The other category is still nearly 20% of the total cost. Management needs to fullyunderstand what goes into that cost and reduce cost wherever possible. It is difficult tojudge whether the activities are value added or non-value added until better informationis available.The only activity that is clearly value added is making the product. However, based onthe ABC analysis, making accounts for only 27% of the total cost. Although the SoapTeam Manager and accountant based the ABC analysis on several assumptions, it providesmanagement information that they can use to reduce or eliminate non-value-addedactivities.The response in Exhibit 7 answers both Requirements 4 and 5, but many students
answer these questions separately. Students commonly respond to Requirement 5 thatmanagement should eliminate the Tiny Bar from Consumer Brands’ product line.However, the case does not contain enough information to allow students to make that recommendation.After we return the case, we discuss items management should considerbefore making product line decisions and other strategic implications of the case.Exhibit 8 presents several items management should consider in light of the ABC studybefore making product line decisions.Exhibit 8. Consumer brands inputs into product decisions.. Can consumer brands increase the sales price of the Tiny Bar? Market factors, not costnormally establish prices. Under costing of products often leads to under pricing. Competitionwill normally indicate over costing and overpricing, but the market indicatesunder costing and under pricing much less lucidly. A pump manufacturer, forexample, asked the authors why his sales force was so enamoured with the sale of specialtypumps. The answer was that the pumps were under costed; therefore, under pricedand easy to sell.Instructional Case—Activity-based Costing 399. Will demand for the company’s other products change if the company eliminates theTiny Bar? For example, does Consumer Brands sell the Tiny Bar to institutions suchas hotels and motels that will stop purchasing other company products if the TinyBar is not available? If Consumer Brands’ customers view the three bar sizes as substitutesfor each other, then sales of the other two sizes may increase. If customers viewTiny Bar as a product that complements the other two bars, then sales of the othertwo sizes may decrease.. Will Consumer Brand’s costs actually decrease if they eliminate the Tiny Bar and if soby how much? Only five employees work exclusively on Tiny Bar production. Labour
cost will decrease by those five employees, but other costs may or may not decrease.. If demand for the other two sizes does not increase, there may be additional downtimewhere the company is not producing product and subsequently not earning revenue.