Integrating ABC to Improve Strategic Portfolio Decision Making

- a Case Study

Requirements

1. Calculate throughput based on the standard TOC (Throughput = Sales Revenue minus Direct Costs) and carefully comment on your findings. Explain why pricing discretion based on throughput arguments is to be reserved for special (short-term decision) orders only.

2. Calculate the ABC production-only cost per liter for each of the three products Arran Malt, Loch Ranza and Holy Isle.

3. Integrate the full ABC analysis into a cost system that provides you with the following information:

- net throughput per liter;

- variable cost per gallon;

- (integrated) ABC cost per gallon.

4. Comment on your findings concerning the strategic decision whether or not to drop products under:

- the traditional absorption approach;

- the ABC approach

Exhibit A
Isle of Arran Distillers
Income statement under traditional absorption costing
(x 1000)		Arran Malt		Loch Ranza		Holy Isle
Sales ()		7,800		21,000		7,200
Materials ()		2,200		6,300		2,350
Labour ()		720		2,200		610
Production overhead ()		2,640		7,560		2,820
Cost of sales ()		5,560		16,060		5,780
Gross margin ()		2,240		4,940		1,420
Commissions (5% of sales)()		390		1,050		360
Advertising&other marketing ()		644		1,732		594
Administrative ()		539		1,453		498
Total expenses ()		1,573		4,235		1,452
Operating income ()		667		705		- 32
Total liters		11,355		22,710		10,600

Exhibit B
Isle of Arran Distillers
Activity & Activity Drivers
Activity		% production overhead (rough estimate, excluding labor)		Activity Driver
Material procurement		16%		number of purchase orders
Making (Mash, Tun & Still House)		29%		number of set-ups/liters produced
Bottling (Spirit House)		18%		number of casks per set-up
Facility activities (joint costs)		15%		no real driver found (liters produced?)
Shipping		22%		orders shipped

Exhibit C
Isle of Arran Distillers
Advertising and Other Marketing Expenses
(in thousands)	Arran Malt	Loch Ranza	Holy Isle	Total
Product Advertisements ()	300	600	280	1,180
Magazines	54	312	186	552
Connoisseurs meetings	148	142	-	290
Free samples	98	146	94	338
Other Marketing ()				1,790
News Letter (quarterly) 40%				537
Flyers & brochures 30%				716
Website				179
Personal mailings				358
Total Advertising & Other Marketing				2,970

Exhibit App.A
Isle of Arran Distillers
Average Customer Order Size
	Bottles	Liters
Arran Malt	8.14	6.1
Loch Ranza	27.16	20.37
Holy Isle Liquor	5.6	4.2