1. Context and Problem Definition
Blue Ridge Manufacturing produces and sells towels for the U.S. ‘sports towel’ market. A ‘sports towel’ is a towel that has the promotion of an event or a logo printed on it. Their most popular use is distribution in connection with major sporting events such as the Super Bowl or the U.S. Open. The firm designs, knits, prints and embroiders towels in three sizes: regular (18”x18”), hand (12”x20”) and mid-range (15”x24”). Occasionally, customers order towels in another size, referred to as ‘special’. Blue Ridge Manufacturing serves three types of customers: large (national chains), small (single store operations) and medium sized customers (small chains, large single stores, licensing agents). Recently Blue Ridge introduced an activity based costing (ABC) system to determine product costs. The system is fairly complicated and the management is confident of the accuracy of the manufacturing cost figures for each product line. The question of Blue Ridges’ management is to advise them on the potential of using strategic cost analysis in assessing the profitability of their customers’ accounts. Potential behavioural implications on the marketing and selling personnel arising from using ABC in costing distribution, marketing and customer support functions should also be discussed.
2. Approach & assumptions
The assignment of the manufacturing costs (manufacturing towels, customising and other factory overhead) towards product groups will be taken as a given and will not be re-allocated because the company has full confidence in the accuracy of these figures. However, in order to reveal the true profitability of the three customer accounts we will examine & re-allocate the costs regarding selling and administrative expenses towards the customer groups. We will use for this the ABC approach. The steps to take in ABC analysis are the following ones [Slagmulder, 2010]: 1. Identify the key activities