The ABC Group (ABC), which commenced trading during 2002, manufactures a range of high quality electrical appliances such as kettles, toasters and steam irons for domestic use which it sells to electrical stores.

The directors consider that the existing product range could be extended to include industrial sized products such as high volume water boilers, high volume toasters and large steam irons for the hotel and catering industry.

They recently commissioned a highly reputable market research organisation to undertake a market analysis including the use of strategic models such as PEST and Porter's Five Forces. Their analysis identified a number of significant competitors within the hotel and catering industry.

At a recent meeting of the board of directors, the marketing director proposed that ABC should make an application to gain 'platinum status' quality certification in respect of their industrial products from the Hotel and Catering Institute in order to gain a strong competitive position. He then stressed the need to focus on increasing the effectiveness of all operations from product design to the provision of after sales services.

An analysis of financial and non-financial data relating to the application for 'platinum status' for each of the years 2018, 2019 and 2020 is contained in the appendix.

The managing director of ABC recently returned from a seminar, the subject of which was 'The Use of Cost Targets'. She then requested the management accountant of ABC to prepare a statement of total costs for the application for platinum status for each of years 2018, 2019 and 2020. She further asked that the statement detailed manufacturing cost targets and the costs of quality.

The management accountant produced the following statement of manufacturing cost targets and the costs of quality:

2018

2019

2020

Forecast

Forecast

Forecast

$m

$m

$m

Variable manufacturing costs

8,400

10,500

12,600

Fixed manufacturing costs

3,000

3,400

3,400

Prevention costs

4,200

2,100

1,320

Appraisal costs

800

700

700

Internal failure costs

2,500

1,800

1,200

External failure costs

3,100

2,000

980

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-------

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Total costs

22,000

20,500

20,200

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APPENDIX

'Platinum Status' Quality Certification Application - Relevant Statistics

2018

2019

2020

Forecast

Forecast

Forecast

Total market size ($m)

300

320

340

ABC - sales ($m)

24

30

36

ABC - total costs ($m)

22

20.5

20.2

ABC - sundry statistics:

% of products achieving design quality standards

and accepted without further rectification

92

95

99

Rectification claims from customers ($m)

0.96

0.75

0.1

Cost of after sales rectification service ($m)

1.8

1.05

0.8

% of sales meeting planned delivery dates

88.5

95.5

99.5

Average cycle time:

(customer enquiry to product delivery) (days)

49

45

40

Product enquiries not taken up by customers

(% of enquiries)

10.5

6

3

Idle capacity of manufacturing staff (%)

12

6

1.5

Required:

a)Briefly explain how strategic models such as PEST and/or Porter's Five Forces can assist with strategic performance management. (5 marks)

b)Explain how the use of cost targets could be of assistance to ABC with regard to their application for platinum status. Your answer must include commentary on the items contained in the statement of manufacturing cost targets and the costs of quality prepared by the management accountant.(8 marks)

c)Assess the forecasted performance of ABC for the period 2018 to 2020 with reference to the application for 'platinum status' quality certification under the following headings:

i.Financial performance and marketing

ii.External effectiveness; and

iii.Internal efficiency.(12 marks)