Kanthal Case

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Kanthal specializes in production and sales of electrical resistance heating elements and is headquartered in Hallstahammar in Sweden. In 1985, Kanthal had about 10,000 customers and 15,000 items produced with sales revenue of SEK 850 million between 1985-87. Kanthal consists of three divisions: - Kanthal Heating Technology - Kanthal Furnace Products - Kanthal Bimetals It has manufacturing facilities in Sweden, Brazil, UK, USA, Germany and Italy. In 1985, Kanthal had a change in leadership with a new President, Carl-Erik Ridderstrale. Upon becoming President, Ridderstrale initiated a new strategic plan (Kanthal 90) to ensure the resources were adequately allocated to increase profits while maintaining a return on capital in excess of…show more content…
The activity based costing system implies that high volume activities consume less resources and should be more profitable. However, with the new costing system, the management could see the hidden costs previously not visible, associated with individual product lines, orders and customers and their respective profit margins. In Exhibit 7, Customer # 33519 and 33527 are both comparably high volume but 33519 is less profitable due to the high non stocked item costs associated with customer 33519. Similarly, Customer # 33518 and 33537 have similar volumes, however, 33518 is more profitable due to lower non-stocked costs. Thus it implied, that high volume customers are not always profitable due to costs associated with manufacturing non-stocked items requiring special services. The customers who ordered more in stock items were on average more profitable than customers requiring non-stocked items. The non-stocked items required special services, increased manufacturing costs and also were seldom low volume orders. Previously, the traditional cost system did not take into account the differences between the manufacturing costs of a product order requiring stocked items vs non-stocked items in final product pricing and profit analysis. With the new costing system, Kanthal realized that only 40% of its customers were profitable, with 5% of most profitable generating 150% of profits and least 10% of customers losing 120% of profits. In fact, two of the

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