(title page)Recommended Corporate Strategy for MoonsnailCurrently, Moonsnail is part of an industry comprising several similar-sized competitors producing similar soaps, bath, and personal care products of comparable quality, operating within a relatively small market in Eastern Canada and the Northeast United States. If considered in terms of Porter’s Generic Strategies, the entire industry is using a Focus strategy, leaving Moonsnail with the choice of either pursuing a Low-Cost or a Differentiation strategy. Since the critical question facing Moonsnail right now is whether or not the production and sale of Moonsnail Babycream is a financially wise move, the implication is that a Low-Cost focus is best for the company.
Porter’s Generic Strategies, however, are only good for identifying a strategy and no help at all in developing the details, so for that another model must be used. (Sims, 2001) Porter’s Value Chain is a good choice for this, because it considers the full range of Moonsnail’s business activities, and the cost drivers associated with and generated by each of them. (Collier, 2006: 121) The value chain model for Moonsnail thus looks like this: Fig.
1: Moonsnail Value ChainThe Role of Management Accounting in Strategy FormulationEach of the activities shown in Moonsnail’s value chain on page 1 has one or more cost drivers which ultimately affect the margin that Moonsnail can take from its Babycream or any of the company’s other products. The reason management accounting is important in the formulation of strategy is that it provides a common assessment metric which can be applied in both a historical and forward-looking manner to each of these activities, even ones that do not have an obvious financial definition, such as merchandising or customer service activities.
In the historical sense, management accounting can describe current or past costs and help to identify where costs can be reduced, and describe the impact of these costs in terms of a percentage of the margin. Once that impact is understood, forward planning can be done because the effects of planned changes and activities will have a known quantitative result. This is a more internal focus for management accounting than has been traditionally used, but one which some research has indicated is more appropriate.
(Collier, 2006: 49)Financial Analysis of Moonsnail BabycreamThe variable costs for a unit of Moonsnail Babycream, as calculated in the following section, are $1.75/unit. Production of Babycream is estimated to account for 10 to 15 percent of total direct labour, and the total fixed costs based on the 2000 budget statement are $38,091. The projected retail volume of Babycream for 2001 is 1,000 units. Using the Marginal Cost method, the contribution of this volume of Babycream at the projected retail price of $9.95/unit is: [at 10% of total labour]$9.95 revenue - $1.75 variable costs per unit = $8.20 contribution per unit$8,200 total contribution - $3,809.10 fixed costs = $4,390.90 positive contributionAt 15% of total labour, the fixed costs are increased to $5,713.65 and the net contribution is reduced to $2,486.35.The estimated wholesale potential of Moonsnail Babycream is an average of 35 units per month from 10 accounts at a wholesale price of $6.00/unit.
This yields a yearly volume of 4,200 units with a per-unit contribution of $4.25, or $17,850 total. The production of this many units, however, will increase the proportion of labour devoted to the production of Babycream; 4,200 units at 0.14 hours/unit is equal to 588 hours.
Assuming that these hours will have to be added to the total direct labour hours, and that the 1,000 retail units account for 10% of the existing total labour hours, the total proportion of labour hours for the production of 5,200 units is 37%. Therefore: