A Norwegian brewery with three production plants has been facing dramatic economic challenges. To deal with them, a project has been launched with the aim of improving the management control system in the brewery. The above-mentioned project includes, but is not limited to, mapping of free capacity, as well as product profitability via the application of an ABC system.

A brewery’s marketing director has claimed that an ABC model provides a reasonably good cost picture, but it overestimates dramatically the costs for low-volume products (which are believed to be very important for the customers). So does it overlook the fact that low-volume products use free capacity? A proposal to close down one of the three production plants was recently rejected by brewery’s Board of Directors. The marketing director is firmly convinced that all the products which yield the positive contribution margin (i.e. variable wages/salaries and materials are covered) have to be kept in the brewery’s product mix.

Discuss, in great detail, what you think of all the above. Use examples to support your reasoning.

Specify clearly assumptions.

Answer rating: 100% (QA)

In general its established that unless products are the same cost relations are nonlinear regardless ... View the full answer