Reference no: EM133380155

Respond to the answer below

1. Assume you are the new CFO of large coffee roasting business that has recently experienced three consecutive years of declining profitability. During this period, the organization has introduced several new lines of roasted coffee. Discuss how implementation of activity based costing can reverse this disturbing trend.

As the new CFO of the coffee roasting business, I would recommend implementing activity-based costing (ABC) by following the process of identifying the activities involved in producing each line of roasted coffee, assigning costs to each activity, calculating the total cost of each product line, comparing the total cost to revenue, and analyzing the profitability of each product line. Therefore, we can make informed decisions about which lines to keep and which ones to discontinue. We can also identify activities that are not adding value to our business and eliminate them, thereby reducing costs. The following are listed activities that could possibly reduce unnecessary costs, thus can improve efficiency, and increasing profitability.

Optimize production processes: We can optimize our production processes by using ABC to identify the activities that are driving costs and find ways to streamline them. For example, instead of holding on to old and outdated machines, we could invest in new machines that can roast and brew premium coffee more efficiently.

Reduce setup times: By analyzing the cost drivers for setup times, we can standardize the process of cleaning the roasting equipment between batches or use pre-measured packages of coffee beans to reduce the time it takes to measure and weigh the beans.

Improve quality control processes: We can install temperature and humidity sensors in the roasting equipment to ensure that the coffee beans are roasted at the optimal temperature and humidity level.

Negotiate better prices with suppliers: By using ABC to understand the cost drivers for our raw materials, we can negotiate better prices with our suppliers based on the volume of materials we need and the timing of our orders. For example, we can place larger orders with suppliers to get better pricing or negotiate discounts for early payment.

Conduct market research more efficiently: After using ABC to understand the marketing expenses, we can leverage existing data sources, such as online reviews or social media conversations, to gather insights about customer preferences and tastes. By analyzing this data, we can identify emerging trends and choose the product lines that are most appealing to our target audience. We can also leverage social media platforms to reach coffee enthusiasts or partner with local coffee shops to offer samples of our most popular product line.

Overall, by using ABC, we can focus our efforts on the profitable roasted coffee lines and accurately determine the costs associated with producing them and use that information to set a selling price that will allow us to achieve our desired profit margin. This can help us avoid underpricing our products, ensure that we are covering all our costs, and improve the overall profitability of our business. Such that setting our business on a path toward growth and success.