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GCOM 7020: STRATEGIC COST MANAGEMENT
FINAL EXAM
Name ___________________________________________ computing id ______________
INSTRUCTIONS:
This is independent exam. You may use only your one page of notes.
You have 3 hours to complete the exam.
Treat each numbered question independently.
Show work (computations) where indicated. No points will be awarded for problems where you are
equired to show work and you do not do so.
Exams must be signed with your complete Honor Pledge when submitted. The penalty for not writing the
complete Honor Pledge and signing it is 5%.
This exam is worth 50 points. There are 11 pages in this exam. Make sure you have all 11 pages. The
questions begin on page 2. Background information that you will need and formulas that might prove
useful to answer many of the exam questions are in the background information, which begins on page 9.
You may separate the background information from this exam. You do not need to submit the background
information with the exam.
Please write and sign your complete Honor Pledge below:
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During November 2019, LVMH Moët Hennessy Louis Vuitton SE (“LVMH”), the world’s leading luxury
group and Tiffany Co. (“Tiffany” or “the Company”), the global luxury jeweler, announced that LVMH will
acquire Tiffany Co. for approximately $16.2 billion. Way before this merger was announced, LVMH financial
analysts did some due diligence that included analyses similar to the following.
Unless otherwise noted, for all questions assume that cost of sales is a variable cost and all other costs
are fixed costs.
1. Compute Tiffany’s
eakeven point in sales dollars for fiscal year 2019. Show work. 3 points
________________
Put answer here
2. Refer to the
eakeven number you computed in question #1. The actual (or real)
eakeven point is
likely not the
eakeven point you computed. For each item circle whether the
eakeven number
computed in question #1 is likely understated, overstated or not affected.
a. Tiffany Co. maintains two separate distribution centers in close proximity to one another in New
Jersey. Both are dedicated to warehousing merchandise. The costs related to these distribution centers
are included in cost of sales.
Understated Overstated No effect
. Included in SG&A costs are advertising, marketing, public, and media relations costs. In fiscal year
2010, these costs totaled $314.9 million.
Understated Overstated No effect
c. Included in SG&A costs are commissions for their retail sales force.
Understated Overstated No effect
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3. The following questions relate to
eakeven forecasts for fiscal year 2020 assuming LVMH acquires
Tiffany Co. Assume (1) Tiffany will be a separate division of LVMH – think of LVMH and Tiffany Co.
as separate product lines; (2) the sales mix percentages for both companies are the same as in fiscal year
2019 for Tiffany Co. and 2018 for LVMH; (3) SG&A costs related to Tiffany Co. are expected to decrease
40%; (4) cost of sales related to Tiffany Co. are expected to decrease 15%; (5) the conversion rate from
EUR to U.S $ is 1:1; and (6) there will be no other changes to operations, prices, or costs for either
company.
a. Forecast the
eakeven point in sales for the newly formed company that will include LVMH and
Tiffany Co. for the next year. Show work. 5 points
______________________________
XXXXXXXXXXPut answer here
. Forecast the
eakeven point in sales for Tiffany Co. for the next year. Show work. 1 point
_______________
XXXXXXXXXXPut answer here
4. Assume that Tiffany’s operating leverage is relatively low. For each of the following items, indicate
whether it is an advantage, disadvantage, or neither for Tiffany Co. to have low operating leverage. Circle
A for advantage; D for disadvantage; or N for neither. Treat each lettered item independently. 2 points
a. As a retailer of goods which are discretionary purchases, the Company's sales results are particularly
sensitive to changes in economic conditions and consumer confidence.
A D N
. Sales volume has increased in each of the last 3 years.
A D N
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The analyses and questions that follow are the types of analyses and questions that Tiffany’s management
would perform and ask.
Unless otherwise noted, for all questions assume that cost of sales is a variable cost and all other costs
are fixed costs. All remaining questions relate to Tiffany Co.
5. The Company is working with the Academy of Motion Picture Arts and Sciences (the Academy) to include
in the gift bags of certain Academy Award nominees the Tiffany 1837® na
ow
acelet in sterling silver.
The
acelet retails for $355. The Company will provide these
acelets at no charge to the Academy.
Given the information provided, indicate in dollars your best estimate of the opportunity costs and the
marginal costs management must consider when deciding to give away a
acelet. Treat each lettered
question independently and write your answers in the spaces provided. Show work.
a. Assume the
acelets given to the Academy are in inventory – that is, they have already been made.
Cu
ently, there is demand for the
acelet. Thus, the Company can sell the
acelet at its retail price.
3 points
____________________ XXXXXXXXXX_________________
Opportunity cost XXXXXXXXXXMarginal cost
. Assume that the Company will make
acelets specifically for the Academy. There is no demand for
these extra
acelets, which means the Company cannot sell the
acelets made specifically for the
Academy. 3 points
____________________ XXXXXXXXXX_________________
Opportunity cost XXXXXXXXXXMarginal cost
6. Tiffany Co. is working with the Academy of Motion Picture Arts and Sciences (the Academy) to include
in the gift bags of certain Academy Award nominees their Tiffany 1837® na
ow
acelet in sterling silver.
The
acelet retails for $355. The Company will not charge the Academy for these
acelets. Assume the
following for this question only: (1) 25% of Cost of Sales relate to warehousing costs; (2) the Company
made too many
acelets for the Academy and is having trouble selling the
acelets to their customers.
As a result, the Company will discount the
acelets. What is the minimum can price they charge so they
do not lose money? Show work. 2 points
_______________
Put answer here
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7. The Pet Adoption Center of New York City approached Tiffany Co. and requested they donate a piece of
jewelry to auction at their annual fundraising gala. Tiffany Co. is considering whether to donate a piece of
jewelry that retails for $4,400 or to donate $2,000 cash. Assume that (1) the piece of jewelry is already in
inventory and (2) the Company can sell the piece of jewelry.
a. How much is the difference in cash flow from giving away the jewelry versus donating cash? Show
work. 2 points
__________________________
XXXXXXXXXXPut answer here
. As it relates to Tiffany’s cash flow, is it better from them to give away the jewelry or to donate cash?
Ignore tax implications. Circle jewelry or cash. 1 point
Jewelry Cash
8. Tiffany’s LOVE necklace, which retails for $3,400, is a slow-moving product. Thus, management will
discount the price. What is the maximum discount they can give without losing money? Circle one
answer. 2 points
$0 $3,400 $1,249 $2,151 $605
9. Assume for this question only that 15% of SG&A costs relate to the wages of retail sales personnel who
are paid strictly on commission. In an effort to retain quality employees, Tiffany Co. is considering making
etail sales personnel salaries fixed and paying these employees an average of $46,000 a year. The
Company cu
ently has 7,000 retail sales employees. At what sales dollar level would Tiffany Co. have
prefe
ed to pay its retail sales employees a fixed salary instead of on commission? Use fiscal year 2019
data to determine your answer. Assume the Company wants to maximize profits. Show work. 4 points
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10. Tiffany’s cost of sales includes costs to internally manufacture merchandise – primarily metals,
gemstones, labor, and overhead. Assume for this question only that the Company has two ring product
lines – engagement rings and other rings. All engagement rings are made in Tiffany’s New York
manufacturing facility and other rings are made in Tiffany’s Rhode Island manufacturing facility. Both
ing product lines use diamonds. Which of the following are overhead items are likely included in cost of
sales AND allocated to the engagement ring product line? Circle YES or NO. Make sure to refer the
information in the background section to answer these questions. 5 points
a. Cost related to diamonds.
YES XXXXXXXXXXNO
. Costs related to the manufacturing plant in New York.
YES XXXXXXXXXXNO
c. Royalty fees paid to outsider designers who design both engagement and other rings.
YES XXXXXXXXXXNO
d. Wages related to retail sales personnel.
YES XXXXXXXXXXNO
e. Costs related to