Product-Mix Decision Integrated with ABC for Better Profitability Management: The Case of Communications Equipment Firm in Taiwan

Chiao Da Management Review 的 1.32NO.2, 2012 pp.37-76

產品組合決策結合作業基礎成本制度

以提昇企業獲利之研究一以台灣通訊

設備公司為例

Product-Mix Decision Integrated

with

ABC for Better

Profitability Management: The Case of Communications

Equipment Firm in Taiwan

戴怡蕙 1 Yi-Hui Tai

國立台灣大學會計學系暨研究所

Department of Accounting, National Taiwan University 王文英 Wen-Ying Wang

國立政治大學會計學系

Depa此mentof Accounting, National Chengchi University 張玉輝 Yu-HueiChang

台灣可億隆股份有限公司總經理室

General Manager Department, Coiler Corporation

摘要:過去關於產品組合決策的研究，主要分為兩大類，一類為針對不同的 成本制度進行比較，另一類則是採用電腦模擬或數學模型推導出最通產品組 合決策 。 然而，產品組合決策建構過程的思考邏輯比最終祭構更具關鍵性， 因為思考及評估過程中的完整性決定最終祭構的適用性 。 又因為投標市場 中，投標廠商可能有多種不同成本的產品同時符合投標規格需求，且每一個 標案都對投標公司的損益有重大影響性，因此在電信投標市場中適宜的訂價 及產品組合決策更是重要 。 故本研究選擇以一家通訊設備廠商為個案公司， 深入探討該公司如何在電信投標市場中籍由導入作業基礎成本制度 (ABC) 與改革產品組合決策，來提昇公司的獲利 。

1 Corresponding author: Department of Accounting, College ofManageme帥，National Taiwan Universi旬，Taipei City, Taiwan. E-mail: y出uitai@ms54.hinet. net

38 月'oduct-MixDecision lntegrated with ABC for Better Pr，吶。bilityManagement -The Case ofCommunications Eqllipment Firm in Taiwan

個案公司改革後的產品組合決策像以市場導向策略規劃方式為出發點， 亦即先考量願景，再接績考量內外部環境及公司定位後，最後推導出公司的 產品組合策略 。 再根據前述策略推衍出公司的產品組合決策考量因素 。研究 結果顯示相較於改革前，改革後的累積毛利約為改革前的 3.13 倍，而累積淨 利則為 27 倍;故本研究結果有助於補充以往產品組合決策相關研究之缺口， 並可供產業界參考之用 。 關鍵詞:產品組合決策;市場導向策略規劃方式;件業基礎成本制度;投標 市場

Abstract : The Iiterature on product-mix decisions can be categorized into two groups. The studies in the 白rstcategory compare different cost systems, whereas studies in the second category determine the best product-mix decision using computer simulations or mathematical models. However

,

product-mix decisions are important not only for the final structure of the product-mix but also for the decision-making process. The comprehensiveness of the decision-making process has a pi votal e仔ecton the appropriateness of the outcome. In particu1ar

,

in the telecommunications bidding market

,

pricing and product-mix decisions are indispensable. This is because of certain specia1 features of the telecommunications bidding market. Producers may have many products that conform to the specifications of buyers, but these wou1d have different prices Each bidding project can have a huge impact on a company's profit or 10ss. This study considers a communications equipment company operating in the te1ecommunications bidding market and examines how this company can increase its profits by using activity-based costing to improve its product-mix decision

After making the improvement, the product-mix decision of the company is based on a market-oriented strategic p1anning method in which the vision is first c1arified. Then, it is fol1owed by an analysis of the intema1 and externa1 environments. Next, the company's positioning choice is made; final1y, the company's product-mix strategy is derived. According to the company's product-mix strategy

,

the main factors that influenced the product-mix decision are deduced. The resu1ts revea1 that the accumu1ated gross profit after the improvement was 3.13 times greater than that before the improvement, and the

Chiao Da Management Reνiew Vol. 32 No. 2, 2012 39

accumulated net profit after the improvement was 27 times greater than that before the improvement. The results of this study complement the existing literature and provide implications for companies in the bidding market

Keywords: Product-mix decision; Market-oriented strategic planning method; Activity-based costing (AB

C);

Bidding market

1.

Intr

o

ducti

o

n

In recent years, accelerated technological innovation has increased competition and shortened product life cycles; meanwhile, customers have also developed diverse and refined tastes. In response to these changes in the technological environme肘， product diversification and production automation have emerged as two m句 or 甘ends in c。中orate management. These trends have brought about two effects. First, product diversification has made product-mix decisions and management issues the two most important concems for corporations. Second, production automation and the increase in the percentage of indirect costs have made the appropriate allocation of indirect costs a very important factor in determining whether product costs can be calculated accurately. ln fact

,

there is a close correlation between product-mix decisions and proper calculations of product costs (Johnson and Kaplan, 1987). Customer preferences differ

,

and the resources that companies devote to different products and customers vary. Therefore, product cost not only affects selling price but also production strategy (Huang et al., 2010). lf a company cannot accurately calculate costs

,

it will make erroneous decisions and suffer additional losses from selling a higher quantity of products than is necessary. For example

,

when there is no direct cause-and-effect relationship between the majority of indirect costs and volume-related allocation bases

,

the traditional cost allocation method (which depends on volume-related allocation bases) leads to what is called cross-subsidization. This, in tum, results in erroneous management decisions regarding product mix and product pricing (Cooper and Kaplan, 1988, 1992; Kaplan

,

1989). However

,

activity-based costing (AB

C),

which has been proposed

40 Product-Mix Decision lntegrafed wifh ABC for Beffer Projìtability 蜘nagement -The Case ofCommunications Equipment Firm in Taiwan

as a means of overcoming the flaws of traditional costing

,

uses various drivers (inc\uding volume-related allocation bases and non-volume-related allocation bases) to allocate costs. This is expected to improve the acc盯acyof product cost caIculations and to lead to an increase in the appropriateness of management decisions.

Certain features of the telecommunications industry

,

such as the large investment size, limited number of producers, transmÍssion constraints, and transmission losses (David and Wen

,

2000)

,

produce stability for both buyers and producers. Also

,

each bidding project can have a huge irnpact on a producer's profit or loss. Producers may forego tens of millions of New Taiwan dollars in revenue if they do not win a bid; however

,

they cannot afford to suffer losses for the sake of outbidding competitors. Furthermore

,

in the telecommunications bidding market, a producer's product specifications should conform to the requirements of buyers. Producers may have many products that conform to a buyer's specifications, and each product will have a different cost. Therefore, pncmg and product-mix decisions are key issues in the telecommunications bidding market. In addition

,

because the investment size in the telecommunications industry is very large

,

properly allocating indirect costs is crucial for making appropriate pricing and product-mix decisions

Product-mix decisions have long been the subject of wide-ranging discussions in management and economics. However

,

previous research has often focused on the relationship between the Theory of Constraints (TOC), ABC, Iinear planning or mathematical models, and product-mix decisions. Rarely has research used a real case study to investigate how a company should practically proceed with a product-mix decision. A significant amount of research has examined the relationship between market structure and the efficient bidding strategy for producers. In general

,

there are three methods for developing an optimal bidding strategy: estimating the market-c\earing price

,

predicting a rival 's bidding behavior, and using a game theory model. However, these methods are more appropriate for analyzing the poten討almarket power than for constructing a bidding strategy. This is because many simplifying assumptions have been established in applying these methods (David and Wen

,

2000). Our research is

Chiao Da Management Reνiew Vol. 32 No. 2, 2012 41

unprecedented because, unlike past research, our study is based on the case study of a real company. We have researched how this company improves its product-mix decisions in the bidding market.

A product-mix decision is a multi-faceted framework that includes many variables, and it produces different product-mix decision results according to the weights and priorities that the firm assigns to the variables. However

,

firms might have to take into account certain common variables and a common framework Consequently, when studying the product-mix decision, it is not sufficient to focus on any particular variable. It is also necessary to emphasize the framework of the entire product-mix decision from a macro viewpoint. Furthermo時， the product-mix decision is important not only for the final framework of the product mix but also for the decision-making process. The comprehensiveness of the decision-making process has a crucial effect on the appropriateness of the framework. Therefore

,

this study examines how the company being studied generates a profit by using ABC to improve its product-mix decision in the te1ecommunications bidding market. This study complements the existing literature and provides implications for companies in the bidding market.

2. Literature Review and Initial Construction of the

Product-mix Decision

2.1. The Effect of the Cost System 00 the Product-mix Decisioo Kaplan and Cooper (1998) have identified the ABC method's effects on product-mix management. 1n the traditional costing system, direct labor hours or direct labor costs are often used as the base for allocating indirect costs and support costs. However, because indirect costs and sUPPort costs are very weakly correlated with direct labor, the use of the traditional costing system often leads to an inaccurate assessment of product costs; this !eads to an erroneous product-mix decision. However

,

a company can correctly attribute indirect costs and support costs to products under ABC using resource drivers and activity drivers. Lea and Fredendall (2002) found that the effects of a product-mix decision model based on

42 Produc/-Mix Decision Integraled with ABCfor Beller Projìtabi/ity Management -The Case ofCommunications Equipment Firm in Taiwan

ABC are superior to the traditional costing system because ABC is more sensitive to changes in extemal factors. Sievanen et al. (2004) used a case study method to substitute numbers from a real case into the ABC system and analyzed the factors ofthe company's profitable products using the drivers ofABC system.

The results of Low (1992) and Spoede et al. (1994) support the view that the TOC can produce a more profitable product-mix decision model than ABC However, Kee (1995) found that ABC could produce a more profitable product-mix decision model than the TOC when capacity costs are taken into account. Many subsequent studies used the aforementioned viewpoint as the basis for comparing the merits and f1aws of ABC and TOC product-mix decision models. However, these studies did not achieve any breakthroughs

Sridharan et

a

l. (2009) proposed using asset specificity as the standard criterion for product-mix decision systems. If a c。中oration has high asset specificity, i.e., it has more directly attributed costs, using the ABC method is recommended. Bakke and Hellberg (1991), Holmen (1995), and MacArthur (1993) have all proposed the compromise position that ABC and the TOC are complementary methods with di缸erent benefits and drawbacks. Furthermore, because the TOC assumes that direct material costs are the only variable costs, it is recommended for use in short-term product-mix decisions. In contrast, ABC regards all costs as activity related; therefore, it is recommended for use in long-term product-mix decisions. The same conc\usion was reached in the discussions by Tsai et al. (2008) on the relationships between ABC and the TOC and the product-mix decision model ofjoint products

From the studies mentioned above, it is apparent that the TOC assumes that direct material costs are the only variable costs when other resources are fixed, and it is based on a short-term perspective. However, ABC assumes that all resources are variable and is accordingly based on a long-term perspective. In addition, because ABC attributes costs based on activity drivers and resource drivers, it can produce a more accurate product-mix than the traditional costing system. Although the studies are divided in their support of either ABC or the TOC, they place equal emphasis on the importance of costs in product-mix

Chiao Da Management Review 的1.32 No.之2012 43

decisions. That is, costs are the most important consideration in product-mix decisions.

2.2. The Effects of Non-cost Factors on Product-mix Decisions Lea and Fredendall (2002) used experiments to investigate the effects of using product-mix decision frameworks for manufacturing decision models. They considered four variables: the product-mix algorithm, product structu況，

management accounting system

,

and planning period. These four variables correspond to uncertain factors in the real world.

Bayou and Reinstein (2005) studied product-mix decision models using the fuzzy hierarchical model. First

,

this model is used to decide the development direction of the company. Then, one can draw up the company strategy according to this development direction and break down the strategy into smaller goals

Sirnilarly, for the research by Bayou and Reinstein (2005), Chen et al. (2006) used the modified analytic hierarchy process to deterrnine the product-mix decision model for a new product. The model Iists the factors individually and assigns weights to them. Then, it decides the survival time and production quantity of each product according to its weighting score. Chen et al. (2006) identified the following 10 factors that intluence the success of a new product: (1) quality of human capital, (2) market potential of the product, (3) the product's ability to enter the market, (4) positive net present value ο-æV) of income, (5) the product's survival capability, (6) related equipment and assets, (7) the producer's competitors and production experience

,

(8) the product's technological characteristics, (9) the product's competitive advantage, and (10) technology possessed in the trade. In addition to that, as was pointed out by Letmathe and Balakrishnan (2005), a product-mix decision framework must consider extemal factors such as regulations, taxes, penalties, and allowances

A review of the studies discussed in this section reveals that companies have a wide range of qualitative factors. The results obtained will vary depending on the qualitative factors that a company emphasizes

44 Produc/-Mix Decision In/egraled wilh ABCfor Be/ler Profilability Managemenl The Case ofCommunica/ions Equipment Firm in 加 wan

2.3. An Initial Summary of Factors that Should be Considered in a Product-mix Decision

If the telecommunications market is perfectly competitive

,

the optimal bidding method for a supplier is to bid at the marginal cost; otherwis巴， suppliers can increase their profits through strategic bidding

,

which exploits imperfections in the market (David and Wen, 2000). Consequently, acquiring precise information on costs is crucial in the bidding market. In addition, Shapiro et al

(1987) pointed out that the best-selling products might not necessarily bring in the highest profits for their suppliers. They recomrnended that the company management pay attention not only to product revenues but also to profits. Revenue, cost, and gross profit are the three components of a transaction, and a corporation must consider all three together. A review of the above fmdings on the e缸ects of costing systems on product-mix decisions reveals that cost is an important factor that influences product-mix decisions (Bakke and Hellberg, 1991; Holmen, 1995; Kaplan and Cooper, 1998; K巴巴， 1995; Lea and Fredendall, 2002; MacArthur, 1993). It follows that the profit-related factors to be considered in a product-mix decision inc1ude sales revenue, cost, profit, and profit rate.

A review of the previous literature shows that factors other than costs should be taken into account in a product-mix decision. These inc1ude the product structure (Lea and Fredendall, 2002), quality of human capital, product's market potential, product's ability to enter the market, positive net present value of income, product's survival capability, related equipment and assets, producer's competitors and production experienc巴， product's technological characteristi的， product's competitive advantage

,

and technology possessed in the trade (Chen et al., 2006), regulations, taxes, and allowances (Letmathe and Balakrishnan, 2005).

A review of the previous literature reveals that there are very few studies that address the factors to be considered in a product-mix decision. Furthermore, rarely does the research use actual corporations as supporting examples. This study tries to cover and sumrnarize the factors that were mentioned in previous studies. By a c10se investigation of one particular corporation, this study attempts to arrive at an understanding of the factors that corporations actually consider

Chiao Da Managemenf Review Vol. 32 No. 2, 2012 45

when making their product-mix decisions. From the actual corporate case, the

study constructs a product-mix decision framework that conforms to a real industry situation.

3. Research Design

A review of the previous research shows that most investigations into

product-mix decisions either compare di缸erentcost systems or determine the best

product-mix decision model using computer so丘ware or mathematical models

,

or

proposes some qualitative factors. However, studies on product-mix decision that

compare cost systems or that use computer so丘ware or mathematical models

simply plugging in assumptive situations and related numbers to arrive at a "theoretical" best framework. 1n addition

,

the optimal product-mix decisions that

are reached will vary according to differing company strategies

,

resource

qualifications, and financial and non-financial goals. Product-mix decisions are important not onJy for the final product mix but also for the decision process. In addition

,

previous studies on market structure and bidding strategies have often used simplifying assumptions in their frameworks. As a result

,

the equilibrium state they arrive at may not make sense for building a practical bidding strategy (David and Wen

,

2000)

This study investigates issues pertaining to a corporation's intemal

management, such as how to make practical product-mix decisions, which factors

to consider while making these decisions, why these factors are important, and

how they are considered in actuality. Therefore, conducting a large-scale

questionnaire survey is not an appropriate method. In order to understand the

actual operation of a corporation's intemal management system in detail

,

it is necessary to use the case study method (Bruns and Kaplan, 1987; Ge and Ding,

2008; Yin, 2003). In accordance with this view, this study adopts the case study

method in order to understand the product-mix decision process in a real

co巾orahon

Company C is chosen as the case study subject. Company C is a Taiwanese manufacturer that specializes in producing and sel\ing cellular repeaters (i.e., cell

46 Product-Mix Decision Integrated with ABC for Better Pr，吶。bilityManagement

-The Case ofCommunicalions Equipment Firm in Taiwan

phone indoor signal products). Company C is the second largest producer in Taiwan

,

and its market share rate is approximateLy 35%. Its products are reguLated telecommunications products, and a concession licens巴 is required to sell them The telecommunications industry in Taiwan has aLways used the bidding method to purchase equipment. This means that when one telecommunications company

needs to purchase repeaters

,

it sends its purchase order to all qualified suppliers

The quaLified suppliers then bid anonymously with the lowest bidder winning the bid; each bidding project is worth at Least NT$l 0 milIion.

Because of this characteristic of the teLecommunications indus甘y and the

size of this company, Company C appears suitabLe for our case study.

Company C could lose tens of millions of New Taiwan dollars in revenue if it fails to win a bid; however

,

it cannot afford to suffer Losses for the sake of

outbidding its competitors. In addition

,

because both the manufacturers and seLlers of repeaters need to possess licenses, there is stabiLity with both buyers and vendors in the market. Furthermore, in the telecommunications bidding market, a

producer's product specifications should conform to buyers' requirements Producers might have many products that conform to a buyer's requirements, and

each product wilI have a different cost. As a result, the Company C needs a

concrete, clear, and stable product-mix decision. In addition, the clients of Company C have requested customized products, meaning the company has to produce increasingly diversified products. However, even though the subject

company diversifies its products to meet customer requirements or lowers prices because of stiff competition in the bidding market, it must not sacrifice its profits, because multiple products meet the specifications of each bid. Therefore

,

the key elements that actually affect the profit of the company are the true cost of each

product and product-mix decisions for determining the product that shouLd be included in the bid. Moreover, both before and after the improvement of its product-mix decision, Company C targeted the market for mid- and Low-end products. Hence, the target market did not have a great impact on the company's decreasing profit. The above analysis shows that the main causes for an increase in saLes and a decrease in profits for the company wen: pricing (i.e.. the true cost

product-Chiao Da Management Reνlew均132No. 2, 2012 47

to improve its product-mix decision

After the improvement

,

its management felt greater confidence in its product-mix decisions. The company increased its pro日的，which demonstrates the usefulness and effectiveness of the improved product叫lix decision process. An examination of this process and the results is helpful for gaining an understanding of the factors that should be considered in product-mix decisions in the bidding market. lt also helps understand the relationship between the factors and the product-mix decision

The information collection procedure is described as follows. On-site

interviews were conducted

,

and related documents and information were collected

and studied. The interviewed subjects were the director-general, the chief

technology offic缸， an associate manager of research and development (R&D), and a fmancial manager. Fifteen interviews were held

,

and the average length of a

session was three hours. There were six additional sessions of phone interviews and fact confirmations. Finally, responses from di釘erent interviewees were crosschecked and confirmed to ensure the objectivity and reliability of the

collected information

4. Overview of the Case Study Company

The history of the mobile phone market began with the first generation of analogs in the 1980s

,

which was followed by the second generation of digitals in the 1990s and the third generation of W-CDMAs in 2000. Company C was

founded in 1991 between the development stages of the first-generation AMPS

andGSM

The early telecomrnunications market was a monopoly seller's market. In Taiwan

,

the monopolist was Chunghwa Telecom. Consequent!y

,

sellers often

ignored the infrastructure-related demands of consumers who had to put up with

the seller's poor communication quality. Mobile Telecom adopted wireless radio frequency (RF) transmission. lnterference from mountains or tall buildings resulted in many dead zones; indoor reception quality was even worse because

48 Produc/-Mix Decision Integra/ed with ABC for Betler Projìtability Management

-The Case ofCommunications Equψment Firm 附加 wan

signal improvement products were sold.

1n 1997, Taiwan's telecommunications market became more open and began to use European mobile phone specifications (GSM)

,

which resulted in the brealcup of the Chunghwa Telecom monopoly. The new telecommunications

industry was more consumer-centric; consequently, demands for improvement in

indoor reception quality increased. At the same time

,

Company C and its

competitors' sales growth improved greatly; however, large intemational companies still dominated most markets with their superior technology and capital strength. Consequently

,

signal enhancement in large indoor shopping malls

was accomplished using equipment from European or American companies.

However

,

telecomrnunications companies used products 台om small domestic

companies

,

inc1uding Company C

,

for similar but less important indoor areas such as small restaurants. From 1997 to 2001

,

Company C was left only with the low-Ievel market because of competition from large intemational companies.

After 2002, due to growth in technology and cons仕uctionlevels that were at full capac旬 various telecommunication companies gradually transferred

construction to smaller areas. For every year from 2002 to 2005, the

telecommunications companies had budgets for improving small indoor signals Most orders for equipment went to Company C

,

Remo

,

and other domestic

companies that subcontracted Korean products

1n 2005, Taiwan entered the third generation (3G) era. 3G applications

inc1ude video and other media that enable a broader use of mobile phones than the

second generation (2G) technology. Therefore

,

the indoor signal equipment requirements of the 3G era far surpassed those of the 2G era. Currently

,

Company C must face its major domestic competitor

, Remo,

as well as Korean competitors supported by the Korean govemment. 1n the past

,

these firrns have repeatedly

taken control of the Taiwanese market with their low prices. ln addition to the

original competitors in the intemational market

,

companies in China

,

Korea

,

and

1ndia, with their own large domestic markets and govemment protection, have begun to pursue the intemational market. 1n response to this change in business climat巴，Company C has transferred its business focus to overseas markets. Since

Chiao Da Management Reνiew Vol. 32 No. 2, 2012 49

increased; in mid-2007

,

overseas sales accounted for 45% of its total sales

Company C's total capital amounted to NT$70 million in 2006, and its

annual revenue was approximately NT$3 billion. Ninety-five percent of its business transactions were conducted through the bidding method. Its ratio of

domestic revenue to foreign revenue was 2: 1. Foreign business was conducted by

selling self-developed brands through product distribution contracts signed with

licensees from many countries. The sales products can be c\assified as self-manufactured repeaters and licensed import products. Regarding licensed import products

,

Company C collaborated with advanced manufacturers in Europe and the United States and began importing cutting-edge products in 2000.

In order to distinguish itse\f from the m句 or intemational brands

,

it mainly

targeted the small- and medium-frequency markets with its self-manufactured

repeaters. Its target products fell under the following three categories:

(1)Customized repeaters. The frequency details of these products can be

customized according to customer specifications, and they are made-to-order.

The production period for products in this category is longer, and customers face a longer waiting period. Most of the customers of this product are

telecommunications companies or their system supply pa此ners in Taiwan

and abroad. According to their transmission efficiency

,

these products can be

c\assified as E-series

,

D-series

,

or C-series

(2)General repeaters. These products use the standard frequency of cel1 phone

systems. Most customers are restaurant, department store, or wholesale superstore owners. These products are standardized and can be manufactured

in small quantities. According to their transmission efficiency

,

these products

can be c\assified as G-series

,

B-series

,

or L-series

(3)Automobile cel/ular repeaters. Due to geographic limitations or tìnancial

concems, local te\ecommunications companies in some European and American countries have been largely unwilling to devote resources to building telecommunications infrastructure that could improve transmission quality in suburban and mountainous areas. However

,

many peop1e Iiving in these areas must drive for two to four hours between home and work each

50 Producl-Mix Decision Inlegraled wilh ABC for Beller Pr，昕labilityM.αnagemenl -The Case ofCommunicalions Equipmenl Firm in Taiwan

cornmuting, Company C launched Series A, an automobile cellular repeater. From the above, it can be seen that the company has diverse product

categories. There are significant differences between the different series of its products

,

and these differences extend to the product costs. Thus

,

it is very

lmpo此antfor this company to define product costs clearly and properly analyze

its product-mix decision.

5. The Product-mix Decision Before Improvement and its

Challenges

Before the improvement

,

the company's product-mix decision was very simple. As long as customers accepted the price of a product

,

the company would

manufacture and sell the product. The pricing method calculates the total production cost as follows: (direct material cost + direct labor cost +

manufacturing cost) x (1

+

target gross profit rate). The target gross profit rate is subjectively decided by the director-general, whereas the manufacturing cost is

allocated according to the cost percentage of each product material.

Company C faced increasingly fierce competition. On top of the competitive

price slashing among domestic competitors, Korean manufacturers, who were supported by the Korean govemment, broke into Taiwan's market with a low-price strategy. In addition to European and American manufacturers,

manufacturers from China, Korea, and lndia were entering the intemational market on the strength of their own enormous local markets and their

govemments' protection. Along with facing a fiercely competitive environment,

the company was experiencing major intemal problems. In order to satis砂 its sales personnel 's need to deliver its public-oriented general repeaters quickly, the

company had accumulated products of different series. Due to improper allocation of production power and resources, the company often produced products that did not conform to client specifications

,

which led to escalating costs

At the same time, the company did not properly manage information about

the various service costs provided by its logistics department, and its target gross

Chiao Da Mαnagemenl Reνiew Vol. 32 No. 2, 2012 51

costs arrived at by the logistics department were not considered during the pricing stage

,

and it was not possible to clearly discem the costs of various products or their contributions to the company's profit. Matters soon reached a point where pricing was subjectively decided by the director-general while the sales personnel busied themselves with selling; this could have led to a generation of debt-incurring orders. ln addition

,

clients continued to demand customized products, which led to the company's products becoming even more diversified with prolonged production times and management problems. ln this si仙ation，

E仟ortsto improve the sales volume and sell more products led to a falling profit rate (see Table 1). In addition

,

the percentage sales of popular and low-margin products of Company C did not increase. On the contrary

,

the percentage decreased year after year (as shown in Table 2). Relatively

,

the weighting of customized products rose year after year. In 2005, it even reached 40%. Therefore,

profits decreased from 2001 to 2005 even though sales increased due to an increase in the proportion of customiz巴d products. Nonetheless

,

the company did not have a sound costing system and thus offered an inappropriate product (i.e., a product of higher cost) in the tender. Meanwhile, competition had resulted in price lowering among the competitors. Because a variety of products within a company may comply with the specifications of a bid request

,

the company does not have to raise the price of an undervalued product when faced with a price cut. Instead

,

in fulfil1ing the request for a bid

,

it can respond by selecting a product with a lower cost to secure profits to a certain extent. In other words

,

by grasping the true product cost and selecting the right product for the tender, a company can retain its profit. Therefore, the key elements that affect profitabi\ity of a company are the comprehension of the true costs of products and a strategic product mix for participating in the tender. After having recognized its root problem, Company C decided to irnprove itself.

Table 1

Sales Volumes and Net Profit rates of Company C from 2001 to 2005

Year Sales volume (Units) Protit rate 2001 4,043 9% 2002 4,211 8% 2003 4,532 9% 2004 3,482 7% 2005 6,987 5%

52 Product-Mix Decision Integrated with ABCfor Belter Profitabili吵 Management -The Case ofCommunications Equipment Firm in Taiwan

Table 2

Sales Volumes from Popular and Low-margin Products and Customized

Products Over Total Sales Volumes of Company C from 2001 to 2005

Year 2001 2002 2003 2004

Sales volumes from popular and low-margin _{21% 20% 的%}

17%

pSraoleds ucvtE o OVEr total sales voltlmm

lumes 告。 m customized products over _{23% 28%}

31% 35%

total sales volumes

6. BC

Implementation and Product-mix Decision Improvement

6.1. BC

Implementation and its Structure

2005 16% 40%

Company C was deeply aware that the problems with its product-mix

decisions stemmed mainly from the lack of accuracy in its cost calculations. The

company's management leamed that the ABC method is a cost calculation method

that is ideal for clarifying the costs of diverse products that are produced in small

quantities. They also leamed that management could use the information obtained

via ABC in product-mix decisions, which could possibly lead to a better product

mix. Because the product-mix decision of the company was based on long-term

considerations, the management decided to introduce the ABC system. It used

ABC to obtain the cost information needed for its product-mix decision and then

reevaluated and amended the entire framework. The company officially launched

its ABC project on January 5, 2005. The planning phase extended from January to

August

,

and the data collection was done in September. To successfully introduce

and launch its ABC pr句 ect，the company established an ABC project team whose

members included a project manager director-general, a project implementation

consultant, directors along with their project personnel, and information engineers

The director-general was responsible for interdepartrnental communications and

progress tracking progress. The project implementation consultant was

responsible for planning and implementation. The directors of each department

Chiao Da Management Reνzew 均/.32 No. 2, 2012 53

departments

,

personnel education training

,

and participation in interdepartmental

meetings. The information engineers were responsible for writing the software

after communicating with the implementation consultant

In addition to considering direct material costs, direct labor costs, and

manufacturing costs

,

the ABC system also takes into account the supporting costs

of the logistics department. First, it divides the company's entire resources into

manufacturing department resources and other department resources. Then

,

after

ca1culating each model's manufacturing cost using the information on

manufacturing department resources

,

it assigns the resources of other departments

to specific models. Then, it can deduct the model manufacturing costs and the

supporting costs of other departments from the corresponding product sales

amount to obtain the profit amount for each product. In terms of resource

expenses related to labor in the manufacturing department

,

it can allocate

resources to specific activities according to activity hours and then allocate

activity costs to specific product models according to model labor hours. As for

the remaining labor costs not directly related to the models, it allocates them evenly across all products according to production amounts because they cannot

bc allocated directly to particular models according to modellabor hours

Regarding other resource costs unrelated to labor, apa前台om attributing

direct material costs to specific models according to the bill of materials (BOM)

,

ABC can attribute other costs evenly across all products according to production

amounts. For other departments

,

the labor-related expenses amount to 80% of the

total expenses. The company attributes the labor-related resource expenses to

specific activities according to activity hours and then attributes the classifiable

activity costs to specific models according to model supporting labor hours. Other labor-related expenses not directly related to specific models are allocated evenly across all products according to specific production amounts because they cannot

be attributed directly to specific models according to model supporting labor

hours. The remaining resource expenses unrelated to labor are allocated evenly

across all models according to specific production amounts

54 Product-Mü: Decision Jntegrated wi1h ABCjòr Better Projìtability Management -The Case ofCommunications Equipment Firm in Taiwan

were very different. Therefore

,

ABC attributes costs according to the labor hours

of specific models. For example

,

the labor hours of a specific product equal the production amount multiplied by the product series manufacturing difficulty score (see Table 3 for the manufacturing difficulty weighted scores of all product series)

The company began to collect relevant cost information through the ABC system

in September 2005 and started implementing the post-improvement product-mix decision on April 1, 2006 in order to update its product mix based on the collected information.

Table 3

Weighted Scores of Manufacturing Difficulties of Various Product Series

Product series E D C B G L A

Weighted Scores ofthe Manufacturing Difficulty 4.5 3 2.5 2 2

6.2. The Post-improvement Product-mix Decision

The company's product-mix decision before the improvement had only one

specification: the sales personnel could sell a product if the sales price was higher than the minimum price set by the company. However

,

in the face of an increasingly competitive market, the company was forced to rethink its

product-mix decision. High-ranking management personnel read pertinent

documents, engaged in intemal discussions, and consulted with professionals in

academia. Then

,

they opted to adopt market-oriented strategic planning to rethi此

and amend the company's product-mix decision. Market-oriented strategic

planning means maintaining a management sequence that includes VISlon

,

environment

,

positioning

,

and strategy to maintain proper interactions between an organization's goals

,

technology

,

resources

,

and changing market opportunities (Kotler et al., 1999)

The term

“

vision" has three dimensions: Technology, Market, Leverage and

Scalability. Case company's vision is mainly formed by Market. The term

“environment" mainly refers to a company's extemal and intemal conditions;

Chiao Da Managemenf Review Vol. 32 No. 2, 2012

are descriptions of the five forces of this model

(1) Competition from altematives

55

Company C's products were originally cheaper than base stations; however

,

due to recent technological improvements and mass production techniques

,

the once high-priced base stations are no longer costly. Certain base station prices have fallen c10se to the prices of high-Ievel products

,

meaning they can be used as

cost-effective altematives. However, in the low- and mid-Ievel product markets,

from a cost vi巴wpoint， there is no altemative that can fully substitute for the products of Company C

(2) Potential threats from entrants

Because of easy access to production technology and the progress of the semiconductor manufacturing processes, it is not overly difficult for low- and

mid-Ievel products to enter the market from the viewpoint of technolog

y.

From a

marketing viewpoint

,

however

,

regional characteristics

,

the govemrnent

,

and

regulatory restrictions require en甘antsto have considerable financial resources to

support long-term relationships with customers, and a number of breakthroughs must be made conceming laws and regulatory restrictions

(3) Confrontation with existing competitors

Because Company C's production technology is established in the industry,

unless there is a special requirement

,

many manufacturers can offer substitutes. ln gen巳ral ， telecommunications customers 0位en have open budgets for purchasing products

,

and this allows two to three manufacturers to compete to maximize their profits. Company C and its competitors have relatively less profit due to lowering their prices to win bids

(4) Buyer's price negotiation ability

Because 20 and 30 licenses are limited resources

,

there are only a few telecommunications companies operating in any country or region. In the 1990s,

sellers could obtain a high price because the technology was concentrated in the hands of a small number of manufacturers and buyers did not have su質icient information. However, today there are more participating manufacturers, and it is

possible to obtain information easily over the Intemet; consequently

,

buyers have

56 Prodllcl-Mix Decision /nlegraled with ABCfor Betler Pn刑的bilityManagemenl -TheCαse ofCommllnicalions Equipmenl Firm in 必iwan

(5) Supplier's price negotiation ability

Because of the development of semiconductors, many key components have

been developed into ICs. This development can help reduce a large portion of its

direct costs. However, because the company product is industrial, the component procurement amounts are significantly smaller when compared to consumer electrorucs such as mobile phones. This has resulted in a decrease in the price negotiation ability of the company. 1n additi凹， the suppliers of the company's product are inferior to suppliers in the consumer electronics industry.

Next

,

the term “positioning" mainly refers to the fact that at different points

in time, Company C makes different positioning choices in various extemal

environments. In general

,

the SWOT model proposed by Ansoff (1995) will be

used in the analysis. Descriptions that pertain to this model are given below. (a) Strength

Company C is a non-public company

,

and the chairperson is also the general

manager; hence

,

its organization is more f1exible than that of a public company. Its development is also not easily affected by extemal laws and regulations. Therefore, the company's strength is that its orgaruzation can expand rapidly and operate a flexible work environment

(b) Weakness

As was mentioned above, Company C is a non-public company. Therefore,

the company has fewer funds

,

and it has more difficulty attracting talented

employees. In addition, its technical capability is low (c) Opportunity

The 3G market is boorning

,

and the popularity of mobile phones has

increased yearly. Therefore

,

the company's product market is expected to grow.

(d) Threat

The rate of progress of large intemational companies is far greater than that

of Company C. Therefore

,

when the technological distance between Company C

and the large intemational companies increases

,

the overall production value of

the 3G market grows. 1n such a case, the company might not experience an

increase in profit or sales.

Chiao Da Management Reνlew 均 1.32 No. 2. 2012 57

analys時 it is c1ear that the company's vision was mostly deterrnined by the market

,

which means that the company placed the highest value on the market

structure in its vision. From the industry market analysis

,

one can see that the

company's product market is a buyer's market. Because equipment purchases in the telecommunication industry are made through bidding

,

it is necessary to manage relationships with clients on a long-terrn basis. Moreover

,

because

Company C is not a publicly traded company

,

it has Iimited resources and labor Because of its ability to respond to changes quickly

,

it targets the low- and

mid-Ievel product markets. ln addition, because of advances in the lC industry, it is not prohibitively di伍 cult to produce products similar to those produced by

Company C. It is also noteworthy that, because each bidding project is worth at

least NT$IO million

, the company

must focus on the accuracy of product cost ca1culations. Furtherrnore

,

both the manufacturers and the vendors of repeaters

need to possess licenses

,

so there is stability between buyers and sellers in the

market. New competitors or buyers rarely appear in the market; therefore, whether a project is won is determined by the company's long-terrn management policy. Because of these considerations, Company C chose

“mar

ket prospect and cost accuracy" as their product-mix strategy. This strategy focuses on the opportunity in the target market, the competitive conditions of the target market, and the sales perforrnance that is achievable in the market. Because the company emphasized cost accuracy, the product profit rate and product profit contribution are also considered. It is evident that the four major factors in the company's

product-mix decision framework are (1) target market opportunity, (2) competitive market conditions, (3) profit rate, and (4) sales perforrnance and

profit contributions. ln addition, the management acknowledged that it made

mistakes when exercising judgment on the product mix

,

and these mistakes varied according to situation. Therefore

,

it added the factor of alternative projects in order to be more comprehensive. These four m句 or factors would address the challenge of alternative projects2• If the company remained unable to solve the

2 The "market-oriented" strategic plarr日 ingadopted by the company was to develop and maintain

a management process so that the goals, technology, and resources of the organization were appropriately adapted to changing market opportunities. First, the vision of the company was

58 ProducI-Mix Decision Integroled with A BC for Better Projìtability Management

-The Case ofCommunicalions Equ伊menlFirm in Taiwan

problem after considering all altemative pr句 ects， it would choose to abandon

production of the product. The company's post-improvement product-mix

decision framework is summarized in the run-down diagram in Figure 1

Figure 1 shows that the company first considers the target market

opportunity (i.e., the possible sales scale) when evaluating the viability of a

product. If the scale is not larg巴 it considers whether there is an altemative

pr句 ect.After discussions between the director-general and the two sales associate

managers, relevant documents are consulted and the alteIτ\ative project is

analyzed according to (1) the national development policy of the target sales

country, (2) the development trend of the industry, and (3) the future development

oppo此Ull ityofthe company's related product series. Ifthe target sales country has

the potential to ensure sound development for the industry, then the project passes

the target market opportunity test. The company next proceeds to consider

competitive conditions in the market (i.e., the existing rivals in the target market,

competitiveness of the company's products, and market regulations). When a

particular product does not pass the market competitiveness test, the company

looks for an altemative project such as (1) building an alliance with competitors

,

(2) developing a technology upgrade by itself, or (3) improving a Iicensed sales

vendor. Then, it considers the profit rate and determines whether it is greater than

or equal to the target value. This applies to both the gross profit rate and the net

profit rate. The current target gross profit rate is 30%, and the target net profit rate

is 0%. lf the product cannot meet the company's target profit rate, the company

considers altemative projects. The current altemative projects include (1) raising

the sales price, (2) lowering buying costs, and (3) improving manufacturing and

logistics supporting procedures. Lastly, the company considers contributions to

c1arified. Then, the intemal and extemal environments were analyzed. Next, a decision was

made for the positioning of the company. Finally, a strategy was deduced for the company. In

analyzing the intemal and extemal environmen峙， the five forces included the effects of

competitors. A SWOT analysis was conducted to select a position; it considered the extemal

competitive situation of the company for decision making. ln addition, the four main elements

(target market opportunity, competitive market conditions, profit rate, and sales performance and

profit contributions.) that 出 e company took into account in deciding the product mix also

included competitive market factors (e.g., prices that competitors may offer). Therefore, we can say that the“market-oriented" strategic plan already includes a “competition-oriented" concept

Chiao Da Management Review Vol. 32 No. 2, 2012

Figure 1

Post-improvement Product-mix Decision Framework Chart

N Target market opportun昀 Altemative proJect N Y N _Altemative N proJect Competitive market conditions Y N N Sales perfonnancè and 、一--+/ Altemative

profit contributions pro.1ect

59 STOP cdEL E LEL N G

60 Product-Mix Decision Jntegrated with ABC for Better Profitability Management -The Case ofCommunications Eq呻mentFirm in Taiwan

sales and profits (i.e., the sales revenues and profits that are brought in by product

sales). Again, if the product does not meet the required sales and profit

contributions, the company considers altemative projects that would bolster

sales

,

such as (1) improving salability

,

(2) increasing sales channels, and (3)

launching discount programs. However

,

if there is no altemative project for the product regarding sales

6.3.

Comparison of the Post-improvement Product-mix Decision and Previous studies

Table 4 summarizes comparisons between the factors of the company's

post-improvement product-mix decisions and the factors mentioned in previous

studies

From Table 4 it is apparent that, of the factors mentioned in previous studies, the factors that the company adopted included the following: the sales revenue,

cost, gross profit amount and rate, net profit amount and rate

,

market potential of products

, ability of

products to enter the market, survival capability of products

,

competitors and production experienc巴，technological characteristics of products, competitive advantage of products, and regulations. The main reason why the company considered these factors was that they were relevant to its product-mix

strategy of “market prospect and cost accuracy". ln contrast to the previous

studies

,

the company's product-mix decision framework included the extra factor of altemative pr句 ects. This was to al\ow the company to respond to various

unforeseen incidents and make decision-making more comprehensive.

7.

Benefit Analysis After the Improvement of the

Product-mix Decision

In this section, we will use a product profitability comparison, bidding project simulated analysis

, and statistical

tests to demonstrate the benefits of the improved product-mix decision. In order to update its product mix, the company

began implementing the post-improvement product-mix decision based on the

Chiao Da Managemenl Reνlew 均 1.32 No. 2, 2012 61

Table 4

Comparison of Factors Considered for the Company's Post-improvement

Product-mix Decision and the Factors in Previous Studies

Factors

Sales revenue

Gross pIroronft it rate,

net prottt rate

Cost; gross profit amount;

net profit amount

Product structure

Quality of human capital

AMMealnrlttky eper t rotopfhdoe putrmecontdas turtakcl ets t of to

Net present value of mcome Survival capability of

Related peroqduu1pcmts ent and assets

procCdhTouaemcrcatphIcOnetn euortelIooSxgrtps tIcecas nanol ed nf ce

compoeupf ruporvdoe udacudtcs vts antaEe

Technology in the trade Regulations Taxes Penalties Allowances Studies Shapiro et al. (1987) Shapiro el 01. (1987)

S(khlaa9pp9ll8rao )n ,eakfnead elC((lol9o99p85e7)r ), , Lea and Fredendall

(2002)

Lea and Fredendall (2002) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Chen el 01. (2006) Letmathe and 8alakrishnan (2005) Letmathe and 8alakrishnan (2005) Letmathe and 8alakrishnan (2005) Letmathe and 8alakrishnan (2005)

Factors in Company C's product-mix d缸ision /Explanation for non-adoption

(4) Sales perfonnance and profit contributions

(3) Profit rate

(4) Sales perfonnance and profit contributions

8ecause the business model of the company is a bidding

system, buyers already clearly define the structure of the

products in the bidding contracts; therefore, the company has no decision rights regarding the product

structure

Current旬， the human resources quality of the company

meets the requirement of product technologies; therefore, there is no need to consider the quality of its human resources

(1) Target market opportunity (2) Competitive market conditions

8ecause product competition is fierce, the obsolescence

rate is high. The product life span and projected revenue are hard to predi叭，and the NPV is difficult to calculate (2) Competitive market conditions

8ecausc many models have been outsourced, machinery

and equipment are not factors being considered (2) Competitive market conditions

(2) Competitive market conditions

(2) Competitive market conditions

The company only manufactures a社erreceiving orders; therefo悶，technology in the trade is not a key factor (2) Competitive market conditions

Tbe products sold by the company do not enjoy tax

concessions in the domestic or overseas markets; therefore, the amount oftaxes is not a factor

The company produces regulated telecommunication products that must be sold lawfully, and its Iicense will

be suspended if there is any violation. Therefo間，Iawful penalties are not a factor under consideration.

The company must obtain allowances before selling its

products. 8ecause this is a prerequisite, it is nol a faclor IDC油nsideration

62 Producl-Mix Decision lnlegraled wilh ABC for Beuer Pr:昕labilityManagement -The Case ofCommunications Equipment Firm in Taiwan

2006 is used as the point of reference. The period from September 1

,

2005 to December 31

,

2006 is divided into two segments. First

,

September 1

,

2005 to March 訓， 2006 is the period of product-mix decisions before the improvement.

Second

,

April 1

,

2006 to December 31

,

2006 is the period in which the

post-improvement product-mix decision was adopted on the basis of the ABC information.

7.

1.

Profitability Comparison for Products Before and After the

Improvement

This section describes the periods before and after the improvement and

c1assifies product costs as manufacturing costs and logistics supporting costs. Profits from which only manufacturing costs have been deducted are referred to

as gross profits. Profits 企om whicb both the manufacturing costs and logistics

supporting costs have been deducted are referred to as net profits. A comparison of costs is presented to demonstrate the correlation between changing product

mixes and different cost structures.

One feasible way to analyze product profitability is the

“

whale c叮呵，\This

curve presents a company's cumulative profits as a function ofproducts ranked by

their profitability. Therefore, we will use a wbale curve to analyze tbe company's

product profitability in this section

(1) Profitability analysis of products in the p間-improvementperiod

1n general, there are three steps to draw a whale cUlve. First, we list the sales

profits and sales volumes of each product. Second

,

we accumulate the numbers of total sales profits and total sales volumes and use these two numbers as

denominators to calculate each product's sales profits rates and sales volumes

rates. Finally, we rank products by their sales profits rates and draw out the whale curve. Following the above method

,

we obtained the whale curves representing the cumulative gross profits and cumulative net profits for the pre-improvement period (from September 1, 2005 to March 訓， 2006). These are presented in Figures 2 and 3, respectively.

From Figure 2 it is apparent that

,

if the logistics supporting the costs of the

63 Chiao Da Management Review Vol. 32 No. 2. 2012

Figure 2

Whale Curve of the Product of Cumulative Gross Profits Before the Improvement

~一­

/ /

/ /

7ζ

120% 100% 80% 60% 400/. ECD 』屯的的 EOω 〉 ZS=EZυ 20% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 。% 0% Cumulative Volume Figure 3

Whale Curve of the Product Cumulative Net Profits Before the Improvemene -/UU"'. 6凹Y份 5帥% 3凶% 皂白。』 ι 間 ω 。 』 OU 〉 Z 唱一口 E2υ 2個" l仰% 1 飢>". 90% 80-;' 70"1. 叫" 5~. 4~. 30":' '0啥也 1仰危 Cumulative Volume

) The denominator was the summation of the net profit from each of the products. Some products made profits, whereas others made losses. Negative net profits were recorded by 26.86%

products. Therefore, the ultimate profit after the summation (i.e., the ov巴rallnet profil lak巴nas the denominator) was nol the largest number. Hence, the percentages of net profit for some profitable products in Figure 3 can exceed 100%. If only the net percentages of profitable products were added, the result could be as high as 600%. 10 other words, the company lost

64 Product-Mix Decision lntegrated wi1h ABC for Betler Profitability Management -The Case ofCommunicat

positive gross profits

,

whereas 17.21 % of the products would have negative gross profits. In addition，企omFigure 3 one can see that when logistics supporting costs

of the service department are taken into consideration

,

73.14% of the products generate 600% of total profits

,

whereas 26.86% of the products lose 500% of profits, leaving a figure of \ 00% total profits. The proportion of profitable products drops from 82.79% to 73.14% when logistics supporting costs are considered

(2) Profitability analysis for products in the post-improvement period Using the same method

,

we obtained the whale curves representing the cumulative gross profits and the cumulative net profits for the post-improvement products (for the period from April 1, 2006 to December 31, 2006). These are

presented in Figures 4 and 5

,

respectively.

From Figure 4 it is apparent that approximately 99.05% ofthe products have positive gross profits

,

and on\y 0.95% of the products have negative gross profits In comparison

,

in Figure 5

,

approximately 90.21 % of the products have positive net profits, and 9.79% of the products have negative net profits. The proportion of profitable products falls from 99.05% to 90.21 % when logistics supporting costs are considered

(3) Comparison analysis of product profitability of the two periods

If logistics supporting costs are not inc1uded, approximately 83% of the products of the pre-improvement period have positive gross profi俗， whereas

approximately 99% of the products of the post-improvement period have positive

gross profits. An analysis of the changing products of the two periods reveals that the production of 3-C-0006 and 3-E-00IO (two products with \ower than 30% gross profits) was ceased after the improvement. Products that were more profitable were produced after the improvement

,

which resulted in the accumulation of high gross profits. Because only 25 products result in losses, the

cumulative loss does not have much impact. Thus, the accumulative gross profit

after the improvement was 3.13 times that before the improvement4.

4 A cumulative gross profit of approximately 10 million NT dollars was obtained by the

summation of gross profits of each product during the period before the improvement of 也e

65

Chiao Da Management Reνlew均1.32 No. 2, 2012

Figure 4

Whale Curve of the Product Cumulative Gross Profits After the Improvement

120% l∞% 80% ω% 約% 20% 的 VGEL 閻明白』 OU 三百三 gzu l∞% 90% 80% 70% ω% 50% 的% 30% 20% 10%

Cumulative Volume

Figure 5

Whale Curve of the Product Cumulative Net Profits After the Improvement

12協 l∞% 80% “。已 物% 20% ECDh 恥的問。』 OUE 】咱 -z 口出， υ l∞% 90% 80% 7(協 ω% 50% 40% 30% 20% 10%

Cumulative Volume

gross profit of approximately 31.3 million NT dollars was obtained by the summation of gross profits of each product during the period af!er the improvement of the product-mix decision

(台omApril 1, 2006 to December 31, 2006). Lastly, when the latter was divided by the former, it

showed that the accumulated gross profit after the improvement was 3.13 times that before the lmprovement

66 Prodllcl-Mix Decision lnlegraled wilh ABCjor Beller Pr，圳的bilityManagemenl

-The Case o.fCommllllicalions Equψment Firm in Taiwan

If logistics supporting costs are included

,

approximately 73% of the products

of the pre-improvement period have positive net profits

,

whereas approximately

90% ofthe products ofthe post-improvement period have positive net profits. The analysis shows that four products from the pre-improvement period have negative net profits: 3-E-00IO

,

3-C-0006

,

3-A-0002

, and

3-D-0015. The sales of3-A-0002 and 3-D-00 15 were continued after the improvement, whereas the sales of the other two products were stopped. Many profitable new products were \aunched after the improvement; therefore, the accumu\ated net profit after the

improvement was 27 times greater than that before the improvement5. Among the

loss-incurring products from the post-improvement period, only 3-A-0002 has a

sales figure of 200 units. The reason why the company continued to sell 200 units

of product 3-A-0002 was that this batch was from the warehouse inventory.

Therefore, iπespective of whether the batch was so\d or not, the related

manufacturing cost had already taken p\ace. In other words

,

it was a sunk cost

,

and selling the inventory would allow the company to recover at least some portion of the cost. Therefore

,

the company decided to sell the inventory.

However, after that, the company stopped producing and selling 3-A-0002

Besides that

,

sales of the loss-incurring products of other models add up to only 55 units

,

and the cumulative loss is not very high.

ln addition

, the

sa\es revenue in 2006

,

2007

,

and 2008 was approximately NT$300million

,

NT$306million

,

and NT$327million

,

respectively. Moreover

,

the

net income in 2006

,

2007

,

and 2008 was approximately NT$21 million

,

NT$22.68 million

,

and NT$30.87 million

,

respectively. Therefore

,

the financial

repo此 forCompany C shows a 2% increase in sales revenue in 2007 as compared

with 2006 and a 9% increase in 2008 as compared with 2006. There was an 8% increase in the net income in 2007 as compared with 2006 and a dramatic 47%

increase in the net income in 2008 as compared with 2006. The increase in sa\es revenue may be the result of overall economic conditions and competition;

5 By summation of net profit of each product, the net accumulated profit of approximately

NT$760,OOO was obtained for the period before the improvement of the product-mix decision This was divided by the profit of approximately NT$20,620,OOO obtained after the improvement

lt showed the accumulated net profit after the improvement was 27 times that before the Improvement