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BW Manufacturing Company Case Solution

Solution Id Length Case Author Case Publisher
583 1333 Words (3 Pages) Brandt Allen Darden School of Business : UV1767
This solution includes: A Word File A Word File and An Excel File An Excel File

BW Manufacturing Company (BW) manufactured gas grills. The company had three products; Grill A, Grill B, and Grill C. Although BW was a small firm compared to its competitors in the market, it had been doing reasonably well for a number of years. In December 2008, while making the operating budget, the two owners, Inez Wallace and Oliver Blanchard analyze and decided to explore different alternatives to increase profits. After exploring the impact of these options, BW's owners decided to lower the price of grill C to increase the sales volume. The report analyses the decision taken by the firm and its impact on the performance of the company. It also determines the difference between the budgeted and actual performance of BW.

Following questions are answered in this case study solution:

  1. Abstract

  2. No Change

  3. Drop Grill A

  4. Lower price of Grill C

  5. Shift Advertising Emphasis

  6. Change Price of Grill C and Shift Advertising focus

  7. Decision Analysis

  8. Recommendations


BW Manufacturing Company Case Analysis

2. No Change

The first option available to the firm was to continue with the same prices of all the grills. Exhibit 1 shows the profit in case no change is made to the original budget. This option will result in a total gross margin of $18,400,000. The profit per product for this volume is $46 per grill. In this option, 80,000 Grill A are being produced, 120,000 Grill B and 200,000 Grill C.

3. Drop Grill A

If Grill A is dropped, the profits will fall. This is because Grill A has the highest fixed cost and without the contribution margin of $94 per unit, the loss will be very high. Hence, after dropping A the profit turns out to be $10,880,000 which translates into a per grill profit of $34. Exhibit 2 shows the calculations for the gross profit after dropping Grill A from the product line. This fall in profit is very significant. Therefore, BW decision to reject this option was justified.

4. The lower price of Grill C

The second option is to lower the price of Grill C to $75 per grill from $80 per grill. This is done to boost the volume. It is expected that due to this price reduction the sales volume will rise by 10,000 units. Exhibit 3 shows the results after these changes in price and volume of Grill C are accounted for. The total profit for this option is $18,580,000 which is higher than that for the original operating budget. However, due to an increase in volume, the profit per grill has fallen to $44. This shows that as this option increases the gross profit, BW took the made the right decision of approving this price reduction, given the forecasted increase in volume.

5. Shift Advertising Emphasis

Another alternative to consider was to change the advertising and marketing focus from Grill A to Grill C. It is estimated that this shift will reduce the sales of Grill A by 10,000 units and increase the sales of Grill C by the same amount. Exhibit 4 shows the effect of this change in sales volume on the gross profit. The Exhibit shows that due to this change, the gross profit falls slightly to $18,100,000, and the profit per product also falls to $45 per grill. As the total gross profit and the profit per product fall, this alternative would not be recommended to BW. Hence, the owners were wise to ignore this option.

6. Change Price of Grill C and Shift Advertising focus

The last alternative analyzed by the owners was to reduce the price of Grill C and Shift the advertising focus from Grill A to Grill C simultaneously. The impact expected for this change would be an increase in Grill C sales volume by 30,000 units as the product becomes cheaper and more popular and the simultaneous decrease in Grill A sales volume of 10,000 units. Exhibit 5 shows that with these changes, the gross profit falls slightly to $18,230,000. However, the profit per product falls to $43 per unit. Hence, as this alternative reduces the profits, it was rightly ignored by BW's Management.

7. Decision Analysis

BW's owners based their judgments on the results given in the exhibits. As the second option of lowering the price of Grill C increased the gross profit from the original level, they opted for this option. The actual results on the sales volume were very different from the expected. Firstly, due to the reduction in price, the sales volume of Grill C did not rise by 20,000 units but by 25,000 units. Hence, the estimates of 20,000 unit increases in sales were understated. Despite no change in prices and advertising focus of Grill A and Grill B, there sales volume also changed. Grill A became more popular and sold 115,000 units instead of just 80,000 units. This was a huge change of 35,000 units. On the other hand, Grill B became less popular as it lost 10,000 unit sales and sold 110,000 units instead of 120,000 units.

Exhibit 6 shows the new budget based on new sales volume and prices. The gross profit of Grill C fell in the new budget by $750,000 from the original operating budget. The profit of Grill A rose dramatically by almost 137% from the original budget to $5,690,000. The profit of Grill C also increased more than expected to $10,475,000. The overall profit shown in the new budget was $21,415,000 which was $2,835,000 greater than the original budget. The actual results show a gross profit of $20,635,000 which is $780,000 lower than the profit shown by the new budget but $2,055,000 higher than the original budget. The reason for this could be attributed to the higher costs than expected. After a comparison of the actual costs with the budgeted costs, it becomes obvious that either all the costs in the budget are understated, or the costs showed an unexpected increase over the period.

The overall result of the decision seems positive with a significant increase in overall gross profit but no change in the average profit per product. However, the increase in profits can be mainly attributed to the unexpected and significant increase in the sales volume of Grill A. Without this increase; the gross profit could have fallen due to falling in sales of Grill B. Therefore, the decision of reducing the price of grill C only increased the gross profit slightly.

8. Recommendations

BW's owners should have analyzed other options before reducing the price the Grill C. In order to make the best decision for the company to maximize profits, they must first determine the profitability of each product. Exhibit 7 shows the breakeven analysis done for each product. It shows that, even though the contribution margin of Grill A is the highest $94 per grill, the fixed cost of Grill A is significantly higher than that of the other two grills. The breakeven of Grill A is also the highest. Thus, to increase gross profits, BW needs to increase the sales volume of Grill A. The option of dropping Grill A showed the worst drop in gross profits when different options were analyzed for BW. Hence, Grill, A sales volume should be increased. As the fixed cost of Grill A is divided over an increased sales volume the product cost will fall, and the profits will rise. Exhibit 7 also shows that the contribution margin for Grill C is the lowest, and so is the total fixed cost. So, the efforts to boost the sales of Grill C might not increase the profits as much as boosting sales of Grill A. The advertising focus should have been shifted to Grill A to boost sales. The reduction in the price of Grill A might increase the sales volume, but it might also reduce the sales volume. Therefore, if price reduction has to be done for Grill A, the reduction should be made wisely. Consequently, BW, in the future, should focus on maximizing the sales volume of Grill A while keeping its contribution margin high.

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