31-1
Sloan Styles, Inc.
Teaching Commentary
OVERVIEW
This case is an excellent one to go beyond “simple ABC” and show how ABC must take into account the business
context in which it is applied. The company in the case has no profitability information other than the overall income
statement. With ABC, it is possible to calculate ABC profit by product, by customer, and by order size.
That is usually as far as textbooks and existing cases take the analysis. This case goes further to explore the
two-way interactions between product or customer and order size. It turns out here that product and customer are both
dominated by order size. Thus, a profitable customer is really just one who places large orders. Conversely, an
unprofitable product is just one bought in small orders.
ANSWERS TO ASSIGNMENT QUESTIONS
Questions 1 and 2
The exhibits listed here as 9, 10, and 11 provide the calculations for the three elements of question 1. Exhibits
12-17 provide the calculations for Question 2. We use the same numbering sequence as in the case since these Exhibits,
9 to 17, follow from case Exhibit 8. As noted above, the key insight in Question 2 is that order size dominates both
Question 3
Small orders are a serious drain on profits. Small orders explain why Dillards is a profitable account and
Nordstrom is not. Dillards is only 50% of Nordstrom sales, but profit is +$330 vs. -$160:
• 86% of Dillards styles are for more than 1,000 units vs. 68% for Nordstrom.
• Dillard’s has half the total volume with only forty-three styles versus 240 for Nordstrom.
• Units/Style = 1,748 for Dillards and 658 for Nordstrom
31-2
Of course, it does not necessarily follow that SS
should drop Nordstrom as a customer because they are
unprofitable, per Exhibit 9. Chet Sloan points out three
important reasons why Nordstrom is a valuable customer
to him, in spite of the losses:
1. It creates instant credibility to tell
prospective customers that SS is a supplier
But it is unclear how much these issues are
worth in terms of identifiable profitable orders.
Something must be done to improve overall profitability.
What are management’s choices for the small
orders?
3. Drop the small orders altogether? One
estimate is a $1.2M profit increase on a
$5.6M decrease in sales. The calculations
for the profit impact of dropping all styles
(orders) sold in fewer than 500 units is
shown here as Exhibit A, with supporting
notes.
information systems to provide the
information necessary for basic strategic
analysis. Currently, management is “flying
blind” with regard to key business
information.
3. SS should very carefully analyze the
Talbots’ relationship to see why it works so
31-3
Exhibit A
PROFIT IMPACT IF DROP THE STYLES THAT SELL FEWER THAN 500 UNITS
1998
Projected
% Change
# Styles
1,282
436
–66%
(Note 1)
# Units
1,221,749
1,078,934
–12%
(Note 1)
# Shipments
37,721
29,897
–21%
Net sales
–12%
(Note 2)
Contribution Margin
Overhead Costs Incurred
Customer Service
–17%
(Note 4)
Selling Support
1,129
661
–41%
(Note 5)
Sample Manufacturing
Variable
–12%
(Note 6)
Fixed
1,576
931
–41%
(Note 7)
Purchasing
623
463
–26%
(Note 8)
Materials Handling
–16%
(Note 8)
Production Support
1,802
1,392
–23%
(Note 8)
Shipping
874
788
–10%
(Note 9)
General
(Note 10)
9,945
–19%
Profit before interest & tax
Note 1 Order size mix change:
1998
Projected
Styles
Units
Styles
Units
321
12,767
—
—
525
130,048
—
—
159
112,697
277
966,237
1,282
Note 5 Reduction of selling support staff: three assistants at $74,000 each.
Modeling expense will be reduced by about 35% since there are fewer styles to produce.
No purchased samples cost since the sampling requirements will be filled by own sample manufacturing workers. Courier services cost reduced by 60%. All
other costs in this category kept at 1998 level.
31-5
Question 1: Activity-based profitability analysis by customer (seven largest accounts)
Exhibit 9
TAL
NOR
DIL
JJL
LAN
STM
ORV
Other 178
Total
Contribution Margin
$7,468
$1,953
$ 946
$ 673
$ 749
$ 703
$ 295
$ 766
$ 13,553
Overhead Costs Assigned
Customer Service
305
336
130
177
134
48
46
610
1,786
(Note 1)
Note 1
Per Exhibit 8, Note 1
Note 2
Assigned by styles
Note 4
Assigned at 7% of sales dollars
Note 5
Assigned first by product and then by customer within product, based on actual production volumes as shown in Exhibit 5-A
Sample Making
TAL
NOR
DIL
JJL
LAN
STM
ORV
Other 175
Total $
Pants
120
11
11
6
4
13
1
44
210
Tops
Dresses
5
10
20
6
1
–
4
46
Skirts
59
16
10
5
12
7
3
32
144
Materials Handling
Pants
66
6
6
3
2
8
–
24
115
Tops
Dresses
3
5
11
3
2
–
2
26
Skirts
32
9
6
3
6
4
1
18
79
Selling Support
202
211
38
56
41
53
43
485
1,129
(Note 2)
Sample Manufacturing
366
118
49
42
37
38
17
164
831
(Note 5)
282
295
53
79
57
74
60
676
1,576
(Note 2)
Purchasing
111
117
21
31
22
29
24
268
623
(Note 2)
Materials Handling
(Note 5)
Production Support
322
337
60
90
65
84
69
775
1,802
(Note 2)
Shipping
88
221
25
5
8
41
3
483
874
(Note 3)
Profit before int. & tax
$3,953
$ 330
$ 32
$ 187
$ 151
$ 1,211
31-6
Question 1: Activity-based Profitability Analysis by Product Group
Exhibit 10
Pants
Tops
Dresses
Skirts
Jackets
Total
Contribution Margin
$ 2,920
$ 705
$ 522
$ 3,111
$ 6,295
$13,553
Overhead Costs Assigned
Customer Service
350
191
76
593
576
1,786
(Note 6)
Selling Support
279
117
61
321
351
1,129
(Note 1)
Profit before int. & tax
$ 14
$ (322)
$ (23)
$ (165)
$ 1,707
$ 1,211
Note 1
Assigned by number of styles, assuming that account executives’ time is spent in proportion to number of styles
Note 2
Assigned by equivalent material usage
Note 3
Assigned by styles
Note 4
Assigned by number of shipments
Note 5
Assigned at 7% of sales dollars
Note 6
First assigned by customer per Exhibit 8. Within customer, the assignment is based on actual unit volumes as shown in Exhibit 5-A
per unit
Tops
Dresses
Skirts
Jackets
Talbots
305
535,660
93
16
2
92
101
Nordstrom
336
157,958
33
23
15
96
169
Dillard’s
130
75,163
26
8
49
47
J.Jill
177
61,586
23
67
41
43
4
Lands’ End
134
56,335
13
10
75
37
Stein Mart
48
56,314
15
2
1
15
15
Orvis
46
22,442
2
1
15
28
$ 1,786
1,221,749
$ 350
$ 191
$ 76
$ 593
$ 576
Sample Manufacturing
210
45
46
144
386
831
(Note 2)
390
164
85
449
488
1,576
Purchasing
154
65
34
177
193
623
Materials Handling
115
25
26
79
213
458
(Note 2)
Production Support
445
187
97
513
560
1,802
Shipping
225
49
12
261
327
874
(Note 4)
31-7
Question 1: Activity-based Profitability Analysis by Order Size
Exhibit 11
<100
100 to 500
500 to 1000
>1000
Total
Contribution Margin
$ 101
$ 1,459
$ 1,443
$ 10,550
$ 13,553
Overhead Costs Assigned
Customer Service
28
254
191
1,313
1,786
(Note 5)
Selling Support
283
462
140
244
1,129
(Note 1)
Note 1
Allocation by styles
Note 2
These costs are first assigned by product and then by order size within product based on unit volumes per Exhibit 5-C
Sample Making
$
Units
Cost per unit
<100
100 to 500
500 to 1000
>1000
Jackets
386
405,618
0.95
3
36
35
312
Skirts
144
394,049
0.37
1
12
13
117
Pants
210
287,744
0.73
3
26
19
163
Tops
45
101,301
0.44
1
6
3
35
831
1,221,749
$ 8
$ 94
$ 80
$ 648
Materials Handling
Jackets
213
405,618
0.53
2
20
19
172
Skirts
79
394,049
0.20
1
7
7
64
Pants
115
287,744
0.40
1
14
10
89
Tops
25
101,301
0.25
1
3
1
20
Dresses
26
33,037
0.79
0.2
8
6
12
458
1,221,749
$ 5
$ 52
$ 44
$ 357
Note 3
Assigned by shipments
Note 4
Assigned at 7% of sales dollars
Note 5
Assigned first by customer, per Exhibit 8. Within customer, assigned based on unit volumes as shown in Exhibit 5-B
Total $
Units
Cost per unit
<100
100 to 500
500 to 1000
>1000
Talbots
305
535,660
0.57
0.2
12
16
277
Nordstrom
336
157,958
2.13
7.1
58
42
229
Dillard’s
75,163
1.73
0.5
8
9
112
J.Jill
177
61,586
2.87
1.0
14
34
128
Lands’ End
134
56,335
2.38
0.2
10
17
107
Stein Mart
56,314
0.85
0.2
4
12
31
Orvis
22,442
2.05
0.4
15
10
20
Other 175 customers
610
256,291
2.38
19.0
131
50
410
1,786
1,221,749
$ 28
$ 254
$ 191
Sample Manufacturing
8
94
80
648
831
(Note 2)
395
645
195
341
1,576
Purchasing
156
255
77
135
623
(Note 1)
Materials Handling
5
52
44
357
458
(Note 2)
Production Support
451
738
224
389
1,802
(Note 1)
Shipping
28
153
137
556
874
(Note 3)
General
32
369
323
2,539
(Note 4)
Profit before int. and tax
$ (1,286)
$ 32
$ 4,028
$ 1,211
Question 2: ABC Profitability for Jackets, By Size
Exhibit 12
<100
100 to 500
500 to 1000
>1000
Total
Net sales
$ 188
$ 2,215
$ 2,171
$ 17,472
$ 22,046
Variable COGS
151
1,593
1,512
12,495
15,751
Contribution Margin
37
622
659
4,977
6,295
Overhead Costs Assigned
Customer Service
8
72
55
442
577
(Note 1)
Selling Support
89
138
45
79
351
(Note 2)
Sample Manufacturing
3
36
35
312
386
(Note 3)
124
191
63
488
(Note 2)
Purchasing
75
25
44
193
(Note 2)
Materials Handling
2
20
19
172
213
(Note 3)
Production Support
142
219
72
127
560
(Note 2)
Shipping
54
53
211
327
(Note 4)
Profit before int. and tax
$ (402)
$ (333)
$ 145
$ 2,297
$ 1,706
Note 1
Customer service costs for jackets assigned from customer to order size based on actual units sold as shown in Exhibit 6.
Per unit
Jackets
per Note 6
Units
to Exh. 10
<100
100 to 500
500 to 1000
>1000
Total $
Talbots
177,450
0.57
–
4
5
92
101
Nordstrom
79,569
2.13
3
20
15
132
169
Dillard’s
27,289
1.73
0
3
3
42
47
J.Jill
1,540
2.87
–
1
4
4
Lands’ End
15,445
2.38
2
6
29
37
Stein Mart
17,039
0.85
0
1
7
7
15
Orvis
13,567
2.05
0
8
5
15
28
405,618
$ 8
$ 72
$ 55
$ 442
Assigned by styles
See Note 2 to Exhibit 11
Note 4
Assigned by number of shipments
Assigned at 7% of sales dollars
31-9
Question 2: ABC-based profitability for Tops, by Order Size
Exhibit 13
<100
100 to 500
500 to 1000
>1000
Total
Net sales
$ 76
$ 413
$ 173
$ 2,047
$ 2,709
Variable COGS
60
333
132
1,479
2,004
Contribution Margin
16
80
41
568
705
Overhead Costs Assigned
Customer Service
5
31
14
140
191
(Note 1)
Total
182
316
72
457
1,027
Profit before int. and tax
$ (166)
$ (236)
$ (31)
$ 111
$ (322)
Note 1
Customer service costs for tops assigned from customer to order size based on units sold
as shown in Exhibit 6.
Per unit
per Note 6
Units
to Exh. 10
<100
100 to 500
500 to 1000
>1000
Total $
Talbots
28,871
0.57
–
0.2
0.3
15.9
16
Nordstrom
10,920
2.13
0.6
4.5
1.7
16.4
23
Dillard’s
4,352
1.73
–
–
7.5
8
J.Jill
23,153
2.87
0.5
4.6
8.9
52.5
Lands’ End
2.38
–
–
Stein Mart
2,340
0.85
–
0.5
1.5
2
Orvis
672
2.05
1.4
$ 5
$ 31
Note 2
Assigned by styles
Note 3
See Note 2 to Exhibit 11
Note 4
Assigned by number of shipments
Note 5
Assigned at 7% of sales dollars
Selling Support
36
50
9
22
117
(Note 2)
Sample Manufacturing
1
6
3
35
45
(Note 3)
51
70
12
31
164
(Note 2)
Purchasing
20
28
5
12
65
(Note 2)
Materials Handling
1
3
1
20
25
(Note 3)
Production Support
58
80
14
35
187
(Note 2)
Shipping
5
19
2
23
49
(Note 4)
Question 2: ABC Profitability for Jackets, by Order Size (per Exhibit 12)
Exhibit 14
<100
100 to 500
500 to 1000
>1000
Total
Contribution Margin
$ 37
$ 622
$ 659
$ 4,977
$ 6,295
Total assigned overhead
$ 439
$ 955
$ 515
$ 2,680
$ 4,588
Profit before int. and tax
$ (402)
$ 144
$ 2,297
$ 1,707
Conclusion:
Even a profitable product like jackets is unprofitable in small orders
ABC Profitability for Shirts by Order Size (per Exhibit 13)
<100
100 to 500
500 to 1000
>1000
Total
Contribution Margin
$ 16
$ 80
$ 41
$ 568
$ 705
Total assigned overhead
$ 182
$ 72
$ 452
$ 1,027
Profit before int. and tax
$ (166)
$ 116
Conclusion:
Even an unprofitable product like tops is profitable in large orders
31-11
Question 2: ABC-based Profitability for Nordstrom, by Order Size
Exhibit 15
<100
100 to 500
500 to 1000
>1000
Total
Net sales
$ 133
$ 1,181
$ 761
$ 4,018
$ 6,093
Variable COGS
102
833
514
2,691
4,140
Contribution Margin
31
348
247
1,327
1,953
Overhead Costs Assigned
Customer Service
7
58
42
229
336
(Note 1)
Selling Support
45
104
24
38
211
(Note 2)
Profit before int. and tax
($202)
($328)
($4)
$373
($160)
Note 1
Assigned from Customer (Exhibit 9) to order size per the volume data in Exhibit 5-B
Note 2
Assigned by styles
Sample making and materials handling costs for Nordstrom are assigned from customer (Exhibit 9) to
order size based on units sold as shown in Exhibit 5–B
Materials Handling
Note 4
Assigned by number of shipments
Assigned at 7% of sales dollars
Sample Manufacturing
Variable
63
145
34
53
295
(Note 2)
Purchasing
25
57
14
21
117
(Note 2)
Materials Handling
1
11
8
44
65
(Note 3)
Support
Shipping
8
34
23
156
221
(Note 4)
Question 2: ABC-based Profitability for Dillard’s, by Order Size
Exhibit 16
<100
100 to 500
500 to 1000
>1000
Total
Net sales
$ 11
$ 188
$ 201
$ 2,747
$ 3,147
Variable COGS
8
128
138
1,927
2,201
Contribution Margin
3
60
63
820
946
Overhead Costs Assigned
Customer Service
0.5
8
9
112
130
(Note 1)
Selling Support
3
11
7
17
38
(Note 2)
0.2
3
4
42
49
(Note 3)
5
15
10
23
53
(Note 2)
Purchasing
2
6
4
9
21
(Note 2)
Materials Handling
0.1
2
2
23
27
(Note 3)
Support
Shipping
1
2
4
18
25
(Note 4)
Profit before int. and tax
$ (16)
$ (17)
$ (2)
$ 365
$ 330
Note 1
Assigned from Customer (Exhibit 9) to order size per volume data in Exhibit 5-B
Note 2
Assigned by styles
Note 3
Sample making and materials handling costs for Dillard’s are assigned from customer (Exhibit 9) to
order size based on units sold as shown in Exhibit 5–B
Materials Handling
Note 4
Assigned by number of shipments
Note 5
Assigned at 7% of sales dollars
31-13
Question 2: ABC Profitability for Nordstrom, by Order Size (per Exhibit 15)
Exhibit T 17
<100
100 to 500
500 to 1000
>1000
Total
Contribution Margin
$ 31
$ 348
$ 247
$ 1,327
$ 1,953
Conclusion:
Even an unprofitable customer like Nordstrom is profitable in large orders
ABC Profitability for Dillard’s, by Order Size (per Exhibit 16)
<100
100 to 500
500 to 1000
>1000
Total
Contribution Margin
$ 3
$ 60
$ 63
$ 820
$ 946
Total assigned overhead
$ 19
$ 77
$ 65
$ 455
$ 616
Profit before int. and tax
$ 365
$ 330
Conclusion:
Even a profitable customer like Dillard’s is unprofitable in small orders
So What?
Total assigned overhead
$ 676
$ 251
$ 954
$ 2,113
Profit before int. and tax
$ 373