Managerial Accounting

Question:

Since the 1960s, GEK Technologies Inc. has established a reputation for producing prestige
audio products and aims to set the standard for performance, reliability and service. The
company’s first product, namely the GEK Record Player, is a high quality vinyl record player
built into a wooden cabinet made of the finest quality jarrah.

In the late 1980s, GEK started producing CD players, which was in demand at that time. In
order to maintain a strong commitment to keeping with its brand image, GEK ensured that
the new product also met the highest standards of quality in the audio industry. MP3 players
emerged in the early 2000s, which resulted in another new line of products. It was followed
in more recent years by the GEK USB Turntable, which can be plugged into a computer to
convert music from vinyl records into digital format so that it can be played on portable
music players. The USB Turntable was introduced as a result of the Vinyl Revival.

Sebastian Burwood, the company’s Chief Financial Officer, had become concerned about the
performance of some of the products in recent years. As shown in the following product line
sales report (See Table 1 below), even though total sales were still growing at an acceptable
rate of approximately 10%, the sales mix was changing significantly. The concern was
particularly strong for the Record Player because of the sharp decline in sales and the high
costs of producing that line. Due to the high level of craftsmanship required for the Record
Player, it has always had higher than average costs for labour and materials. Furthermore,
attracting and retaining the highly skilled workers necessary for this product line was becoming more and more difficult. In 2012, the workers in the GEK Record Player line were
older, more experienced and very loyal employees who were paid well because of their skill
and seniority. These workers displayed the highest level of craftsmanship in the company
and, some would argue, in the entire industry. However, not many of the newer employees
seemed eager to learn the skills required for the manufacture of this product line.

Moreover, the company’s ability to meet customer demands was constrained by the limited
manufacturing capacity. A sharper than expected increase in sales for the USB Turntable had
resulted in delays in production and a backlog of orders. At the same time, plant managers
had been scrambling to find the plant capacity to meet the demand. Some plant supervisors
had suggested shutting down the Record Player line to increase capacity for the production of
the USB Turntable line. However, eliminating the Record Player line would make obsolete about $287,000 worth of raw materials inventory that can only be used in the manufacture of
the Record Player.

Kelly Walters, the firm’s sales manager, reported that sales of the Record Player were more
and more difficult to find and that demand for the new styles was increasing as portability
was now a criterion for music enjoyment. She also noted that there were significant sales
differences based on the areas. The USB Turntable was popular in the South Australia and
West Australia, and the CD players and MP3 players were popular nationally. The Record
Player tended to have strong support only in the northeast states. In some sales districts in
these states, Record Players represent a relatively high proportion of total sales.
Mitchell Barrett, the firm’s CEO, is aware of these concerns and has decided to set up a task
force to consider the firm’s production options and strategy with regards to these problems.

Table 1: Product Line Sales Report
Record
Player  CD Player  MP3 Player  USB Turntable
2010  20%    33%              45%              2%
2011  16%    40%              40%              4%
2012  14%    40%              40%              6%
2013    9%    40%              40%              11%

Required:
1. How would you describe GEK’s Competitive Strategy? Briefly explain.
2. Develop a SWOT analysis for GEK Technologies Inc. The analysis should include
two items in each category: Strengths, Weaknesses, Opportunities, and Threats.
3. On the basis of your answer to requirements (1) and (2), what recommendation would
you make to the task force?

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