Does the combined cardiac and vascular tissue cost center, which composes roughly 50% of total sales, operate at an operating loss?
During CY2011, tissue sales were $59,793,000. COGS was $34,340,000. This resulted in a gross profit of $25,453,000. If operating expenses are then allocated to each cost center, using a pro-rata based upon total revenue allocation calculation, $32,089,766 in operating expenses gets allocated to the tissue cost center. Subtract $32,089,766 from $25,453,000 and you get a tissue cost center operating loss of negative $6,636,766. If you credit back taxes using a 40% tax rate, the after tax tissue cost center operating loss drops to negative $3,982,060. The math certainly makes it appear that the tissue cost center does operate at an operating loss.
The question again: “Does the combined cardiac and vascular tissue cost center operate at an operating loss”? Yes/No. Explain.
That's not the right question. There are many questions but the proper question in relation to profitability of the tissue business is what is the contribution after variable costs and direct fixed costs. You can't make business decisions based on a cost allocation method related to gross sales.
I'm not going to get into a whole discussion on the subject because I could write a text book on the subject. All I'm going to say is I very lucky to have two semesters from probably the best cost accounting professor in the country in the 70s.
buckeye, in all due respect, I understand fixed and variable costs quite well. I think my question is an important one. CRY's problem in part seems to be that the gross margins are low because of the complex process of complying with the FDA requirements. With low margins this cost center can't generate much in the way of after tax cash flow. I suspect that the only cost center at CRY that does generate after tax cash flow may be the BioGlue cost center. Tissue doesn't make any money because of low margins. The other cost centers probably don't generate much, if any, after tax cash flow either because of low sales numbers that don't lend themselves to profitability. It CRY can ramp up sales on othr products, then other cost centers may generate after tax cash flow.
I'm willing to be proven wrong, but only if you show me the numbers. I'm sending this from a class room right now, where I'm auditing an Investment Management class form a fantastic professor.
I'll change my mind if I see numbers that show I'm wrong. It really doesn't help CRY's case if they shift more overhead to another cost center either. By doing so, they may be able to make tissue marginally profitable, but the corresponding effect is that the same amount then hurts the cost center that has to absorb the identical amount of core fixed costs.
Also, in addition to appearing to be unprofitable, the tissue business has a potential liability tail too, witness 2001.
Just my take on things. Do your own due diligence.
P.S. This is why CRY's ROIC (return on invested capital) is so low. Also, it is probably part of ther reason why CRY is priced the way it is now.