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Case 4

The document discusses an account management system implemented by Kanthal to more accurately measure customer profitability. [1] The previous system could not allocate costs properly and hid unprofitable "hidden loss" customers. [2] The new system calculates individual order costs to identify profitable vs unprofitable customers. It revealed that two large customers were unprofitable when considering order processing costs. [3] Ridderstrale should charge premiums for non-stocked items to see if unprofitable customers will pay more or adjust orders, and focus on high-volume stocked item customers.

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Polina Karpenkova
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113 views

Case 4

The document discusses an account management system implemented by Kanthal to more accurately measure customer profitability. [1] The previous system could not allocate costs properly and hid unprofitable "hidden loss" customers. [2] The new system calculates individual order costs to identify profitable vs unprofitable customers. It revealed that two large customers were unprofitable when considering order processing costs. [3] Ridderstrale should charge premiums for non-stocked items to see if unprofitable customers will pay more or adjust orders, and focus on high-volume stocked item customers.

Uploaded by

Polina Karpenkova
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Karpenkova Polina, MA-22

1. What was the Kanthal president, Ridderstrale, attempting to


accomplish with the Account Management System? Are these
sensible goals?
According to Ridderstrale, resources were evenly distributed among all
products and customers and could not measure the profitability of each
customer or the costs of individual orders. He wanted the company to be
able to cope with the increase in sales volume without a corresponding
increase in support resources. As there were low customers with hidden
costs, as it imposed high demands on personalized services and products,
while on the other hand there were customers who bought standardized
products without any request. Ridderstrale therefore intends to design an
account management system that identifies individual profitability and
allocates resources to the most profitable areas.
Surely these goals make sense because they would help the company
become more profitable by directing its resources to customers with
hidden profits. Now Kanthal can attract the most profitable customers by
identifying customer profitability, product group, all orders received from
customers. These objectives would also allow for the identification of less
profitable customers and the development of a strategy for dealing with
customers who put additional pressure on Kanthal's production and
distribution functions.
2. Why did Ridderstrale feel that the previous cost system was
inadequate for the new strategy? Why could there be hidden profit
and hidden loss customers with the previous cost system? What
causes a customer to be a “hidden loss” customer?
The previous cost system showed that both customers were equally
profitable on a gross margin basis, with overheads based on the
percentage of sales. However, some customers needed the most sought-
after low-margin custom products in the service and were therefore too
expensive for the company, but the previous system could not allocate
costs and profitability accordingly. Therefore, these customers had
hidden costs. There were customers who did not place any orders and
bought standardized products, but based on volume, the costs were
distributed in the same way as other low-margin products. They're
customers with hidden profits.
Second, Customers who had adopted the JIT system, but were putting
great pressure on Kanthal, reducing inventories and placing small orders,
and therefore were the least profitable, customers and could be
considered as hidden customers losses. In the present case, Kanthal could
not measure new orders, the costs imposed on production, the
customers of the processing of orders by these customers, and these
costs were considered fixed and distributed on the basis of volume rather
than individual costs and profitability.
3. How does the new Kanthal 90 Account Management System work?
What new features does it offer? What are its limitations that may
limit its effectiveness?
The new Kanthal accounting statement 90 would allow Kanthal to
determine the order profit and order costs, including costs related to
Kanthal's production, sales and administrative resources. Through
interviews, the project team determined how much of the Department's
expenses were related to volume, and how much of them were related to
production and individual order. The tradition divided the selling and
administrative costs as a percentage of the volume and also applied the
additional costs of handling non-available items to all items instead of
only non-available items. The new system calculated the cost of
production, the cost of storage and non-storage, the cost of order, the
cost of sales and the cost of turnover, thereby helping to determine the
real cost of products. The newer system identified individual profitability,
and also shows the profitability of the customer by product group or by
all orders received from customers.
Since this new system changed the whole cost process and showed the
real cost of products, the cost of ordering several products was high, and
many customers were now balanced or even loss-making customers.
Therefore, people did not believe that the cost of the order is too high.
Accounting for unprofitable customers high indirect costs can affect the

2
operation and sale of the enterprise. As for the adoption of the new
system, the overseas divisions were skeptical of it and were perceived as
the intrusion of the headquarters into their operations.
4. Consider a product line whose products generate a 50% gross margin
(after subtracting volume-related manufacturing and administrative
expenses from prices). The cost for handling an individual customer
order is SEK 750, and the extra cost to handle a production order for
a non-stocked item is SEK 2,250.
a. Compare the net operating profits of two orders, both for SEK
2,000. One order is for a stocked item and the other is for a
not-stocked item.
Stocked items: $2000*50%=$1000-$750 = $250 SEK
Non-Stocked items: $2000*50%=$1000-$2250 = ($1250) SEK
In case of the first order, after subtracting the cost of the individual
order from the net operating profit, the profit comes out to be SEK 250.
As this order is a stocked item, so cost of SEK 2,250 does not apply here.
While in case of the other order, the cost of handling is SEK 2,250 which
makes this order to be a loss of SEK 1,250.
b. Compare the operating profits and profit margins of two
customers, A and B. Both customers purchased SEK 160,000
worth of goods during the year. A’s sales came from three
orders, for three different non-stocked items. B’s sales came
from 28 orders, of which 6 were for stocked items and 22 for
non-stocked items.
Since customer B's sales also contain 22 unaccounted items, which
would cost SEK 49,500, the additional cost of processing an unaccounted
order is SEK 2,250. Thus, after such a distribution, according to the new
accounting system, it can be said that the rate of Return Of A is higher
than B, the total value of customer orders a is 9, 000 SEK, while in the
case of B it is 70, 500 SEK. Operating profit is also SEK 71,000 in case A
and SEK 9,500 in case B.
If you use the traditional method of calculating costs, the cost of both
will be equal, since the total cost of processing individual orders and

3
additional costs for non-stock items will be distributed evenly. The value
of customer a's orders will now be SEK 39,750 instead of SEK 9,000, while
in case B, costs will also be SEK 39,750 well below the actual costs of SEK
70,500. Now, in case A, the operating profit will be reduced from SEK
71.000 to SEK 40.250. In case B, operating profit would increase to SEK
40,250, compared to SEK 9,500.
5. What should Ridderstrale do about the two large unprofitable
customers revealed by the account management system?
The company should concentrate on selling to high volume customers
who purchased stocked items. Efforts should be made to boost orders for
stocked items and move away from non-stocked items. This is under the
assumption that prices will be held constant.
Kanthal management should not necessarily decline the orders for non-
stocked items; rather they should charge a healthy premium for them. By
charging the higher, this allows the company to see how important non-
stocked items are to the customer. If the non-stocked items are of any
importance to the operations of the customer, they will continue to
purchase and pay the premium, or they will try to adjust their operations
so that it will accommodate the stocked items. On the other hand, the
customer could decide to purchase these items from another supplier.
This would definitely have a negative effect on Kanthal’s profitability.

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