- What type of cost system does Blue Ridge use, and is it consistent with strategy?
- Develop a spreadsheet analysis which can be used to assess the profitability of the three customer groups of Blue Ridge - large, medium, and small customer account sizes. Use the information in Tables 1-4 to trace and allocate the costs necessary for the analysis.
5-1 Blue Ridge Manufacturing BACKGROUND: Blue Ridge Manufacturing is one of a dozen companies that produces and sells towels for the U.S. "sports towel" market. A "sports towel" is a towel that has the promotion of an event or a logo printed on it. They're called sports towels because their most popular use is for distribution in connection with major sporting events such as the Super Bowl, NCAA Final Four, Augusta National Golf Tournament and the U.S. Open Tennis Tournament. Towels with college, NBA and NFL team logos, and promotions for commercial products such as soft drinks, beer, fast food chains, etc., are also big sellers. The firm designs, knits, prints and embroiders towels. The firm knits all the towels it sells and tracks costs for towel production separately from the cost to customize the towels. Seventy-five percent of its orders include logo design, while the balance are print only and require the payment of a license fee for the logo used. However, about 15% of its orders include embroidery. Towels are made in three sizes: regular (18" x 30"), hand (12" x 20") and mid- range (15"x 24"). The normal production cycle for an order of white towels is three days. If a customer wants a colored towel, the basic white towel made by Blue Ridge is sent to a dyeing firm, which extends the production cycle of an order by three days. Also, occasionally, customers order towels in sizes other than the three standard sizes. These towels are called "special". The firm now produces a "medium" quality towel. They have had some difficulty with the "staying power" of the material printed on these towels, which is attributed to the towel quality, the ink and the printing process. Customers have complained that the ink "lays on the surface" and it cracks and peels off. Blue Ridge recently made a break-through in developing an ink that soaks into the towel, won't wash out and is non-toxic. A big advantage of this ink is that it avoids EPA disposal requirements because is can be "washed down the drain". Due to these characteristics of its new ink, Blue Ridge is considering upgrading the quality of the basic towel it produces because it will "take" the ink better, both the towel and the ink will last longer and the product will sell at a higher price. If it takes this step, the company will evaluate expanding its marketing and sales area with the objective of "going national". CUSTOMERS: Except for a few non-regional chains, Blue Ridge's sales are predominantly in the southeastern states. The company sells its products to 986 different customers. These customers differ primarily in the volume of their purchases, so management classifies each customer in one of three groups: large (8 customers), medium (154 customers) and small (824 customers). Large customers are primarily national chains, small customers are single store operations (including pro shops at golf courses) and medium-sized customers are small chains, large single stores or licensing agents for professional sports teams and manufacturers of consumer products. Table 1 gives the product and customer size statistics for 2001. Blue Ridge has a different approach to customers in each of its three categories. A small group of in-house sales people sell directly to buyers in the large customer category. Independent manufacturer representatives, on commission, call on the license holder or the manager of a store in the medium customer category. Ads placed in regional and national magazines and newspapers target customers primarily in the small-customer segment, who call or mail in their orders. Blue Ridge does not give discounts and it ships all order free on board (FOB) point of origin, i.e., customers pay their freight costs. MANUFACTURING: Blue Ridge has a modern knitting and printing plant in the foothills of North Carolina's Blue Ridge Mountains. Upgrading the facilities over recent years was accompanied by the introduction of an activity-based costing (ABC) . TABLET BLUE RIDGE MANUFACTURING Sales Information Product and Customer Size Statistics Sales in Units by Customer Account Size Large Medium Small . Total Towel: Regular Mid-Size Hand Special 27,250 36,640 35,880 480 16,600 18,552 19,966 3,426 10,550 10,308 95,954 594 54,400 65,500 151,800 4,500 Number of Units Sold Number of Units Embroidered Number of Units Dyed Sales Volume Revenue Number of Orders Received Number of Shipments Made Number of Invoices Sent Accounts with Balance >60 Days 100,250 5,959 20,536 $308,762 133 58,544 6,490 9,935 $183,744 845 923 754 117,406 29,394 12,328 $318,024 5,130 5,431 4,737 276,200 41,842 42,798 $810,530 6,108 6,501 5,603 147 112 11 122 134 BLUE RIDGE MANUFACTURING Unit Cost Information Line 1 Direct Manufacturing Costs Per Unit Sales Price Unit Cost Quantity Material Labor Overhead Towels: Regular Mid-Size Hand Special 54,400 65,500 151,800 4,500 $3.60 3.20 2.55 4.00 $0.60 0.50 0.39 0.67 $0.37 0.33 0.31 0.48 $0.22 0.20 0.19 0.29 $1.19 1.03 0.89 1.44 Line 2 Direct Costs of Customizing Per Unit Quantity Cost Material Labor Overhead Total - $0.0030 $0.0045 Inking (based on passes) Dyeing Embroidery 552,400 42,798 41,842 $0.1 $0.11 $0.0742 0.0000 1.0994 $0.0817 0.1100 1.2770 0.0026 0.1750 Direct Labor Wage Rate: $9.00 (Including Fringes) Inking requires one pass for each color used; average two colors per towel (i.e., 2 per unit), and is used on all towels. TABLE 3 BLUE RIDGE MANUFACTURING Selling and Administrative Costs and Activities Costs Incurred in Each Function (Shipping, Sales, Marketing) Directly Assigned To: Total Shipping Sales Marketing Other Total Assigned Unassigned Administration $170,000 $ 17,000 $ 37,400 $20,400 $56,100 $130,900 $39,100* Selling 155.000 15.500 117.800 9 .300 12.400 155,000 $325.000 1.32.500 $155,200 $29,700 $68,500 $285.900 $39.100 Each function is used for the Following Activities Percentage of: Selling and Administrative Activities: Shipping Sales Marketing Other Entering Purchase Orders Commissions Shipping Activities Invoicing Cost to Make Sales Calls Checking Credit Samples, Catalog Info Special Handling Charges Distribution Management Marketing, by Customer Type Advertising/Promotion Marketing Administrative Office Support Licenses, Fees 100 100 100 100 1. Note that $39.100 of the SG&A cost was not directly assigned. This amount represents the facility-sustaining activity cost TABLE 4 BLUE RIDGE MANUFACTURING Activities and Cost drivers Cost Drivers for Allocating Costs of Activities to Customer Groups (Large, Medium, Small) Cost Driver Activity Entering Purchase Orders Commissions Shipping Activities Invoicing Cost to Make Sales Calls Checking Credit Samples, Catalog Info. Special Handling Charges Distribution Management Marketing, by Customer Type Advertising Promotion Marketing Administrative Office Support Licenses, Fees Number of Orders Sales Dollars with Medium Customers Number of Shipments Number of Invoices Sales Dollars with Large Customers Percent Accounts >60 Days Sales Dollars Management Estimate Sales Dollars Sales Dollars Management Estimate? Number of Units Sold Number of Units Soldt Sales Dollars with Medium Customers 20% to medium-sized customers; 80% to small-sized customers. -25% to medium-sized customers; 75% to small-sized customers. PExcluding Specials "Excluding Specials 5-1 Blue Ridge Manufacturing BACKGROUND: Blue Ridge Manufacturing is one of a dozen companies that produces and sells towels for the U.S. "sports towel" market. A "sports towel" is a towel that has the promotion of an event or a logo printed on it. They're called sports towels because their most popular use is for distribution in connection with major sporting events such as the Super Bowl, NCAA Final Four, Augusta National Golf Tournament and the U.S. Open Tennis Tournament. Towels with college, NBA and NFL team logos, and promotions for commercial products such as soft drinks, beer, fast food chains, etc., are also big sellers. The firm designs, knits, prints and embroiders towels. The firm knits all the towels it sells and tracks costs for towel production separately from the cost to customize the towels. Seventy-five percent of its orders include logo design, while the balance are print only and require the payment of a license fee for the logo used. However, about 15% of its orders include embroidery. Towels are made in three sizes: regular (18" x 30"), hand (12" x 20") and mid- range (15"x 24"). The normal production cycle for an order of white towels is three days. If a customer wants a colored towel, the basic white towel made by Blue Ridge is sent to a dyeing firm, which extends the production cycle of an order by three days. Also, occasionally, customers order towels in sizes other than the three standard sizes. These towels are called "special". The firm now produces a "medium" quality towel. They have had some difficulty with the "staying power" of the material printed on these towels, which is attributed to the towel quality, the ink and the printing process. Customers have complained that the ink "lays on the surface" and it cracks and peels off. Blue Ridge recently made a break-through in developing an ink that soaks into the towel, won't wash out and is non-toxic. A big advantage of this ink is that it avoids EPA disposal requirements because is can be "washed down the drain". Due to these characteristics of its new ink, Blue Ridge is considering upgrading the quality of the basic towel it produces because it will "take" the ink better, both the towel and the ink will last longer and the product will sell at a higher price. If it takes this step, the company will evaluate expanding its marketing and sales area with the objective of "going national". CUSTOMERS: Except for a few non-regional chains, Blue Ridge's sales are predominantly in the southeastern states. The company sells its products to 986 different customers. These customers differ primarily in the volume of their purchases, so management classifies each customer in one of three groups: large (8 customers), medium (154 customers) and small (824 customers). Large customers are primarily national chains, small customers are single store operations (including pro shops at golf courses) and medium-sized customers are small chains, large single stores or licensing agents for professional sports teams and manufacturers of consumer products. Table 1 gives the product and customer size statistics for 2001. Blue Ridge has a different approach to customers in each of its three categories. A small group of in-house sales people sell directly to buyers in the large customer category. Independent manufacturer representatives, on commission, call on the license holder or the manager of a store in the medium customer category. Ads placed in regional and national magazines and newspapers target customers primarily in the small-customer segment, who call or mail in their orders. Blue Ridge does not give discounts and it ships all order free on board (FOB) point of origin, i.e., customers pay their freight costs. MANUFACTURING: Blue Ridge has a modern knitting and printing plant in the foothills of North Carolina's Blue Ridge Mountains. Upgrading the facilities over recent years was accompanied by the introduction of an activity-based costing (ABC) . TABLET BLUE RIDGE MANUFACTURING Sales Information Product and Customer Size Statistics Sales in Units by Customer Account Size Large Medium Small . Total Towel: Regular Mid-Size Hand Special 27,250 36,640 35,880 480 16,600 18,552 19,966 3,426 10,550 10,308 95,954 594 54,400 65,500 151,800 4,500 Number of Units Sold Number of Units Embroidered Number of Units Dyed Sales Volume Revenue Number of Orders Received Number of Shipments Made Number of Invoices Sent Accounts with Balance >60 Days 100,250 5,959 20,536 $308,762 133 58,544 6,490 9,935 $183,744 845 923 754 117,406 29,394 12,328 $318,024 5,130 5,431 4,737 276,200 41,842 42,798 $810,530 6,108 6,501 5,603 147 112 11 122 134 BLUE RIDGE MANUFACTURING Unit Cost Information Line 1 Direct Manufacturing Costs Per Unit Sales Price Unit Cost Quantity Material Labor Overhead Towels: Regular Mid-Size Hand Special 54,400 65,500 151,800 4,500 $3.60 3.20 2.55 4.00 $0.60 0.50 0.39 0.67 $0.37 0.33 0.31 0.48 $0.22 0.20 0.19 0.29 $1.19 1.03 0.89 1.44 Line 2 Direct Costs of Customizing Per Unit Quantity Cost Material Labor Overhead Total - $0.0030 $0.0045 Inking (based on passes) Dyeing Embroidery 552,400 42,798 41,842 $0.1 $0.11 $0.0742 0.0000 1.0994 $0.0817 0.1100 1.2770 0.0026 0.1750 Direct Labor Wage Rate: $9.00 (Including Fringes) Inking requires one pass for each color used; average two colors per towel (i.e., 2 per unit), and is used on all towels. TABLE 3 BLUE RIDGE MANUFACTURING Selling and Administrative Costs and Activities Costs Incurred in Each Function (Shipping, Sales, Marketing) Directly Assigned To: Total Shipping Sales Marketing Other Total Assigned Unassigned Administration $170,000 $ 17,000 $ 37,400 $20,400 $56,100 $130,900 $39,100* Selling 155.000 15.500 117.800 9 .300 12.400 155,000 $325.000 1.32.500 $155,200 $29,700 $68,500 $285.900 $39.100 Each function is used for the Following Activities Percentage of: Selling and Administrative Activities: Shipping Sales Marketing Other Entering Purchase Orders Commissions Shipping Activities Invoicing Cost to Make Sales Calls Checking Credit Samples, Catalog Info Special Handling Charges Distribution Management Marketing, by Customer Type Advertising/Promotion Marketing Administrative Office Support Licenses, Fees 100 100 100 100 1. Note that $39.100 of the SG&A cost was not directly assigned. This amount represents the facility-sustaining activity cost TABLE 4 BLUE RIDGE MANUFACTURING Activities and Cost drivers Cost Drivers for Allocating Costs of Activities to Customer Groups (Large, Medium, Small) Cost Driver Activity Entering Purchase Orders Commissions Shipping Activities Invoicing Cost to Make Sales Calls Checking Credit Samples, Catalog Info. Special Handling Charges Distribution Management Marketing, by Customer Type Advertising Promotion Marketing Administrative Office Support Licenses, Fees Number of Orders Sales Dollars with Medium Customers Number of Shipments Number of Invoices Sales Dollars with Large Customers Percent Accounts >60 Days Sales Dollars Management Estimate Sales Dollars Sales Dollars Management Estimate? Number of Units Sold Number of Units Soldt Sales Dollars with Medium Customers 20% to medium-sized customers; 80% to small-sized customers. -25% to medium-sized customers; 75% to small-sized customers. PExcluding Specials "Excluding Specials
