Saunders selling price has increased by 13.5% over the past two years.

Current year purchase cost \$24.12 – Two years ago purchase cost \$21.25= \$2.87 \$2.87 ÷ \$21.25 = 13.5%
However the revenue of Deere has decreased by 76.9%

Current :(\$30 - \$24.12) * 350,000 = \$2,058,000
Two years ago: (\$40 - \$21.25) * 475,000 = \$8,906,250
(8,906,250 - 2,058,000) ÷ 8,906,250 = 76.9%

Two years Ago
Last year
Current Year Budget
Aftermarket price
\$40.00
\$36.25
\$30.00
Purchase cost
\$21.25
\$22.61
\$24.12
Cost-price ratio
53%
62%
80%
Unit sale
475,000
410,000
350,000

Yet, Saunders maintains the roughly the same amount of revenue.

b. Saunders Estimated Cost

From Susan’s material cost file we can know Saunders pay approximately \$28.00 per hundredweight for the steel and \$0.035 for per pin. Jose estimated that the gatherer chain consisted of approximately 11.6 pounds of steel and 46 pins that joined the links. He also expected that the Saunders would have approximately a 20 percent scrap rate.

So the cost of steel is \$0.28/pound. The gatherer chain consists of 11.6+11.6*20% (scrap rate) = 13.92pound/unit Cost of Steel: \$0.28 * 13.92 = \$3.90
Cost of Pins: \$0.035 * 46 = \$1.61
Cost of materials for per unit: \$3.90 + \$1.61 = \$5.51

According to the report about the breakdown of manufacturing costs for Saunders from the Annual Survey of Manufacturers we know that the breakdown was material, 42 percent; direct labor, 13 percent; indirect labor, 6 percent; and overhead, 20 percent.

So the total cost of the unit is \$5.51 * (1 ÷ 0.42) = \$13.12/unit Cost of direct labor: \$13.12 * 13% = \$1.71/unit
Cost of indirect labor: \$13.12 * 6% = \$0.79/unit
Cost of overhead: \$13.12 * 20% = \$2.62/unit

As we know the purchase cost of Deere is same as the sell price of Saunders, so the sell price of Saunders is \$24.12

So the Cost-Price ratio of Saunders is \$13.12 ÷ \$24.12 = 54% Profit Margin is (\$24.12 - \$13.12) ÷ \$24.12 = 46%

c. Negotiate with Saunders

One of the methods to increase the revenue of Deere is to negotiate with Saunders to persuade Saunders to return the 50-50 cost-price ratio.

If Saunders maintains the 50-50 cost-price ratio, the reasonable current...