Bedtime Stories Ltd (BSL) is in the business of designing and manufacturing bedsheets for sale in departmental stores as well as for hotels.

The Business Processes

BSL has a team of designers who design the graphic images on the bedsheets. Some of these designers are among the best in the industry. They will create a design and pass it to the marketing department to promote it to the customers. The marketing team will email, on a monthly basis, a catalogue that contains bedsheets with the latest design to all the customers, and orders will be taken prior to the production of the bedsheets.

A newly emerged market segment is interior designing (ID) firms locally. These ID firms have some big clients; they are government ministers and well-known entrepreneurs in the city. BSL offers tailor-made design for the bedsheets for the clients of these ID firms, with premium pricing. So far, the feedback from the ID firms concerning the quality of the design were encouraging.

All customers can place an order by emailing an order form, that can be obtained from BSL marketing department, to BSL. Once received the order, the marketing department will liaise with the production department on delivery details. The production department needs to liaise with the logistic and shipping department on all shipment details before the information can be channelled back to the marketing department. Such communication sometimes caused unacceptable delay in reverting to the customers. There were occasions where customers decided to cancel order due to slow response from the marketing department.

As part of the business expansion strategies, BSL has some arrangements with a few departmental stores overseas where the bedsheets are sold on consignment. BSL will store the bedsheets at the departmental stores and will only invoice the departmental stores when it is sold. However, if the bedsheets remain unsold for 120 days, BSL will invoice the departmental stores on these bedsheets. BSL will bear all inventory losses before the bedsheets are invoiced.

Debris from the Production of Bedsheets

The production processes involved the use of rolls of fabric that will be cut into the sizes of bedsheets. BSL has leftover fabrics from the cutting of bedsheets and this represents 5% of the total input fabric. These debris are sold to a nearby factory where it will be used as fillings of soft toys.

Customer Profitability Analysis (CPA)

The accountant of BSL has conducted a customer profitability analysis for the two market segments based on the last financial year ended 31 December 2019. The CPA and other relevant information are as follows:

Explanations on Customer-driven Activities

The purpose of sales visit to the customers was to obtain feedback on the products and, in the case of the departmental stores, to find out how the bedsheets were displayed in the stores. Special handlings involved any specific ways of packing requested by customers. These may include packing in different sizes to suit the shipping space or the use of better quality of packing materials to prevent damages caused by poor handling. Special shipping was normally requested in order to expedite the product delivery in order to meet an expected increase in demand due to, for example some festive seasons, or shortage of bedsheets in some cases due to poor inventory planning by the customers.

Required:

Explain how BSL can use life cycle costing to estimate the cost its product more accurately. (400 words)

Number of customers 23 Departmental store segment Hotel segment 17 $ $ 380 000 247 600 160 000 124 000 220 000 123 600 48 300 38 000 35 700 32 000 Sales revenue Cost of goods sold Gross margin Selling and administrative costs: General selling costs General administrative costs Customer-related costs: Sales activity Order taking Special handling Special shipping Total selling and administrative costs Operating profit 16 000 6 000 80 000 18 000 $206 300 $13.700 12 000 8 000 60 000 20 000 $167 700 $(44 100) Customer-driven activities Activity rate Cost driver Units handled Special handling $100 Special shipping Shipments $1.000 Sales activity Sales visits $2.000 Order taking Purchase orders received $400 Customer-driven activities Hotels segment Departmental stores segment 8 sales visits 6 sales visits Sales activity Special handling 800 units handled 600 units handled Special shipping 18 shipments 20 shipments 20 purchase orders Order taking 15 purchase orders