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Product Costing at DynaGolf DynaGolf has been in business for 20 years making golf club heads in its one manufacturing plant, which is located in the...

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Product Costing at DynaGolf DynaGolf has been in business for 20 years making golf club heads in its one manufacturing plant, which is located in the United States. DynaGolf sells its products to U.S. distributors, who complete the clubs and sell them to retail outlets rhoughout the world. About the Golf Club Business and DynaGolf Golf clubs for beginners are sold in complete sets that include a driver, woods, irons, wedges, and a putter. However, intermediate-level and more experienced golfers buy individual clubs and sets of irons or woods as they search for the magic combination that will help them lower their scores. Most experienced golf enthusiasts will buy a set of irons, a driver, a putter, and a set of fairway woods. The shortest irons in a standard set of irons are called wedges. Better players often discard the wedge (or wedges) that came with their irons set and replace it with one or more specially-designed wedges. DynaGolf makes three types of golf clubs; drivers, putters, and wedges; for more experienced players. More accurately stated, DynaGolf manufactures the metal heads for these clubs. They sell the heads to other companies that attach the shafts, grips, and a few finishing elements, then sell the finished clubs through various resellers to consumers. Golfers like to experiment with new equipment, especially when they are not playing well. They harbor persistent hopes that the right club will magically bring their game back. Many regular players own several putters and switch among them during the golf season. Putter manufacturers often capitalize on this by promoting their new putters with large advertising campaigns. It is less common for players to own multiple wedges because it takes several rounds of golf (or several hours on the practice range) to master the feel and distance control of a new wedge. Many players do own several drivers, but the tendency is not as strong as it is with putters simply because drivers are considerably more expensive than putters. A Meeting of the Board’s Executive Committee Joe Bell, president of DynaGolf, has called a meeting of the executive committee of the company’s board of directors. Joe is concerned about price competition and declining sales of one product line, the company’s DynaWedge series. Bell opened the meeting with a brief statement: As you know, we have set target prices for each of our product lines that will generate a 35 percent gross margin. With our DynaDriver product line, we have been able to achieve the target price. We have been able to achieve even higher prices than our target on the putter line, resulting in margins that are considerably higher than our 35 percent target. This is fortunate, because we have not met our goals with the DynaWedge. To give you some specific numbers, our target price for drivers is $162.61. We sell them, on average, at that price. Our target for wedges is $134.09, but competition has forced our prices to remain at an average of $125.96 no matter what advertising and promotion we do. Our putters have a target price of $81.31, but we’ve been able to raise the putter price to $105.70. To our surprise, our distributors seem fine with the higher prices and have not complained or moved business to our competitors. 1
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Joe Bell continued: Our factory is among the most efficient in the world. We use the latest technologies and our employees are highly skilled. This combination has given us a competitive advantage through manufacturing excellence and our products are used by a number of influential golf professionals. Our products are, in general, very successful, so, I have been concerned about our inability to hit our target price point for the DynaWedge. I suspect that some of our foreign competitors could be dumping wedges into the U.S. market, driving down both prices and unit sales. We have been hesitant to cut our wedge prices further for fear of eroding our overall gross margin. It is some comfort that we have been able to offset the bad DynaWedge news by raising the prices on our line of putters. We are lucky that our distributors have so readily accepted the putter price increases. We are even luckier, I believe, that none of our competitors has moved in with putter price discounts and poached our customers. I believe we could be vulnerable if our competitors wake up and recognize the opportunity. Steve Barber, a retired CPA who serves as an outside director, asks: Joe, I don’t pretend to know all that much about the details of the golf club industry, but let me ask you this: How confident are you in your product cost data? I’ve seen many companies in a variety of industries get into trouble because they just didn’t have a good handle on their costs. You rely on your costs as the basis for creating those target prices, so if your costs are off, your target prices will be off also, correct? Joe Bell responds: You make a good point, Steve. Frankly, I have been worried about just that issue. In recent years, we’ve substantially reconfigured the production plant and machinery. I’ve asked our controller, Phil Meyers, to dig into the cost build-ups for each product line and get back to me with a thorough analysis. I expect he’ll be able to do that over the next couple of weeks. My reason for calling this meeting was to let you know that this problem exists and that I am taking steps to address it. I don’t think we are at a crisis stage yet, but I could see this getting worse before it gets better. I’d like to get a handle on it at an early stage so we can plan whatever corrective actions are necessary and execute them carefully. More About DynaGolf’s Product Line DynaGolf holds four patents on a unique golf club head design that forges three different metals; steel, titanium, and brass; into one club head. Each metal contributes different elements to the club head’s performance. The three metals have different weight and density profiles. When they are incorporated into DynaGolf’s patented design, they produce a club head that has appealing characteristics (swing speed, club feel, and moment of inertia) that differ from competitors’ clubs. Experienced golfers find they can get superior distance and control with DynaGolf’s clubs, and that leads to lower scores and happier golfers. Although DynaGolf’s club head design is protected by patents, it is so popular that competing manufacturers have worked diligently using similar materials and their own designs 2
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