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TFC CASE _x000D_

1. Using the information provided in the case, can you devise a better way for TFC to
charge its clients for distribution services?

They were also not convinced that overall profitability would improve without significant changes
in marketing strategy. They were still wondering how to use their new ABC analysis to improve th
profitability of TFC. As a way of understanding customer profitability, TFC management reworked
the information in the database as if accounts had been charged service fees based on actual
usage, leaving net sales and product cost the same as before. They recalculated contribution
based on these figures and tried to analyze it.
In general, the big problems faced by Allied are:
Customer Profitability. Not all customers are profitable but very often without ABC; it is very
difficult to know which ones are profitable.
Pricing. Charges for services needed closer scrutiny. It is not fair for two clients who buy the
same amount of product but uses different level of services to pay the same service fee
2. How much would you charge Customer A and Costumer B under this new system?

The cost charges to customers based on current cost accounting system (Traditional
costing system):

Net sales:
Product cost:
Cost of warehouse (20,5%):
Cost of inventory (4,7%)
Cost of freight (7%)
Gross Profit:
Percentage of Profit:

Account A
79,320
50,000
10250
2350
3500
13,220
16.7

Account B
79,320
50,000
10250
2350
3500
13,220
16.7

Now, we will analyze the cost that should be charged to customers based on ABC system. In a
business organization, Activity-based costing (ABC) is a method of allocating costs to products a
services. It is generally used as a tool for planning and control. TFC management called the ABC
based pricing stystem SBP (Service Based Pricing). SBP is a base price for number of customers
plus a charge for additional services or meter points.
The calculation by using ABC system:

Storage charge:

1,550,000
350,000

4.43

TFC CASE _x000D_

ise a better way for TFC to

ove without significant changes


new ABC analysis to improve the
ity, TFC management reworked
service fees based on actual
ey recalculated contribution

Requistion handling charge:

* TFC would process about 310.000 requistions for product in 1


Basic warehouse stock selection:
310.000 * 2,5
* Each request will have an average of 2,5 lines on it.

y often without ABC; it is very

air for two clients who buy the


y the same service fee

B under this new system?

Charge for pick pack:

* Each request will have an average of 2,5 lines on it.


* About 90% of the carton lines would require pick pack activiti

Date entry:

ing system (Traditional

734,000
310.000 * 2,5 * 0,9

612,000
310.000*2,5

* Each request will have an average of 2,5 lines on it.


* According to case: it doesnt matter which customer it is, only
items they order - items = lines.
Charge for desk-up delivery:

* OBS, figure out how to find the 8.500

ers based on ABC system. In a


of allocating costs to products and
FC management called the ABC
price for number of customers

per carton

Other costs:
* Freight out is charged based on actual rates
* Cost of inventory financing is 13% of average oventory balanc
* Inactive inventory will be charged 1,5% per month after 9 mo

TFC CASE _x000D_


Information:

1,801,000
=
310,000
00 requistions for product in 1992
761,000
310.000 * 2,5

5.81

per request
Customer A:

0.98

1.05

age of 2,5 lines on it.

Requestions:
per line
Lines:
Pick pack
Kept in inventory:
Inventory balance:
Freight cost:
per pick packDesk-up delivery:

.000 * 2,5 * 0,9


Total cost:

age of 2,5 lines on it.


would require pick pack activities.
Customer B:
=

0.79

per line

age of 2,5 lines on it.


tter which customer it is, only depends on how many

250,000
8,500

actual rates
3% of average oventory balance
ed 1,5% per month after 9 month

29.41

Requestions:
Lines:
Pick pack
Kept in inventory:
Inventory balance:
Stock kept over a year:
Freight cost:
Desk-up delivery:

TFC CASE _x000D_

3. Based on your an
would you make to

Numbers:
364
910
910
350
15,000
2,250
0

Cost:
2114.72
1612.17
957.62
1550
1950
2,250
0
10434.51

790
2500
2500
700
50000
7000
7500
26

4589.65
4429.03
2630.82
3100
6500
315
7500
764.71
29829.21

Conclusions on analys

Company A costs Allie


potential growth for th
and has the potential
from the new ABC cos
the services rendered
information shows tha
previously charging th

If we use an internal f
numbers from our ABC
other hand B type cus

However, if we move
customers are good. T
type A customers. The
customers are quite d
is low, and there is a r

Our recommendatio
* Today, Activity-Base
picture of the profits a
help company to bett
or customer life time

* Our strategy would


level of pay. In additio
usage. Using the trad
while B type custome

* We encourage TFC t
guarantee that it will
not depends on how w
very often without AB

* TFC should charge it


plus pricing strategy.
products plus service
customers that have t
differently, based on t

* Dont drop out the b


see the unit cost. The
customers, unit cost w
This will cause some o
customers, the unit co

TFC CASE _x000D_

3. Based on your analysis, what managerial and strategic recommendations


would you make to improve TFC profiability?

Conclusions on analysis:

Company A costs Allied less money to service, they are also a much smaller source of
potential growth for the company. Company B on the other hand utilizes far more services
and has the potential to earn Allied much greater revenue. With the information we have
rom the new ABC costing scheme we now know that Allied should be charging far more for
he services rendered to company B, and less for the services used by company A. Current
nformation shows that company B utilizes $13.829,21 more in service costs than we were
previously charging them, while company A is utilizing $ 5.565,49 less.

f we use an internal focus, and analyze the customer profitability based on the result of the
numbers from our ABC system, we will think that A type customers are profitable. On the
other hand B type customers are unprofitable and hence we should drop them.

However, if we move our focus from internal to customer, we will see that B type
ustomers are good. The level of services they use is considered higher when compared to
ype A customers. The fact that we are billing them wrong is our own fault. B type
ustomers are quite dependent on our firm. On the contrary, the level of services used by A
s low, and there is a risk that they can drop out easily.

Our recommendations:
Today, Activity-Based Costing is widely adopted because it provides a more complete
picture of the profits and costs of doing business than traditional cost accounting. It will
help company to better understanding the true product profitability, customer profitability
or customer life time value in any industry fundamentally.

Our strategy would be to maintain the level of B type customers usage and increase their
evel of pay. In addition, maintain the level of pay for A type customers and increase their
usage. Using the traditional system, A type customers are subsidizing B type customers
while B type customers are exploitingthe firm.

We encourage TFC to implement SBP (service based costing) system. But it will not
guarantee that it will improve the profitability of the division. ABC make situation better or
not depends on how we analyze data from the system. Not all customers are profitable but
very often without ABC, it is difficult to know who the profitable ones are.

TFC should charge its customers based on their service usage. We suggest TFC used cost
plus pricing strategy. It means that the customers should be charged based on the cost of
products plus service charge (based on SBP schemes) plus mark-up. So, it will be fair for
ustomers that have the same sales but different level of services to be charged
differently, based on the services they used.

Dont drop out the bottom 20 customers, because the total cost is still the same. Do not
ee the unit cost. The unit cost is unitized fixed cost. If TFC drop out the bottom 20
ustomers, unit cost will go up because the total cost is spread on the remaining customers.
This will cause some of the remaining customers to look unprofitable. So, if TFC drop these
ustomers, the unit cost will be higher.

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