Harvard Business School9-156-004Rev. September 1, 1982This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of anadministrativesituation.ThiscaseappearsinManagementAccounting:TextandCases,byRobertN.AnthonyandJames S. Reece, Homewood, Illinois, R. D. Irwin, 1975.Copyright 1956, 1984 by the President and Fellows of Harvard College.To order copies or request permissionto reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or goto http://www.hbsp.harvard.edu.No part of this publication may be reproduced, stored in a retrieval system,usedinaspreadsheet,ortransmittedinanyformorbyanymeanselectronic,mechanical,photocopying,recording, or otherwisewithout the permission of Harvard Business School.1Hanson Manufacturing CompanyInFebruary1974,HerbertWesslingwasappointedgeneralmanagerbyPaulHanson,presidentofHansonManufacturingCompany.Wessling,age56,hadwideexecutiveexperienceinmanufacturingproductssimilartothoseoftheHansonCompany.TheappointmentofWesslingresulted from management problems arising fromthedeathofRichardHanson,founderanduntilhis death in early 1973president of the company. Paul Hanson had only four years experience withthe company, and in early 1974 he was 34 years old. His father had hoped to train Paul over a 10-yearperiod,butthefathersuntimelydeathhadcutthisseasoningperiodshort.TheyoungerHansonbecame president after his fathers death, and he had exercised full control until he hired Wessling.Paul Hanson knew that he had made several poor decisions during 1973 and that the moraleof the organization had suffered, apparently through lack of confidence in him. When he received theincome statement for 1973 (Exhibit 1), the loss of over $100,000 during a good business year convincedhimthatheneededhelp.HeattractedWesslingfromacompetitorbyofferingastockoptionincentiveinadditiontosalary,knowingthatWesslingwantedtoacquirefinancialsecurityforhisretirement. The twomen came to a clearunderstandingthatWessling,asgeneralmanager,hadfullauthority to execute any changes he desired. In addition, Wessling would explain the reasons for hisdecisions to Hanson and thereby train him for successful leadership upon Wesslings retirement.HansonManufacturingCompanymadeonlythreeindustrialproducts101,102,and103.These were sold by the company sales force for use in the processes of other manufacturers. All of thesalesforce,onasalarybasis,soldthethreeproductsbutinvaryingproportions.HansonCo.soldthroughoutNewEnglandandwasoneofeightcompanieswithsimilarproducts.Severalofitscompetitors were larger and manufactured a larger variety of products. The dominant company wasSamraCompany,whichoperatedaplantinHansonsmarketarea.Customarily,Samraannouncedprices annually and the other producers followed suit.Pricecuttingwasrare;theonlyvariancefromquotedsellingpricestooktheformofcashdiscounts. In the past, attempts at price cutting had followed a consistent pattern: all competitors metthe price reduction, and the industry as a whole sold about the same quantity but at the lower prices.This continued until Samra, with its strong financial position, again stabilized the situation followingageneralrecognitionofthefailureofpricecutting.Furthermore,becausesalesweretoindustrialbuyersandbecausetheproductsofdifferentmanufacturerswereverysimilar,HansonCo.wasconvinced it could not individually raise prices without suffering volume declines.This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.156-004 Hanson Manufacturing Company2During 1973, Hanson Co.s share of industrysales was 12% for Product 101, 8% for 102, and10% for 103. The industrywide quoted selling prices were $4.90, $5.16, and $5.50, respectively.Upon taking office in February 1974, Wessling decided against immediate major changes; hechoseinsteadtoanalyze1973operationsandtowaitfortheresultsofthefirsthalfof1974.Heinstructedtheaccountingdepartmenttoprovidedetailedexpensesandearningsstatementsbyproductsfor1973(seeExhibit2).Inaddition,herequestedanexplanationofthenatureofthecostsincluding their expected future behavior (see Exhibit 3).TofamiliarizePaulHansonwithhismethods,WesslingsentcopiesoftheseexhibitstoHansonandtheydiscussedthem.HansonstatedthathethoughtProduct103shouldbedroppedimmediately,asitwouldbeimpossibletolowerexpensesonProduct103asmuchas43centspercwt. In addition, he stressed the need for economies on Product 102.WesslingreliedontheauthorityarrangementHansonhadagreedtoearlierandcontinuedproductionofthethreeproducts.Forcontrolpurposes,hehadtheaccountingdepartmentpreparemonthlystatementsusingasstandardcoststhecostspercwt.fromtheanalyticalprofitandlossstatement for 1973 (Exhibit 2). These monthly statementswere his basis for making minormarketingandproductionchangesduringthespringof1974.LateinJuly1974,Wesslingreceivedthesixmonths statement of cumulative standard costs from the accounting department including variancesof actual costs from standard (see Exhibit 4). They showed that the first half of 1974 was a successfulperiod.During the latter half of 1974 the sales of the entire industry weakened. Even though HansonCo.retaineditsshareofthemarket,itsprofitforthelastsixmonthswassmall.InJanuary1975,SamraannouncedapricereductiononProduct101from$4.90to$4.50percwt.Thiscreatedanimmediate pricing problem for its competitors. Wessling forecast that if Hanson Co. held to the $4.90price during the first six months of 1975, unit sales would be 750,000 cwt. He felt that if the price weredroppedto$4.50percwt.,thesixmonthsvolumewouldbe1,000,000cwt.Wesslingknewthatcompetingmanagementsanticipatedafurtherdeclineinactivity.Hethoughtageneraldeclineinprices was quite probable.Theaccountingdepartmentreportedthatthestandardcostsinusewouldprobablyapplyduring1975,withtwoexceptions:materialsandsupplieswouldbeabout5%belowstandard;andlight and heat would decline about one-third of 1%.WesslingandHansondiscussedthepricingproblem.Hansonobservedthatevenwiththeanticipateddeclineinmaterialandsupplycosts,asalespriceof$4.50wouldbebelowcost.Hewanted the $4.90 to be continued, therefore,sincehefeltthecompanycouldnotbeprofitablewhileselling a key product below cost.Questions1.IfthecompanyhaddroppedProduct103asofJanuary1,1974,whateffectwould that action have had on the $160,000 profit for the first six months of 1974?2.In January 1975, should the company have reduced the price of Product 101 from$4.90 to $4.50?3.What is Hansons most profitable product?4.Whatappearstohavecausedthereturntoprofitableoperationsinthefirstsixmonths of 1974?This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.Hanson Manufacturing Company 156-0043Exhibit 1 Income StatementYear Ended December 31, 1973Gross sales $ 21,178,810Cash discounts 313,156Net sales 20,865,654Cost of goods sold 13,022,076Gross margin 7,843,578Less: Selling expense $3,676,476General administration 1,306,040Depreciation 2,716,880 7,699,396Operating income 144,182Other income 42,130Income before interest 186,312Less: Interest expense 290,166Income (loss) $ (103,854)Exhibit 2 Analysis of Profit and Loss by ProductYear Ended December 31, 1973Product 101 Product 102 Product 103 $ Total$ thousands $ per cwt. $ thousands $ per cwt. $ thousands $ per cwt. thousandsRent 376 .1762 314 .3050 374 .3788 1,064Property taxes 125 .0586 100 .0970 80 .0810 305Property insurance 104 .0490 80 .0774 105 .1066 289Compensation insurance 165 .0774 87 .0844 90 .0910 342Direct labor 2,585 1.2126 1,220 1.1844 1,375 1.3930 5,180Indirect labor 882 .4136 424 .4116 460 .4660 1,766Power 45 .0210 50 .0484 60 .0610 155Light and heat 30 .0140 25 .0246 20 .0204 75Building service 20 .0094 15 .0150 15 .0150 50Materials 1,529 .7170 942 .9152 970 .9824 3,441Supplies 104 .0490 95 .0924 70 .0710 269Repairs35 .016630 .029020 .020685Total 6,001 2.8144 3,382 3.2844 3,639 3.6868 13,022Selling expense 1,821 .8540 915 .8890 940 .9524 3,676General administrative 690 .3234 260 .2526 355 .3596 1,306Depreciation 1,130 .5298 856 .8310 731 .7408 2,717Interest 104 .049080 .0776 105 .1064 290Total cost 9745 4.5706 5,493 5.3346 5,770 5.8460 21,011Less other income 20 .0096 10 .0100 10 .0100429,725 4.5610 5,482 5.3246 5,760 5.8360 20,969Sales (net) 10,335 4.8470 5,195 5.0456 5,335 5.4054 20,866Profit (loss) 610 .2860 (287) (.2790)(425) (.4306) (103)Unit sales (cwt.) 2,132,191 1,029,654 986,974Quoted selling price $4.90 $5.16 $5.50Cash discounts taken,percent of selling price1.08% 2.22% 1.72%Note: Figures may not add exactly because of rounding.This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.156-004 Hanson Manufacturing Company4Exhibit 3 Accounting Departments Commentary on CostsDirectLabor: Variable.Unionshopatgoingcommunityratesof$3.20/hr.(includingsocialsecuritytaxes).Noabnormaldemandsforeseen.Itmaybeassumedthatdirectlabordollarsisanadequate measure of capacity utilization.Compensation Insurance: Variable. 5% of direct and indirect labor is an accurate estimate.Materials: Variable.Exhibit2figuresareaccurate.Includeswasteallowances.Purchasesareatmarket prices.Power: Variable. Rates are fixed. Use varies with activity. Averages per Exhibit 2 are accurate.Supplies: Variable. Exhibit 2 figures are accurate. Supplies bought at market prices.Repairs: Variable.Variesasvolumechangeswithinnormaloperationrange.Lowerandupperlimits are fixed.GeneralAdministrative,SellingExpense,IndirectLabor,Interest,andOtherIncome: Theseitems are almost nonvariable. They can be changed, of course, by management decision.CashDiscount: Almostnonvariable.Averagecashdiscountstakenareconsistentfromyeartoyear. Percentages in Exhibit 2 are accurate.LightandHeat: Almostnonvariable.Heatvariesslightlywithfuelcostchanges.Lightisafixeditem regardless of level of production.PropertyTaxes: Almostnonvariable.UndertheleasetermsHansonCompanypaysthetaxes;assessed valuation has been constant; the rate has risen slowly. Any change in the near future will besmall and independent of production volume.Rent: Nonvariable.Leasehas12yearstorun.BuildingService:Nonvariable.Atnormalbusinesslevel variances are small.Property Insurance: Nonvariable. Three-year policy with fixed premium.Depreciation: Nonvariable. Fixed dollar total.This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.156-004-5-Exhibit 4 Profit and Loss by Product, at Standard, Showing Variations from January 1 to June 30, 1974Product 101 Product 102 Product 103 VariationsItemStandardpercentTotal atStandardStandardpercentTotal atStandardStandardpercentTotal atStandardTotal Standard($ thousands)Total Actual($ thousands)+ = Favorable = unfavorableRent .1762 176 .3050 217 .3788 190 583 522 +61Property taxes .0586 58 .0970 69 .0810 41 168 154 +14Property insurance .0490 49 .0774 55 .1066 53 157 146 +11Compensationinsurance .0774 77 .0844 60 .0910 46 183 184 1Direct labor 1.2126 1,209 1.1844 843 1.3930 698 2,750 2,764 14Indirect labor .4136 412 .4116 293 .4660 234 939 896 +43Power .0210 21 .0484 34 .0610 31 86 84 +2Light and heat .0140 14 .0246 18 .0204 10 42 40 +2Building service .0094 9 .0150 11 .0150 8 28 20 +8Materials .7170 715 .9152 652 .9824 492 1,859 1,856 +3Supplies .0490 49 .0924 66 .0710 36 150 150 Repairs .0166 17 .0290 21 .0206 10 48 50 2Total 2.8144 2,806 3.2844 2,339 3.6868 1,848 6,992 6,866 +126Selling expense .8540 851 .8890 633 .9524 477 1,962 1,966 4Generaladministrative .3234 322 .2526 180 .3596 180 683 656 +27Depreciation .5298 528 .8310 592 .7408 371 1,491 1,362 +129Interest .049049 .077655 .106453 157 146 +11Total cost 4.5706 4,556 5.3346 3,799 5.8460 2,930 11,285 10,996 +290Less other income .0096 10 .01007 .01005 22 22 4.5610 4,547 5.3246 3,792 5.8360 2,925 11,264 10,974 +290Actual sales (net) 4.8470 4,832 5.0456 3,593 5.4054 2,710 11,134 11,134 Profit or loss .2860 285 (.2790) (199) (.4306) (216) (129)160 +289Unit sales (cwt.) 996,859 712,102 501,276Note: Some numbers in these columns may appear to be 1 on error; occurs due to rounding.This document is authorized for use only in Understanding Financial Information for Decision Making by Dr. Bala V Balachandran from March 2012 to September 2012.