Moses and San Miguel, Inc.
Teaching Commentary
OVERVIEW
This case is an updated, revised, and expanded version of a 1950s Harvard Business School case called “Martall
Blankets.” The earlier case focused primarily on overhead absorption, based on either units of product or machine hour
utilization, with the additional complication of absorption based on less than full capacity. The current case also
considers this overhead absorption issue, but it has been expanded for use at the Naval Postgraduate School to cover
pricing and product profitability issues for a Navy contract. The case also considers and product line strategy involving
ANSWERS TO ASSIGNMENT QUESTIONS
Question 1
Using the “average” information on pages 3 and 4 of the case: (all numbers in millions)
Sales $26.50 (800,000 x $33.13)
COGS $22.22 (800,000 x $27.78)
*The case says there is no interest cost. The exam does not require estimating income taxes.
Question 2
a) Investment (million)
$12.5
b) ROA (before tax) = 3.24 / 12.5 = 25.9%
26-2
Question 3
Fixed Costs = $3.16M + $1.04M + $2.14M = $6.34M
Contribution Margin (CM) = $33.13 – $21.15 = $11.98
Question 4
Raw Material $19.60 (given)
SM&A 1.14 ($96 / 84)
Planned Profit 2.86 ($240 / 84)
Planned Selling Price $ 30.00
Question 5
The key idea for Question 5 is to keep contribution margin equal on the two products, assuming only raw materials and
Question 6
Raw Material Cost $24.20
Question 7
Cost = $32.13
Question 8
Raw Material Cost $ 24.20 ( same as before)
Question 9
a) Investment per blanket = .2 x Selling Price + ($6.4M / 10,829 / 54)
= .2P + 10.94
b) Price = Cost + .15x Investment
Question 10
I would argue for cost based on capacity utilization, but using 100% of capacity as the denominator:
Raw Material = $24.20
Factory Labor = $ 3.11 ($2.14M / 12,740 / 54)
Given a cost of $33.41 per blanket, there are two approaches to allowable profit:
1) A limit on allowable profit margin as a percent of sales. This is typical in government contacts (“cost plus”) but
2) Allowable profit based on a reasonable ROA. I think this is more fair.
Using an ROA approach, with 20% of sales for Net Working Capital (NWC)* and 10% allowable ROA for a
low risk, stable chunk of business, implies a price of:
Cost + Profit = Selling Price
$33.41 + (.10(.2SP + $9.30)) = SP
$33.41 + .02SP + $.93 = SP
26-4
$34.34 = .98SP
SP = $35.04
Thus, even though I believe a “fair” cost per blanket is higher than MSM calculated ($33.41 vs. $32.85), a
“fair” price is much lower than MSM calculated ($35.04 vs. $37.30).
POSSIBLE ADDITIONAL QUESTIONS
Included here are three additional questions that can be used with the MSM case, along with suggested answers. These
questions give the instructor some additional flexibility in choosing which aspects of the case to emphasize in class.
1) What happens to capacity utilization if MSM were to replace Navy blankets with Del Monte blankets, per Question
5?
Answer: The Navy uses 2,315 shifts (125,000/.54)
2) If the Navy pushed hard for a $35 price, should MSM accept that offer or drop the business and go for the Del
Monte opportunity? Why?
The Mix, now, is:
26-5
3) (Opportunity Cost) What is the maximum price per shift that MSM could pay to buy some extra production
capacity, if needed? The seller of the time (a producer with excess capacity available) would pay labor and machines
operating costs. MSM would pay for raw materials.
Answer: Seller gets price less labor and factory overhead expense. If no incremental costs to him for labor and
TEACHING STRATEGY
At the Naval Postgraduate School, I use this case near the middle of the required MBA core course in managerial
accounting. I use the ten questions in the case and assign the case for two ninety-minute class periods. I try to get
through Question 7 on day one. On day two, I bring up the three additional questions during the class session. Discussing
these three questions, plus Questions 8 through 10 from the assignment, easily fills the class time.