Blue Ridge Manufacturing
Marissa MandleFebruary 20, 2018ACCT511Case I: Blue Ridge ManufacturingBlue Ridge’s primary focus started out as being a cost leader. Organizations that use cost leadership as their competitive strategy (such as Walmart) focus on efficiency, low costs, lower quality, high volume sales, and high volume production. With that being said, Blue Ridge has made its first steps towards shifting towards differentiation by introducing a new high quality ink that will not wash out. Following this change, the company also seems to be trying to reach more customers across the country by placing ads in nationwide magazines and newspapers, which further shows its shift away from cost leadership towards differentiation. It hasn’t made the full switch yet, but it does show that it’s trying to shift into a different strategy category. Currently, Blue Ridge uses the ABC costing system which is typical of the cost leadership strategy. ABC assists in identifying the most profitable customers. Before using ABC, management had no way to identify each customer group’s profitability (large, medium, and small).When we look at what needs to be determined to further assess the situation, the actual costs of selling and administrative need to be calculated. These numbers are in figure 1. Following that we need to determine cost drivers for related activities in all three customer groups; figure 2 shows this. Figure 3 shows the percentage of sales information. Figure 4 shows the cost driver percentages for each customer type. Figure 5 allocates activity costs to customer types. Figure 6 shows the sales and revenues per customer group.
In conclusion, the most profitable customer group is the large size because they have high revenues and low costs. Medium size are still profitable but it holds less revenue. The small size are the largest group for Blue Revenue, which is bad because their profits are negative. Blue Ridge should focus on the large size customer group because it holds the most profits for the firm. If they choose to go nationwide with their products, they need to figure out how to bring more profitability and less costs to the medium and small size groups.ShippingSalesMarketingOtherEntering purchase orders$85,360$6,850Commissions$15,520Shipping activities$21,125$10,275Invoicing$13,700Cost to make sales calls$46,560$6,850Checking credit$6,850Samples & catalog info$1,625$2,970Special handling charges$1,625$3,425Distribution management$3,250$2,970Marketing, by customer type$7,760Advertising/promotions$8,910Marketing$4,875$14,850$3,425Admin office support$13,700Licenses & fees$3,425Figure 1 – Actual costsActivityCost DriverEntering purchase ordersNumber of ordersCommissionsSales dollars (medium)Shipping activitiesNumber of shipmentsInvoicingNumber of invoicesCost to make sales callsSales dollars (large)Checking creditPercent of accounts > 60 daysSamples & catalog infoSales dollarsSpecial handling chargesManagement estimate (20% medium, 80% small)Distribution managementSales dollarsMarketing, by customer typeSales dollarsAdvertising/promotionsManagement estimate (25% medium, 75% small)MarketingNumber of units sold (excludes specials)Admin office supportNumber of units sold (excludes specials)Licenses & feesSales dollars (medium)Figure 2 – Cost drivers