Casemix

Solution

V. Malleret & C. Mendoza 1

Key data on markets and products
Coffee-Maker Hair-Dryer Food-Processor
Volume/month 7 000 15 000 4 400
Price €41 €58 €75
Percentage of sales 19 % 59 % 22 %
Transactions
Set ups 1 5 10
Deliveries 1 7 22
Suppliers contacts 2 2 4
Customers visited 1 4 10
Complexity- Innovation
New products 1 2 3
# components 4 5 10
Niche strategy Very Less
Only one competitive competitive
Market characteristics
customer Price war Possibility to
increase price 2
V. Malleret & C. Mendoza
Casemix’ Cost Structure

Direct costs = €518 640

Indirect costs = €705 520

 Very large proportion of OH (58%)

 Highly differentiated products
 Signals coming from the market
=> Question the costing system!

V. Malleret & C. Mendoza 3

 Full cost current method

Calculation of the Overhead rate

Total indirect costs: €705 520
Total number of labor hours: 0.5 x 7,000 + 1 x 15,000 + 0.8 x 4,400
= 22,020 hours
Overhead rate = 705 520/22 020 = 32.04

CM HD FP
Direct costs 14 22 20.6
Indirect costs 0.5 x 32.04 = 16.02 32.04 25.632
Total cost 30.02 54.04 46.232

V. Malleret & C. Mendoza 4

Direct costs – New method

In €/unit CM HD FP
Components 8 10 11
Direct labor cost
6 12 9.6
(€12/h)
Total direct costs
14 22 20.6
(current method)
Set up labor costs 0.12 (1) 0.392 3
Total direct costs
14.12 22.392 23.6
(new method)

(1) 0.12 = 70 labor hrs x €12 x 1 set up /7 000 products

V. Malleret & C. Mendoza 5

 Indirect costs ABC method
Direct costs
• Components
• Labor costs
• Set-up labor CM
€5 000/supplier
Contact suppliers

Handling €775.2/trans.
HD
components

€5 000/set-up
Production
planning
FP
Manufacturing

.
. V. Malleret & C. Mendoza 6
.
 Cost of cost drivers (1)

Indirect Nb. of cost Cost of one

Activities Cost driver
costs drivers cost driver

Contacting suppliers €5 000/

€40 000 # suppliers 8 suppliers
and placing orders supplier

# different
Handling of components per 129 €775/
€100 000
components set-up x # transactions transaction
machine set ups

Planning and
€5 000/set-
monitoring €80 000 # set-ups 16 set-ups
up
production
# machine
Manufacturing €180 000 11 880 hrs €15.15/hr
hours

V. Malleret & C. Mendoza 7

 Cost of cost drivers (2)

Indirect Nb. of cost Cost of one

Activities Cost driver
costs drivers cost driver
Maintaining the # machine
€45 600 11 880 hrs €3.84/hr
equipment hour
# products €0.76/
Product packaging €20 000 26 400
packed product
Delivering products €3 333/
€100 000 # deliveries 30
to clients delivery

# new
€5 000/new
Product promotion €30 000 products 6
product
launched

# customers €6 000/
Client follow-up €90 000 15
visited customer

V. Malleret & C. Mendoza 8

 Full costs ABC method
CM HD FP
Direct costs 14.12 22.392 23.6
Contacting suppliers 2 s. x €5 000/7 000
0.67 4.54
= €1.429
Handling components 0.44 1.29 17.62
Planning production 0.71 1.67 11.36
Manufacturing 7.57 7.57 3.03
Maintaining equipment 1.92 1.92 0.77
Packaging 0.76 0.76 0.76
Delivering 0.48 1.56 16.67
Promotion 0.71 0.67 3.4
Client follow-up 0.86 1.6 13.64
Total cost 29 40.10 95.39
V. Malleret & C. Mendoza 9
 Comparison of costs and profits per
product line with the 2 methods

CM HD FP
Selling price 41 58 75
Current cost method 30.02 54.04 46.23
Profit per unit current 10.98 3.96 28.77
method
Total Profit - current 76 860 59 400 126 588
method
Cost ABC method 29 40.10 95.39
Profit per unit ABC method 12 17.9 - 20.39
Total Profit – ABC method 84 000 268 500 - 89 716

Should we stop the FP’s

V. Malleret & C. Mendoza production??
10
 Recommendations
CM HD FP
% of revenues 19 % 59 % 22 %
Few competitors,
Niche High volumes,
Market possibility to increase
market price competition
price
Profit with ABC
€84 000 €268 500 €- 89 716
method

Profit rate 29 % 31% - 27 %

Follow the price Increase price to

decrease increase margins on a
imposed by product consuming lots
TO DO
competition to of resources
maintain Analyze processes to
volumes reduce costs
V. Malleret & C. Mendoza 11
Driving costs down of the FP?
focus on least efficient processes

 Product design: limit number of

parts/components (& number of suppliers?)
 Production process: reduce number of set ups by
increasing batch sizes?
 Customer service: reduce frequency of deliveries
& increase # units per delivery, reduce #
customer visits per month

V. Malleret & C. Mendoza

12