138 ACCOUNTING FOR MANAGERS
Table 9.10 Quality Printing Co. – analysisof business performance
Last year One year ago Two years agoSales growth 6.1% 6.3%
Net profit as a % of sales 4.1% 9.3% 13.5%
Gross margin as a % of sales 18.5% 22.7% 26.0%
Materials as a % of sales 55.9% 52.0% 49.0%
Labour and other costs as a % of sales 25.6% 25.3% 25.0%
Fixed selling and administration expenses as
a%ofsales
14.4% 13.4% 12.5%Table 9.11 Quality Printing Co. – throughput contribution
Last year One year ago Two years agoThroughput contribution 995,000 1,020,000 1,020,000
No. production hours 12,100 11,200 10,500
Throughput contribution per hour £82 £91 £97
situation, perhaps having applied strategic management accounting techniques to
its knowledge of its smaller competitor.
Case study: Vehicle Parts Co. – the effect of equipment
replacement on costs and prices
Vehicle Parts Co. (VPC) is a privately owned manufacturer of components and
a Tier 1 supplier to several major motor vehicle assemblers. VPC has a long
history and substantial machinery that was designed for long-run, high-volume
parts. The nature of the machinery meant that long set-up times were needed to
make the machines ready for the small production runs. The old equipment kept
breaking down and quality was poor. As a result of these problems, about 35%
of VPC’s production was delivered late. Consequently, there was a gradual loss
of production volume as customers sought more reliable suppliers. Demand was
unlikely to increase in the short term because of delivery performance. However,
as the current machinery had been fully written off, the company incurred no
depreciation expense. As a result, its reported profits were quite high.
The market now demands more flexibility with more short runs of parts to
meet the assemblers’ just-in-time (JIT) requirements. New computer-numerically
controlled (CNC) equipment was bought in order to satisfy customer demand
and provide the ability to grow sales volume. While the new CNC equipment
substantially reduced set-up times, the significant depreciation charge increased
the product cost and made the manufactured parts less profitable. The marketing
manager believed that the depreciation cost should be discounted as otherwise
the business would lose sales by retaining the existing mark-up on cost. VPC’s