In analyzing the overall income using the ABC method we find that the sports line is actually losing money. The loss is masked by the earnings from the other two lines. If the firm is to devote more production resources to this line they have to look at the consequences of that change.
Sales are increasing in the sports line. There may be many factors that could be driving this change, a new marketing scheme, a new web site, a region of schools may have picked up on their product and mandated it. It is also possible that they have found themselves the cheapest on the market as their competition has already reviewed the costs and put processes in place to ensure the profitability of that line. It is important that the management determines the reasons for the change in sales volumes. Without that information it is not possible to determine the validity of the increase and how to adjust the business to count for the change.
The firm must also determine the effect of increasing volume to the Sports line on the other two lines, does this change result in lower production rates of the Children’s line and Designer line? Or do they plan to maintain the current levels in those areas. The effect of that decision will affect the costing, overtime maybe a factor. We must also consider that if the sports line was removed there are still many costs that would remain and therefore be transferred to the other lines. Machines for example, these may bring additional resources but they may be un-needed resources and therefore costs.
A full review of the Sports line needs to be completed before any decision can be made. Marketing must determine the reason for the change in sales volume. Procurement must review all materials used and look for cost reductions. These reductions may be with existing suppliers or with alternatives they should also consider different materials with their design team to determine if costs can be saved there. Production must also review the manufacturing...