Assignment II Blue Ridge Manufacturing

Transcription

1 INTRODUCTION: Blue Ridge Manufacturing produces and sells sport towels in the USA market. The firm knits all the towels it sells and tracks costs for towel production separately from the cost to customize the towels. Seventy-five percent of its orders include logo design, while the balance are print only and require the payment of a licensee fee for the logo used. Towels are made in four different sizes: Regular, hand, mid-range and hand. The normal production cycle for an order of white towels is three days. If a customer wants a colored towel, the basic white towel made by Blue Ridge is sent to a dyeing firm for 3 days more. The company sells its products to 986 different customers, which are divided into 3 types of groups: Large (8), medium (154), and small (824). They use different approaches to serve different customers: Large Customers, primarily national chains, are supported by a small in-house salespeople; Medium Customers, which are small chains, large single store, licensing, sport teams, are supported by independent representatives (on commissions); and Small Customers, primarily single stores, attracted by Advertisements in magazines and newspapers, who call or mail in their orders. Blue Ridge does not give discounts and ships all orders FOB point of origin. GENERAL ASSUMPTION: 1. We do not take into consideration the value of 85 units for other process as stated in the table 2 since there is no sufficient information about the proportion to separate it into 3 different customer sizes. 2. The same case is happened as well for table 3 where is stated the dollar value of $17,000 for other factory overhead but there is no real relationship with each customer size. 3. According to the information given in page 2, we only allocated the cost of commission and licensees into the medium-sized customers (directly), while the cost to make sale calls is allocated to large-sized customers. CALCULATION: Direct Cost: Towel: Advanced Management Accounting 1

2 Material (Large) = ($0.6 * 27250) + ($0.05 * 36640) + ($0.39 * 35880) + ($0.67 * 480) = $32,497 Labor (Large) = ($0.37 * 27250) + ($0.33 * 36640) + ($0.31 * 35880) + ($0.48 * 480) = $33,527 Overhead (Large) = ($0.22 * 27250) + ($0.2 * 36640) + ($0.19 * 35880) + ($0.29 * 480) = $20,279 Total = $32,497 + $33,527 + $20,279 = $86,303 Customizing: Cost (Large) = $0.11 * 20,536 = $2,259 Material (Large) = {$0.003 * 2 * ( )} + ($ * 5959) = $617 Labor (Large) = {$ * 2 * ( )} + ($0.175 * 5959) = $1,945 Overhead (Large) = {$ * 2 * ( )} + ($ * 5959) = $21,428 Total = $2,259 + $617 + $1,945 + $21,428 = $26,249 Total Direct Cost (Large) = $86,303 + $26,249 = $112,552 Indirect Cost: First of all we re-calculated table 4A to obtain the dollar value of reassignation of the administrative and selling cost into various functions within the selling and marketing areas: Reassign to Customer Related Activities Shipping Sales Marketing Other TOTAL Entering Purchase Orders $85,360 $6,850 $92,210 Commission $15,520 $15,520 Shipping Activities $21,125 $10,275 $31,400 Invoicing $13,700 $13,700 Cost to Make Sale Calls $46,560 $6,850 $53,410 Checking Credit $6,850 $6,850 Sampels, Catalogue, Info $1,625 $2,970 $4,595 Special Handling Charge $1,625 $3,425 $5,050 Distribution Management $3,250 $2,970 $6,220 Marketing by Customer Type $7,760 $7,760 Advertising, Promotion $8,910 $8,910 Marketing $4,875 $14,850 $3,425 $23,150 Advanced Management Accounting 2

3 Administrative Office Support $13,700 $13,700 Licensees, Fees $3,425 $3,425 Table 1. Summary of The Total Cost of Customer Related Activities Then based on the information of allocation base given in table 4B, we calculated the indirect cost as following: Entering Purchase Orders (Large) = (133/6108) * $92,210 = $2,008 Shipping Activities (Large) = (147/6501) * $31,400 = $710 etc. Total Indirect Cost (Large) = $2,008 + $710 + $ $5,031 = $23,650 Thus, the Net Profit (Large) = $308,762 - $112,552 - $23,650 = $172,559 In the following table is the summary of the calculation mentioned above: Large Medium Small Total Revenue $308,762 $183,744 $318,024 $810,530 Direct Cost Indirect Cost Towel Customizing Material $32,497 $20,969 $44,665 $98,131 Labor $33,527 $20,098 $37,336 $90,961 Overhead $20,279 $12,149 $22,786 $55,214 Total $86,303 $53,217 $104,788 $244,308 Cost $2,259 $1,093 $1,356 $4,708 Material $617 $368 $781 $1,766 Labor $1,945 $1,663 $6,201 $9,808 Overhead $21,428 $15,823 $49,739 $86,990 Total $26,249 $18,947 $58,076 $103,272 Total Direct Cost $112,552 $72,164 $162,864 $347,580 Discounts $0 Commission $15,520 $15,520 Entering Purchase Orders $2,008 $12,757 $77,446 $92,210 Shipping Activities $710 $4,458 $26,232 $31,400 Invoicing $274 $1,844 $11,583 $13,700 Cost to Make Sale Calls $53,410 $53,410 Checking Credit $51 $562 $6,237 $6,850 Samples, Catalogue, Info $1,750 $1,042 $1,803 $4,595 Special Handling Charge $1,010 $4,040 $5,050 Distribution Management $2,369 $1,410 $2,441 $6,220 Marketing by Customer Type $2,956 $1,759 $3,045 $7,760 Advertising, Promotion $2,228 $6,683 $8,910 Marketing $8,501 $4,696 $9,953 $23,150 Advanced Management Accounting 3

4 Administrative Office Support $5,031 $2,779 $5,890 $13,700 Licensees, Fees $3,425 $3,425 Total Indirect Cost $23,650 $106,900 $155,350 $285,900 NET PROFIT $119,149 $58, $177,050 Table 2. Summary of The ABC Analysis Calculation SUMMARY: 1. According to the computation above, it is obviously seen that small-sized customers gives negatives revenue to the company, whereas the large-sized customers gives the most positive revenues of $172,559 with the difference of almost $173,000. Hence, we are going to propose an appropriate strategy to each customer segment in the following point. 2. Concerning to the benefits of an application of Customer Profitability Analysis (CPA) as the further appliance from ABC Analysis, some actions should be taken into consideration by the company: Protect highly profitable customers that are existed already. This task can be done since from the calculation above shows understandable information for the company of who are their most profitable clients and why. This information provides competitive advantages because companies can use it to strengthen the relationship with the large-sized customers, by providing more and higher discounts, additional services, better delivery services, etc. Discount large-sized customers to gain market share. Once the market has been segmented and low-cost-to-serve activities been identified, the marketing department can target with heavy discounts to this group of customers. The company will incur in costs by doing so, but these will be smaller in proportion to the gain in market shares. Negotiate with unprofitable customers to reduce high-costs-to-serve. Once these clients have been detected, the next course of action is to decide which of those clients are worth to keep and those that should be defected. For those that should be kept, companies have accurate information to approach them to try to identify new ways of conducting business together. This situation requires a tailor-made company-customer solution, and therefore it is harder to Advanced Management Accounting 4

5 perform it when the company has too many clients. This change should go in accordance with the customer profile, attitudes and expectations. In this case for example, if we could set a minimum order quantity for small-sizedcustomer group, perhaps we can reduce the cost of Entering purchase orders, Shipping activities and Invoicing significantly. Thus, the total cost of this group will be reduced, the profit can turn into positive and then we may have the opportunity to keep our small-sized-customers. By doing this, we can still keep our market share and improve the competitive advantage. Concede permanent small-sized customers to competitors. There will be a group of customers that the company definitely wants get rid of because there is no possible way that they will become profitable. Thus, the strategy is to send them to the competitors. However, doing this requires a fine strategic work so competitors do not understand the company s strategy, such as decreases both the service provided as much as possible and all the incentives that they might had in the past that attracted them to the company (e.g., discounts, delivery service, order-changes at no cost, etc). This passive action will eventually motivate these customers to search for another supplier. 3. Advantages of the system: Customer Profitability Analysis may integrate the cost effect of all functions into the customer base and highlights the relationship between the individual actions and policies and the impact on each customer account. In other words, it provides feasibility on hidden cost and benefits that may be occurred so that may help us to work with the salespeople to classify our customers and differentiate our services and prices to them, such as reward the large-sized customers and change the behavior of the medium-sized and small-sized customers. As contemporary marketing literature proselytizes, all customers are not created equal and should not be treated equally. Make informed decisions. A good CPA provides reliable information about the costs involved in three of the four elements of the marketing mix i.e. price, distribution, and promotions. For example, CPA helps to estimate fairly accurately how much does a discount or an allowance costs. It also helps to Advanced Management Accounting 5

6 evaluate when a promotion is a real investment to increase market share of small-sized customers or is a driver to decrease profitability. 4. Disadvantages of the system: Using ABC analysis as a measurement of customer profitability is much more detailed and complex since each of the pools are often broken into scores of ABC activities and it may take hundreds of inquiries to identify and gather the information on them. Thus, it becomes time-consuming to set up the system. The more detailed of the information would overwhelm the ABC systems and also concluded that much of the requested information was not important for determining cost. In this system we found that the costs of specified products to a particular customer cannot be calculated since there is no data given to determine the allocation base to different products. Actually it is important to determine the profitability level of each product to each customer segment because there is a possibility for a product to cost more to the certain customer and cost less to the others. For example, it might be not all of the product types are giving a negative result to small-sized customers and in the other hand perhaps not all of the product types are giving a positive result to large-sized customers. As the visualization of this problem can be seen in the following figure: Figure 1. Customer/Product Profitability Analysis Advanced Management Accounting 6

7 5. Recommendation: To gain a more sophisticated and accurate information on profitability of each customer segments, the costs for a certain product for a certain segment should be calculated as well. However this is not an easy task as recently it only provides us with the allocation base that are dedicated for different customer without any separation to the different products. Although it seems to be more complex and specific, but it may provide us with more precise information to define a strategy for different products assigned to different customer segments. Advanced Management Accounting 7