Lecture Illustration – Week 1 Management Accounting and the Value Chain

New Zealand produced fine quality merino wool garments that are highly sought after by the fashion
industry. Merino Designs is a fully integrated company that operates in this industry. It has one particularly
popular product in its range, the Merino Jacket.

Required:

Merino Design management would like to understand the performance of this jacket across the varying
value chain activities. Discuss the following:

1. Do you think Merino Designs are cost leaders or differentiators? Explain Why?

Merino Designs would more than likely be differentiators as Merino wool is recognised for its premium
quality. The retail price is $450/kg (value chain pricing is based on kg wool weight). This is reasonably
high price for garments. Further evidence of a differentiation strategy is that the products are very popular
and are highly sought after by the fashion industry.
 Lecture Illustration – Week 1 Management Accounting and the Value Chain

2. With reference to the table above, how would this information support internal decision making?

Referring to lecture, this information could be used in cost analysis of products and individual value chain
activities.

Referring to lecture this information would help support organisational strategies by highlighting areas for
further investment in assets (capital budgeting) and greater return on investment; areas where further
value-adding activities can be performed to improve profitability and asset turnover (product
development) and, areas that can be outsourced or included in value chain activities (analysis of potential
acquisitions). This information would be useful in monitoring and motivating managers by comparing
budgeted profitability, asset turnover and ROA with actual results. Managers may get bonuses for
improved performance.

In general, this information is high-level summary data and is useful in supporting organisational
strategies and to monitor and motivate. To be useful for operating plans, further detailed information
(that underlies the summary information in the table) would need to be prepared by the management
accountant to help with budgets, product mix and cash flow plans, in order to achieve the financial value
chain targets.

3. What does the term ‘fully integrated’ mean in the context of Merino Designs?

Fully integrated means that the entire industry (wool garments) value chain activities are owned and
performed by Merino Designs. Merino Designs would be like company A. You might also consider the
structure of this organisation. It could be centralized with managers operating each of the different value
chain activities and reporting to a head office. It could also be decentralised and this would depend on the
extensiveness of the product range and the ability for the different value chain managers to get together
and plan. You should also refer to consider the structural and executional cost drivers in this setting.

4. What part of the value chain would you prefer to operate in? Explain why?

There can be varied responses for this question. Profitability is certainly highest in the sheep farming
aspect of the value chain whereas asset turnover is much higher in the retail part of the value chain. The
distributor has the highest return on assets and reasonable profitability and asset turnover, so maybe this
might be a good part of the value chain from a financial perspective. Some students might like the
countryside, fresh air and the enjoyment of farming, rather than the hustle and bustle of retail. Choices
can be financial as well as for a favoured lifestyle and working environment.

5. Refer to ‘The overall value chain’ financial performance. Are Merino Designs performing well?

The financial measures need to be considered alongside others. For example, you need to compare results
with past years performance in order to measure trends (up or down). You could compare results with
competitors to see if Merino Designs are performing better or worse across all aspects of the value chain.
The competitors can be smaller more horizontally integrated (large companies operating in a single part of
the value chain – and achieving economies of scale) or similar vertically integrated companies.