M-L Fasteners GmbH: Teaching Commentary

OVERVIEW

This heavily disguised depicted object is very rich in cost analysis opportunities with a strong strategic dimension. We expend it as the first case in a portion on cost organisation design in the involve Managerial Accounting course at Tuck.

The setting is 1986 in a German manufacturer of snap alterings (for garments) and of the machines which attach the fastener to garments. This is a classic example of a bunchd business--the familiaritys strategy is to sell or lease machines cheap and make it up from fastener profits. Business history is filled with examples of firms which have bundled their crop offerings with explicit realization that profitability differed markedly across the bundle:

Gillette - razors and blades

Kodak - cameras and film

AT&T - local and long distance service

General galvanising - steam turbines and maintenance service

In these cases, the less profitable segment was consciously used as a market entree. Individual member costing and profitability was not as important for the boilers suit strategy as bundled profitability. For these firms, the strategy was very successful for many a(prenominal) years.

The problem in the ML case is a company with a bundled business strategy coupled with an accounting system that does not accurately reflect the profit implications of the bundling.



Unfortunately, this situation is all in all too common--the full line producer whose conception of crossing profitability is dangerously flawed by inaccurate output costing. Developing strategic positioning and the related implementation play is difficult enough when one is working from reasonably truehearted monetary information. When the financial information is itself badly flawed, the resulting strategic and tactical assessments can be potentially disastrous, as the ML case shows.

We use the case with three purposes in mind:

* to install a very common way that flawed financial information arises in a firm.

* to illustrate the...

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