Anagene Inc. is faced with the dilemma of uncertain and unpredictable margins. The industry in which Anagene operates is relatively young and full of competition. However, the micro-arrays of Anagene are distinctive in their nature; therefore, Anagene enjoys rising trend in sales. The current costing system of Anagene takes budgeted volume as the base for measuring overhead costs. This method causes the margins to vary and profitability to decrease. Apart from this reason, the market dynamics of Genomic instrument industry pose unpredictability in spotting new customers. Moreover, the reuse of the cartridges from the customers also yields uncertain margins amounts. Kelly should seriously consider the overhead costs in the costing strategy as it allows the company to take into account the idle capacity. Fixed costs are an integral part of Anagene costing strategy and they should not be ignored by employing the variable contribution margins. The actual production yield insights on the variance analysis and the use of both the practical and budgeted level of production can be justified in any business. The practical capacity yields the overhead cost of $30. The final cost of cartridges comes out to be $62. As a result of employing this method, the gross margin increases by 14%.
Overhead Allocation Calculations
Table B Anagene, Inc. Cartridge Financials ($, except for volume and gross profit %)
Income Statement for Anagene Inc
1. Describe Anagene’s competitive environment, including its industry, its specific customer base, its product / customer heterogeneity, and the major concerns facing Anagene.*
2. Considering your answer to item 1, is it likely that the existing cost system may adversely and significantly affect decisions to emphasize certain products or affect profit? Why (a general answer is expected)?*
3. Using the Excel format on my.asu, complete the exercise for Youngstown. What “lessons” can be taken from this exercise? Do the “lessons” relate to Anagene? Give one example.*
4. What has caused the fluctuating margins for Anagene’s cartridges?
5. Should Kelly even be concerned with the assignment of overhead costs to cartridges and gross margins that include allocated overhead? Why not use variable contribution margin (selling price less variable costs, primarily materials) for management decision-making and reporting?
6. Refer to items 3 and items 4, what role does practical capacity, expected production, and actual production play in formulating an approach for assigning overhead? How are these matters useful to managers? Draw on text and readings for your answer.
7. What approach do you recommend that Daniel Yeltin adopt? Explain. For your recommended approach, what will be the cartridge product costs and margins?
8. Suppose sales in 2001 equal 26,000 unit, as in the budget constructed in January, and that actual manufacturing expenses turn out to equal budgeted expense. Prepare an income statement for the year (just include the manufacturing expense for expense) that will help senior management and the board understand the economics of cartridge production in 2001.