A detailed comparison profitability analyses has been performed in order to examine the different profit margins yielded under both accounting systems- The Traditional accounting system and The New accounting system. Intense competition and retailers’ demand promoted G.G. Toys to provide customize production(G Foster, M Gupta, L Sjoblom, 1996). The given table represent the profit margins for each doll specifically with the help of its associated price and cost. Under the old accounting system, it could be seen that the profit margin for Geoffrey doll was 9%, for Specialty-Branded doll was 34% and for the Cradles was 21%. In this system, the unit cost had been determined with the help of production-run direct labor cost.
Under the new accounting system, it could be seen that the profit margin for Geoffrey doll is 27%, for Specialty-Branded doll is 3% and for the Cradles was 21%. The analysis represents the increased unit cost for Specialty-Branded doll and the decreased unit cost for Geoffrey doll. This eventually effect the profit margin. Because of the increased price of Specialty-Branded doll, its profit margin represents a low margin and the Geoffrey doll’s profit margin represent an increased margin. This is because, the Specialty-Branded doll require more customization and an increased usage of machine hours.
Geoffrey doll product was G.G. Toys’ most popular and standard doll product. If G.G. Toys’ adopts this new system, the company will be able to increase its standard product’s profit margins up to 27% along with decreasing its production cost. Under new accounting system, the profit margin for Geoffrey doll has been increased because previously, the management allocated the overhead cost on the basis of total labor used regardless of production runs. Geoffrey dolls requires less production runs, setups and related machine hours. Thus, its profit margin yielding increased returns. Additionally, as the intense competition and retailers’ demand promoted G.G. Toys to provide customize production, the number of sales of Specialty-Branded doll has been drastically increased. Thus, the management could generate more revenues with the help of this increased sales of Specialty-Branded doll in despite of its low profit margins of 3%. However, the increased sale will eventually divided the overhead cost into all units produced and will helped to increase the overall profit margin.
In March 2000, G.G. Toys decided to manufacture the Reindeer dolls for the months of July to September in Chicago plant. Additionally, the management expanded its production capacity for Reindeer dolls’ production along with purchasing more machines and leased space. The product doll will increase the doll’s product line, this new product will require the use of more labor and machine hours and will be resulted in increased overall overhead cost. But this increased cost will be divided among the total unit produced and will help to lower down each product’s cost eventually. This expanded production will yield more unit production and will help the organization to earn more revenues. The overall cost of Geoffrey doll and Specialty-Branded doll will be lowered down because of low overhead cost. Additionally, during the months of October to June, this expanded production capacity will be utilized well for the production of the Romaine patch doll and will help to reduce the fixed cost. To save the cost generated form the Springfield plant, it is recommended that the company should close this plant and start the cradles’ production in the Chicago plant…..
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