Tots T Us
Alternatives and analyses
Tots R Us has two alternatives:
Alternative 1: Status quo
Alternative 2: set up a new cost system
Each of these alternatives will be analyzed in turn.
Alternative 1: Status quo
Under this situation, no change will be made to the current cost system: the company still only assigns the building – related costs to the classes, no these costs will be allocated to the birthday party business; advertising costs are not allocated to either product. Although the director only spent approximately 20% of her time in administration, the other full-time teachers doing the same teaching jobs earned $20,000 per year, then for the director’s $50,000 annual salary, $20,000 should attribute to teaching and the remained $30,000 should attribute to administration.
See Appendix D – how to calculate the gross margin of birthday party business under current cost system.
Advantages:
TRU’s current cost system is extremely simple. Since the company had been using this existing cost system for several decades, the director should be very familiar with it and can handle all the numbers herself, no other accountant is needed. Under the current cost system, no building related costs and advertising costs were allocated to the birthday parties; then the company was able to significantly underprice its competitors, such as children’s gyms, arts and crafts stores, and museums, while maintaining a very high profit margin. If all the birthday party services were similar, then the customers could be price elastic, and TRU would have price advantages than its competitors and could increase its market share of birthday party business in the area. With a 55.65% gross margin, TRU’s strategy of market niche seemed to be very successful, whether or not to expand the birthday party business, the answer is definitely positive.
Disadvantages: