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# Blue Ridge Case – Activity Based Costing (ABC) Essay

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 associated with investing in a higher quality towel and align with an appropriate sales strategy.

* Determine if advertising costs are being properly allocated.

* Study the effects of implementing an incentive program for the independent manufactures who achieve a certain sales volume.

3) Discuss the advantages and disadvantages of this customer profitability system. Did Blue Ridge define the right activities?

* The system provides managers with an insight into why differences exist in the operating incomes earned from different customers.

* The system enables managers to determine profitability levels (profit contributions) of specific customer groups and highlights the costs assignable to each customer.

* The system allocates costs of activities that support individual customer groups to aid in determining cost reduction strategies.

* The System focuses on profit rather than turnover.

* The system allocates the relevant costs associated with each customer.

* The system may prompt managers to make quick decision such as firing customers, instead of implementing cost cutting initiatives.

* The system focuses heavily on the different types of customers rather than on the different products.

* The system does not provide detailed information on the order size and frequency for each individual company within their customer group.

* The system does not focus on customer behavior such as loyalty and future growth patterns.

* The system does not enable managers to determine if price discounting will encourage increased purchases while minimizing profit erosion.

In conclusion Blue Ridge defined the right activities; however they might want to consider conducting a product profitability analysis. This will enable them to manage the product mix more efficiently and identify future cost cutting in initiatives. In addition, we fell this would be another valuable exercise in determining weather or not going national would be profitable for Blue Ridge.

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