ABC COST UNIT ANALYSIS
October 5, 2010
The demand for organic items in the US has been growing exponentially in the past decade. Numerous warnings about what we consume are very common; the chemicals, preservatives and other additives are creating health problems worldwide. Thus, a growing niche for all-natural processing is booming.
Maple Hill Dairy Farm is a small family-owned business. They take pride in their high quality dairy products they produce. They sell their dairy products in a small store adjacent to the farming operation as well as in several area markets. Part of their charm is due to the fact that their products are still bottled in glass bottles. However, this is also part of their problem.
Maple Hill Dairy is that of a DIFFERENTIATOR. They create and sell high quality products and receive between a 25% to 40% premium over standard market prices. Their net profit of $17,759.00 for annual operations appears to be low for a dairy operation this size.
Laura Ashley, the manager for Maple Hill, requested an analysis to help her determine 2 specific ideas.
1. The possibility of changing the container and packaging system. Currently, the bottle that they package each of their dairy products in is .75 cents each. By changing from a glass container to a plastic or paper container, they will save .50 cents each on direct material costs. There is a risk of losing their “charm” as they look to the possibility of new customers. Also, the bottling operation overhead costs, they estimate, would be half of the cost of that in this analysis.
2. The possibility of expansion. Currently, they are operating at capacity.
An ABC cost analysis reveals that although they are posting an annual profit, two of their products are costing more to produce per unit than they are getting revenue for. Each bottle of chocolate milk that they produce costs an average of $2.68. They are selling it for $1.90 – nearly...