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Chapter 16
Accounting and Strategic Analysis
Answer to End of Chapter Exercises

Q 16.1
The basic model costs 16. For a further 7 it would be possible to add an ability to
both toast 4 slices and defrost. This will give a variable cost of 23. The current
margin to retailers is 2 and the manufacturer would want to generate at least the
same contribution from this model i.e. achieve a price to the retailers of 25.
Reservations:
i) Information on the size of the market is not provided.
ii) Sales of the new model may mean that sales of the basic model are reduced.
iii) There may also be an impact on sales of other kitchen equipment. Presumably the
new model will be particularly popular with families. The new model could result in
additional sales of other products if consumers wish to purchase products with a brand
name.

Q 16.2
The chapter has reviewed a number of potential areas where accounting information
may be of help in the strategic analysis process:
1) Accounting information that can assist in the assessment of the current and likely
future competitive position of the organisation in target markets.
- industry profitability analysis, market segment and customer profitability
analysis. The existing customer profitability statement appears to allocate overhead
costs on an arbitrary basis, which is not helpful for decision making.

2) Accounting information appropriate for differing strategic positions (e.g. cost

leadership or differentiation) and at different stages of the business life cycle.
- In this market it could be argued that companies follow a confrontation strategy
e.g. low price and additional product features. Target costing and close liaison with
suppliers (inter-organizational systems) are likely to be important as the organization
will be competing on functionality.
Cost control, product line profitability and kaizen costing are also likely to be
necessary techniques.

3) Analysis of the tangible and intangible resources of an organisation.

- assessment of utilization of tangible assets using ratio analysis.
- This company has existing company loyalty and there is consumer awareness
of the brand name. Consider the work of Roslender and Hart. Value is also embedded
in a number of other intangible assets including marketing rights and customer lists,
customer and supplier relationships and an assessment of these could be of value.

4) Analysis of the value chain of the organisation and a comparison with that of
competitors.
- It may be often be difficult to obtain competitor information to the level of detail
required. Some information has been obtained about two competitors of Siegmund
Ltd and is provided in , although at a more aggregated level of analysis than would be
desired.

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-Cost driver analysis. It seems likely that key competitors are achieving economies of
scale and experience effect benefits with higher volumes of some products. Siegmund
needs to consider action it can take to achieve lower costs. Executional cost drivers
(discussed further in chapter 22) may be of assistance. Additional investment in new
capital equipment and/or changes to the production management system (e.g.
employing some methods consistent with a JIT system) should be evaluated.
- Developing sustainable competitive advantage. At present it seems that Siegmund is
neither able to deliver lower costs than competitors or higher quality or functionality.
As indicated above additional investment and executional cost driver change is likely
to be necessary.

5) Assessing the potential impact of environmental change on the organisation.

Consumer demand is likely to be depressed for the next two years, though long-term
increases are likely. Different scenarios should be developed and the impact on
Siegmund given these different scenarios should be considered.

Q 16.3
Siegmund % Competitor % Competitor %
Ltd 1 2
Sales revenue 53 100.0% 40 100.0% 50 100.0%
( m)
Production costs 32 60.4% 18 45.0% 54.0%
(m) 27
Marketing costs 1.5 2.8% 3 7.5% 2.8 5.6%
(m)
Research and 4 7.5% 6 15.0% 5 10.0%
Development
(m)
Other costs 15 28.3% 9 22.5% 10 20.0%
(m)
Net profit 0.5 0.9% 4 10.0% 5.2 10.4%
(m)
Assets 35 1.4% 30 13.3% 28 18.6%
employed (m)

An analysis of the ratios of Siegmund Ltd compared to the competitors does provide
some useful information. In particular the two competitors are investing a much
higher percentage of sales in marketing and research and development. Both
competitors have lower production costs, in particular competitor 1, which has been
investing in new manufacturing equipment in recent years.

A fully detailed analysis of the value chain of Siegmund Ltd and its competitors has
not been provided. Details of the primary activities of the value chain would be of
interest to explain the very substantial difference in production costs between
Siegmund Ltd and competitor 1. A detailed analysis of the areas on which expenditure
of research and development is taking place would also be highly beneficial. In
absolute terms competitor 1 is spending twice the amount as Siegmund Ltd.

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Q 16.4
Given the information provided, it seems that there has been a lack of investment at
Siegmund Ltd in previous years. The emphasis on budget achievement may be partly
to explain for this with necessary investment in research and development and
production facilities avoided in the interests of short-term gain.

Q 16.5
It is very difficult to know what the positioning strategy of Siegmund Ltd has been, let
alone the type of information that would be appropriate. The question has partly been
answered in question 16.2
In this market it could be argued that companies would need to follow a
confrontation strategy e.g. low price but updating product features is also important.
Cooper (1996) argues that for 6 cost management techniques. Variance analysis,
profitability analysis and kaizen costing to support existing products and Target
costing, value engineering and close liaison with suppliers (inter-organisational
systems) to help manage new products.

Q 16.6 Customer A Customer B

Sales 9,000 9,000
cost of sales 4,000 4,500
Gross profit 5,000 4,500
purchase orders 200 2,800
delivery cost (1) 250 625
delivery cost (2) 50 625
Customer profitability 4,500 450

The information suggests a significantly different level of profit to that

revealed using a traditional method of allocating costs. Care should be taken
in interpretation however as some of these costs are likely to be fixed and not
change because of the need to service the customer.

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Q 16.7 Traditional costing

Customer X Customer Y

Sales 30,000 15,000
cost of sales 15,000 7,500
Gross profit 15,000 7,500
other costs 7500 3750
Net profit 7,500 3,750

Activity based costing

Customer X Customer Y

Sales 30,000 15,000
cost of sales 15,000 7,500
Gross profit 15,000 7,500
sales orders 7000 2,100
sales visits 3000 1,500
number deliveries 6000 3,000
Special deliveries 12000 600
Customer profitability -7,000 3,300

The analysis suggests that customer X actually generates a negative

contribution to general overheads. A more detailed analysis of this customer
is required to identify why so many special deliveries are required.

Q 16.8 using GAAP

Brand Y
Contribution 1,400,000
Identifiable fixed costs 800,000
Contribution 600,000

Using residual income

Brand Y
Contribution 1,400,000
Identifiable fixed costs 400,000
Contribution 1,000,000
Interest charge on investment 40,000
Net residual income 960,000

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Q 16.9 Quote for first 8 units

material cost 480.00
labour cost (note 1) 737.28
1217.28
mark-up 25% 304.32
Selling price 1521.6
Note 1
labour hours per unit for 8 units. Average time = 20 x 0.8 x0.8 x 0.8 = 10.24
hours per unit.
8 units and 9 per hour = 10.24 hours x 8 units x 9 = 737.28

Next 8 units
material cost 480.00
labour cost (note 2) 442.37
922.37
mark-up 25% 230.59
Selling price 1152.96
Note 2
8.192 hours per
labour hours for 16 units = unit
16 units and 9 per hour = 8.192 hours per unit x16 units x 9 per hour =
Labour cost for additional 8 units = 1,179.65 - 737.28 = 442.37

A price of 1,100 would not achieve the desired 25% mark-up on variable
however it would generate a contribution of 177.63 towards general
overheads.

2008 John Wiley & Sons Ltd.

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Q 16.10 Quote for first 4 units

material cost 280.00
labour cost (note 1) 259.20
539.20
mark-up 20% 107.84
Selling price 647.04
Note 1
average labour hours per unit for 4 units =8 hours x .9 x.9 = 6.48
hours
4 units and 10 per hour = 6.48 hours x 4 units x 10 = 259.20

Next 4 units
material cost 280.00
labour cost (note 2) 183.17
463.17
mark-up 20% 92.63
Selling price 555.80
Note 2
labour hours for 8 units = 5.832 hours per unit
8 units and 10 per hour = 5.832 hours per unit x8 units x 10 per hour =
Labour cost for additional 4 units = 442.37- 259.2 = 183.17

A price of 600 would exceed the desired 20% mark-up on variable cost.
generate a contribution of 177.63 towards general overheads.

Q 16.11
10,000 = 2,000 units
5

20,000 = 2858 units

7

Advice depends on the expected sales, margin of

safety

2008 John Wiley & Sons Ltd.

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