Current product range
Windows
For many years, Vunderg has manufactured UPVC window frames used for residential house building.Vunderg buys the glass from an external supplier, inserts it into a frame and sells the completed window units to a small number of large construction companies.These window units all have standard designs, specifications and sizes.This market is very competitive, and Vunderg must offer a complete range of windows for sale to the construction companies.
Glasshouses（温室）
Five years ago, Vunderg developed a range of small garden glasshouses, for non-commercial use, made of attractive and high quality materials.After initial quality problems due to the use of materials and manufacturing methods new to Vunderg, glasshouse production is now efficient, quality is high and the glasshouses now command premium prices.
The glasshouses are sold nationwide through 40 retailers, who vary significantly in the size of orders they place and the level of customer support and trade discounts which they receive from Vunderg.As a result, the profitability of selling to different retailers, or types of retailer, varies significantly.
Loss making products identified using ABM are often those which are highly customised and produced in low volumes, such as the conservatories.By using ABC principles, Vunderg could identify the high overhead costs of the sourcing of special materials and finishes for these by the procurement department.Using ABM, Vunderg could take action to reduce these costs, for example, by standardising the range of materials and finishes used, so that the procurement department spends less time sourcing them.The conservatories earn 8% of Vunderg’s total contribution in 20% of the factory space.This implies that conservatories account for a disproportionate level of factory overheads.
Review of costs, prices and designs
By understanding what drives the costs of a product, Vunderg can take actions to make an unprofitable product profitable, for example, in response to the initial quality problems when the glasshouses were first manufactured, but which now command premium prices.The use of ABM may have led to a faster resolution of these initial quality problems by identifying the causes, or drivers, of the product cost and taking action to manage these.
The manufacturing process after many years will already be efficient.The costs may already be well understood and controlled, in which case the implementation of ABM may not be worthwhile.Vunderg does, however, need a good understanding of the overhead costs, as the residential windows market is competitive.
As windows are highly standardised, Vunderg may be unable to pick and choose which items to produce.Design, specificationand size will be dictated by the large construction companies who buy them and who will expect Vunderg to supply a complete range of windows.
These companies would just buy from a competitor if Vunderg stopped producing the items they needed.As this market is very competitive, there may be little Vunderg could do to improve profitability, for example, by increasing prices,so the use of ABM to choose which products to sell could therefore be of little use.Similarly, as there are only a few largeconstruction companies, the use of ABM may also not be worthwhile as Vunderg could not realistically stop trading with any one of them, nor could it raise prices because of the competitive market.
Incorrect decisions
Despite the difficulties in using ABC, for example, in identifying cost drivers, the use of cost drivers to charge overhead costs toconservatories should give a clearer indication of their profitability than under the current system.Vunderg can then take action to increase the profitability of these products, for example, by increasing the prices or reducing the costs.
The decision on whether these products should be discontinued should, however, take into account the effect on glasshouse sales as customers like to buy glasshouses which match the materials used in the conservatories.Discontinuing conservatories could reduce contribution from glasshouses by up to 17·1% （650/3,800）, a total loss of contribution of approximately $166,000 （17·1% of $969,000）, which is significant.As conservatories are at the start of their life cycle, expecting them to be profitable immediately could be unrealistic.
Just because a large proportion of factory space is dedicated to manufacturing conservatories does not mean that thesecosts will be saved in the short term if the products are discontinued.The depreciation or lease costs of the factory are fixed.Vunderg’s main business is saturated and there is no prospect that the factory space could be better used in making other products.The factory may already not be fully utilised.
