ACG 5075 – Group Case – Orange
You have recently joined Orange Inc, a listed company in Clearwater, Florida that produces luxury yachts.
Orange has organized production and sales of the yachts in two segments: the ‘lower’ segment, where the average yacht is sold for $1 million, and the ‘upper’ segment, where a typical yacht is sold for $12 million. Orange’s pricing policy differs for the two segments. Yachts in the ‘lower’ segment are sold at a modest profit margin, while margins in the ‘upper’ segments are much higher. The rationale for this pricing strategy is to have higher levels of production so that the fixed costs are spread over a larger base, thus reducing the cost. In addition, the target customers for the ‘upper’ segment are deemed less price sensitive.
Orange’s customers are typically wealthy individuals (end-users) or agents, which assist their customers in the purchase and interior design of the yachts. In the last fiscal year (2013), half the sales in the ‘upper’ segment were to end-users, while the other 50% of the customers were agents. For the ‘lower’ segment, the clients were mostly agents.
Main deck of a demo yacht
As a result of the housing and credit crisis, sales growth and profitability have slowed down. This is largely attributed to a sales drop in the most profitable ‘upper’ segment (sales in the ‘lower’ segment remained stable). Mr. Orange, the initial founder and currently president of the Board of Directors, believes that a crisis is simply an opportunity in disguise and has demanded top management to come up with credible plans to grab ‘this opportunity’ to grow profits. Previous occasions where Mr. Orange turned sour have always resulted in the replacement of senior management.
As a new hire to the controller department, you are invited by the CFO to discuss firm performance, and participate in discussions to explore possible alternatives to improve performance.
a. Comment on Orange’s pricing strategy (higher volumes as a result of lower profit margins in the ‘lower’ segment); what are the pros and cons? (Use ‘common sense’.)
You are asked to compare Orange’s firm-level performance with peer companies that operate in the same industry for 2012 – 2013. Exhibit 1 holds financial information for Orange Inc. Details on how to obtain the data are provided in the PowerPoint document (‘case.pptx’) (Sakai, resources/group case/case.pptx).
b1. Compare the performance of Orange Inc. with its industry peers using WRDS using ‘DuPont’ ratio analysis. Consider all listed firms that operate in the same industry (SIC code 3730 ‘Ship and boat building and repairing’).
b2. Repeat the analyses for a few firms (at least one, but no more than three, depending on data availability) with activities that are very similar to those of Orange Inc. (i.e., also producing yachts).
For internal purposes, Orange Inc. uses quarterly income statements, where the revenues and expenses are not further broken down by customer type (just as in Exhibit 1). Orange is active in two market segments, and within each segment they have the end-users and agents as their clients. In general, agents get a discount of 10% of the sales price, while end-users do not get such discounts.
You have contacted the IT department, which has constructed an Excelsheet for you with the underlying data for the fourth quarter of 2013 (Sakai, resources/group case/case.xlsx). This quarter is representative for the full year.
For each completed project, you have the following information:
– type of yacht (‘lower’ or ‘upper’ segment)
– customer type (end-user, or agent)
– sales price (excluding discount)
– discount offered (10% for agents)
– the manufacturing cost of the yacht
c. Make a 2×2 breakdown of the data. Provide sales and gross margin for each segment (‘lower’ and ‘upper’), as well as by customer type (end-user, agent). Where is Orange making the profits?
Orange has always used a simple job costing system. Direct materials and direct labor are added to each job’s account. Manufacturing overhead is allocated at a rate of 100% of the direct material dollars. Since each of the yachts is unique, the manufacturing costs are different for every product. Nonetheless, you have obtained a ‘standard cost’ for each of the two product segments (‘lower’ and ‘upper’), see Exhibit 2.
You notice that overhead costs are large. You find estimates of the breakdown of manufacturing overhead and their cost drivers in Exhibit 3.
Finally, you have found information on the collaboration with agents. The sales managers are heavily involved with the agents, prior to each sale, as well as throughout the production process. On the other hand, the corporate web site mainly results in sales to the direct end-user customers, and requires little effort of the sales managers. Of the $10 million selling, general and administrative (SG&A), $4 million is related to dealing with agents, while $500,000 are fixed costs for the website, which are most appropriate to allocate to end-user customers. There is no information to allocate the remaining $5.5 million in a meaningful way.
d. Explore the sensitivity of the product costs to alternative overhead allocations that take the above information into account.
e. Summarize and conclude all your findings from a-d.
Exhibit 1 – Financial data Orange Inc.
in $ millon 2011 2012 2013
Sales $230 $200 $180
Cost of goods sold $160 $155
Gross margin $40 $25
SG&A $10 $10
Interest expense $15 $15
Profit before tax $15 $0
Income tax (40%) $6 $0
Net income $9 $0
End of year balance sheet items
Working capital $40 $40
Long term assets $300 $300
Total assets $400 $400
Interest bearing debt $200 $200
Total equity $150 $150
Exhibit 2 – Standard costs of typical ‘lower’ and ‘upper’ segment yachts
‘lower’ segment ‘upper’ segment
Direct materials $ 385,000 $ 4,000,000
Direct labor 80,000 500,000
Overhead allocated 385,000 4,000,000
Standard cost $ 850,000 $ 8,500,000
Profit margin 150,000 3,500,000
Sales price $ 1,000,000 $ 12,000,000
Use of cost drivers
Direct labor hours 1,600 10,000
Machine hours 3,200 15,000
Exhibit 3 – Manufacturing overhead breakdown
This exhibit shows a breakdown of the overhead for the fourth quarter of 2013, where manufacturing overhead was $17.5 million. For each item, the main cost driver is included.
Engineering/design direct material dollars $ 3,000,000
Construction machine hours 7,500,000
Systems installation direct labor hours 3,500,000
Supervisors/project managers direct labor hours 2,500,000
Miscellaneous machine hours 1,000,000
Total manufacturing overhead $ 17,500,000
Quality Researched Papers
We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.
We have hired a team of professional writers experienced in academic and business writing. Most of them are native speakers and PhD holders able to take care of any assignment you need help with.
If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account.
All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. We will always strive to deliver on time.
Original & Confidential
We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text.
24/7 Customer Support
Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
No need to work on essay at night. Sleep tight, we will cover your back. We offer all kinds of essay writing services.
No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.
An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.
Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.
If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied.