Sistemi di controllo - Analisi economiche per le decisioni aziendali 2/ed

Robert N. Anthony, David F. Hawkins, Diego M. Macrì, Kenneth A. Merchant

Copyright © 2004 – The McGraw-Hill Companies srl

Teaching notes Lipman Bottle Companv*

This case, unchanged tram the Ninth Edition, was prepared by Michael J. Sandretto. Copyright @ 1982 by the
President and Fellows ofHarvard College. Harvard Business School Teaching Note 5-182-20 I.

Lipman Bottle Company is designed to illustrate cost accounting in a firm with a simple
manufacturing process and with a relatively small product line. The cost accounting information,
together with an industry leader's price list, can be used to revise the price list of the firm.

The primary objectives of the case are to:

1. Illustrate a cost system where work in process and finished good inventories are
insignificant and where there are no inventories of intermediate subassemblies. These
factors greatly simplify the task of calculating product cost .

2. Show how information on a financial statement can be used to estimate product cost for
3. individual items. This can be contrasted with the difficulty in estimating product cost
where in- process inventories are significant and where a cost system does not exist.

4. Discuss how cost numbers can be used as an aid in pricing decisions. This can easily be

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extended to a discussion of whether full or variable costs should be used in pricing
decisions.

This case can be used in an 80-minute class for first-year MBA students or as an introductory
case in a second-year MBA course. Tutti i diritti
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material may be required in a second-year class.
This note is divided into two sections: teaching strategy (A) and answers to the questions (B).

A. Teaching Strategy

1. Case per Bottle

I begin by asking for the variable cost of a 0-1 oz. round bottle, order size 5000-9999, one
separation, for sale in Albany. (See answer to question 1, part B of this note.) The calculation is
relatively straightforward, except that to calculate set-up rime per bottle, it is necessary to
estimate an average size order.

2. Break-Even Volume
I then ask what the firm needs to charge to break even, given their present volume. The simple
answer, without analyzing whether costs have been properly classified as variable or feed, is:
Based on machine hours
Sistemi di controllo - Analisi economiche per le decisioni aziendali 2/ed
Robert N. Anthony, David F. Hawkins, Diego M. Macrì, Kenneth A. Merchant
Copyright © 2004 – The McGraw-Hill Companies srl

Variable cost + $106.944/16.000 = v.c. + $6,68/machine hr.

OR Based on passes:
Variable cost + $106.944/15.500 = v.c. + $6,90/machine hr.

3. Classification of Costs
One of the first two points usually leads to a discussion of how costs are classified in Exhibit 1.
The classification is essentially the same as that used by the consultant, except that the allocation
of depreciation between variable and fixed costs has been reversed. A small amount of
depreciation was considered variable simply because there is some wearing away of the asset.
Students can easily spend 10-15 minutes discussing whether depreciation is a variable or a fixed
cost. Among the more reasonable positions are that depreciation is a fixed expense if machines
tend to be replaced because of technological obsolescence or if machines tend to last for a very
long time. Where machines tend to wear out because of usage, such as an automobile, then there
is a usage of the asset which is probably a variable cost Clearly, depreciation is not a very

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accurate measure of that wearing away. Nevertheless, it may be reasonable to include some
element of that cost as variable.
Students may also raise the point that labor costs are not really variable in the short run. This is a
reasonable position and was the one taken by the firm During slack periods, workers were
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assigned cleaning type tasks. However, the f1rtn did rely on part-time employees to reduce the
fixed element of labor.

4. Pricing
I ask for variable costs for the remaining three bottles for sale in Albany (one pass). That is used
as the basis for establishing Lipman's published price list. Students soon establish a price list that
is higher than the market for large orders of small bottles and lower than the market for smaller
orders of large bottles. Discussion can then shift to two-separation bottles and to sales in the New
York /New Jersey area.
In the Albany area, ovals tend to be the most profitable product. In New York/New Jersey,
Lipman's most profitable products would be ovals and two-pass rounds. The main problem with
selling to New York/New Jersey is that the firm ships by air, and freight cost per bottle increases
rapidly with bottle size.
Although the price list for the major competitors looks unreasonable, it is not an uncommon
occurrence. Most firms in the industry used equipment similar to Lipman's old equipment. Prices
Sistemi di controllo - Analisi economiche per le decisioni aziendali 2/ed
Robert N. Anthony, David F. Hawkins, Diego M. Macrì, Kenneth A. Merchant
Copyright © 2004 – The McGraw-Hill Companies srl

were probably set far in the past and updated only for inflation. In fact, the firm did change its
price list and its bidding strategy to obtain the more profitable orders (smaller volume, large size,
and most ovals) and to reduce orders that were unprofitable. Since the case was written, many
competitors have obtained automatic equipment for ovals, so that the industry pricing has
changed.

This discussion normally covers the merits of using variable or full cost and the merits of low
prices for large orders. An additional point is the fact that selling small orders would probably
increase overhead costs significantly.

The discussion of special orders should consider whether the sales force should know costs, and
if so, whether they should know variable cost For this firm, special orders were normally referred
to headquarters. As an extension, students can be asked if targets should be set for profit by
classification: (a) per thousand bottles; (b) per machine hour, (c) per order.

5. Accuracy of the Case Numbers

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Costs at Lipman arc clearly based on estimates. In discussing the accuracy of the method, it is
useful to suggest ways of accumulating costs. The firm actually kept a record of the cost of each
order on a job worksheet that showed bottles scrapped as well as set-up and run time. That record
of actual costs was used to calculate the times shown on Exhibit 4. The numbers were tested to
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see if there was a learning effect within an individual order, that is, if run time was less per bottle
with large order sizes. There seemed to be no such effect.

An extension is to ask if a standard cost system should be used. Since the operation is so simple
and small, a standard cost system would be relatively simple to install and operate. However, the
benefits would probably be small.
Sistemi di controllo - Analisi economiche per le decisioni aziendali 2/ed
Robert N. Anthony, David F. Hawkins, Diego M. Macrì, Kenneth A. Merchant
Copyright © 2004 – The McGraw-Hill Companies srl

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Sistemi di controllo - Analisi economiche per le decisioni aziendali 2/ed
Robert N. Anthony, David F. Hawkins, Diego M. Macrì, Kenneth A. Merchant
Copyright © 2004 – The McGraw-Hill Companies srl

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