Blue Ridge Manufacturing

Blue Ridge manufacturing

Introduction

Blue ridge manufacturing is a company that produces sports towels. The company segments its clients based on their sizes (small, medium and large). They want to compute the profitability of each customer group by using an ABC model (activity based costing), in which the selling and administrative costs are allocated to each customer group.

Approach

In ABC you need to start with allocating the overhead costs to different cost pools. The activities listed in Table 4A are used as the cost pools for the analysis of this case. We allocated the overhead costs (shipping, sales, marketing and other) to the activities (our cost pools) based on the percentages given in table 4A (Table 1).

Table 1: Overhead costs per cost pool

The overhead costs per activity are allocated to the different customer types (with the help of a cost driver) based on the next two-stage allocation process scheme (Figure 1). Table 4B was used to identify the cost driver (black boxes) for each cost pool.

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Figure 1: The two-stage allocation process scheme for Blue ridge manufacturing

The profitability analysis was performed once those cost drivers were identified. The contribution is calculated for each customer segment by subtracting the revenues with the allocated production costs, overhead costs and customizing costs (we included some administration and selling overhead costs in our production costs, to make a 100% correct analysis of the different cost drivers. However, those should be separated). Our results are summarized in Table 2 (there are two not allocated overhead costs).

Table 2: Comparative profitability analysis for Blue ridge manufacturing

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Conclusion

The ABC analysis conducted in the case of Blue Ridge Manufacturing to the following conclusions.

Firstly, we can notice that the contribution related to the small customers is slightly...