Blue Ridge Case - Activity Based Costing (ABC)
1) Profitability Analysis:
Blue Ridge Large Medium Small Total
Sales $308,762.00 $183,744.00 $318,024.00 $810,530.00
Manufacturing Costs $112,552.70 $72,164.09 $162,864.09 $347,580.88
Sales and Administration Costs $78,303.47 $50,790.54 $156,805.99 $285,900.00
Total Costs $190,856.16 $122,954.63 $319,670.08 $633,480.88
Cost as % Sales 61.81% 66.92% 100.52% 78.16%
Profit $117,905.84 $60,789.37 ($1,646.08) $177,049.12
Profit Margin 38.19% 33.08% -0.52% 21.84%
Note: For detailed calculations please reference attached document.
2) Define action steps for Blue Ridge based on the analysis:
The above customer profitability analysis indicates that the small customers have a negative profit margin. As this specific customer base accounts for 40% of Blue Ridges total sales volume we recommend the following action steps be taken in order to increase their profitability:
* Develop an on line/electronic ordering system for customers in order to eliminate the high costs associated with entering purchase orders by Blue Ridge employees. Currently this represents 14.56% of total costs with 12.23% of total costs allocated to small customers.
* Develop an electronic payment system for small customers, where payments are wired directly into Blue Ridges bank account before the order is processed and shipped. Currently credit checks for small customers represent 1% of total costs.
* Study the effects on price increases for small customers. Currently, shipping costs for small customers represent 4.14% of the total costs, increasing the price for small customers could help offset the shipping costs.
* Conduct a study on small customer orders to help determine if a minimum order requirement can help eliminate the costs associated with shipping without sacrificing the high volume.
* Invest in new inking technology in order to help justify increases in prices. The investment should eliminate their customer complaints and increase their demand.
* Determine the costs
Blue Ridge Large Medium Small Total
Sales $308,762.00 $183,744.00 $318,024.00 $810,530.00
Manufacturing Costs $112,552.70 $72,164.09 $162,864.09 $347,580.88
Sales and Administration Costs $78,303.47 $50,790.54 $156,805.99 $285,900.00
Total Costs $190,856.16 $122,954.63 $319,670.08 $633,480.88
Cost as % Sales 61.81% 66.92% 100.52% 78.16%
Profit $117,905.84 $60,789.37 ($1,646.08) $177,049.12
Profit Margin 38.19% 33.08% -0.52% 21.84%
Note: For detailed calculations please reference attached document.
2) Define action steps for Blue Ridge based on the analysis:
The above customer profitability analysis indicates that the small customers have a negative profit margin. As this specific customer base accounts for 40% of Blue Ridges total sales volume we recommend the following action steps be taken in order to increase their profitability:
* Develop an on line/electronic ordering system for customers in order to eliminate the high costs associated with entering purchase orders by Blue Ridge employees. Currently this represents 14.56% of total costs with 12.23% of total costs allocated to small customers.
* Develop an electronic payment system for small customers, where payments are wired directly into Blue Ridges bank account before the order is processed and shipped. Currently credit checks for small customers represent 1% of total costs.
* Study the effects on price increases for small customers. Currently, shipping costs for small customers represent 4.14% of the total costs, increasing the price for small customers could help offset the shipping costs.
* Conduct a study on small customer orders to help determine if a minimum order requirement can help eliminate the costs associated with shipping without sacrificing the high volume.
* Invest in new inking technology in order to help justify increases in prices. The investment should eliminate their customer complaints and increase their demand.
* Determine the costs