Blue Moon, Pty Ltd. designs and produces sailing boats ranging from 22 to 52 meters (see Exhibit 1). Rob Inglis, the firm’s owner, funded Blue Moon after a successful career as nuclear submarine construction planner. For years his business had an excellent reputation for offering its clients recreational products at a low cost and with reasonably short production time. These aspects were crucial in order to attract customers (especially retired persons and families) who had little sailing experience and were interested in medium performances.
More recently Blue Moon’s profit and market share have started to decline alarmingly. The firm is not attracting as many new clients as before and existing clients are now buying boats from Blue Moon’s competitors. Rob Inglis is extremely worried about this situation.
BLUE MOON ORGANISATION STRUCTURE
Blue Moon, Inc. consists of several departments. These departments are described below .
The Distribution Department is managed by Keshav Dayalani. The role of this department is to establish a reliable distribution network of yacht dealers for Blue Moon. Dealers are asked to stock at least one boat at all times and to market and promote the boats in their areas. Dealers receive a 20% discount on the retail price as compensation for their services (i.e., dealers profit margin is 20%).
One of the most important tasks of the Accounts Executive, Laura Maran, is to track and record the job costs, i.e. the costs of producing each boat (see Exhibit 2). A job includes direct material costs, sub-contractors parts costs, direct design and direct labour costs. Overhead costs (indirect design costs and indirect manufacturing costs) are allocated to each job using a single allocation base (direct manufacturing hours). The job costs have to fit the tight budget of the potential final clients and take into account the dealers’ profit margin.
The Creative Department is responsible for the boats’ design. Rob Inglis, the owner of Blue Moon, is also the Director of the Creative Department. His creative team is composed by mechanical engineers and naval architects. The team creates boat prototypes than are sent to the Accounting Department for job costing first, and then to the Production Department. Within this process, the number of revisions to the original prototype is usually kept to a minimum (no more than two). The aim is to guarantee a relatively short production time and reduce variances compared to the initial budget.
The Production Director, Marcus Georgesz coordinates a team of semi-skilled workers. Moreover, Marcus selects the sub-contractors that sell the fiberglass parts of the boat hulls to Blue Moon. When dealing with sub-contractors, Marcus always tries to buy the fiberglass components at the most competitive price.
The Production Department team is very skilled at producing boats quickly and cost efficiently. Until recently, these skills were crucial in order to compete successfully in the market segment that Blue Moon was targeting.
CHANGES TO THE BOAT-BUILDER SEGMENT
In the last couple of years the recreational boat industry has experienced some significant changes. A number of competitors have entered the market, offering the possibility to place orders and personalize the design of the boats on-line, while at the same time guaranteeing lower prices and shorter production times than Blue Moon. Although the performance of the boats produced by these new competitors is inferior compared to Blue Moon, Rob Inglis is extremely concerned: he has recently discovered that Blue Moon’s market share and profitability are declining because new “on-line” competitors are entering the recreational boat industry. Rob is now trying to understand how to reverse this trend.
One of Rob’s first initiatives was to commission a market research aimed at investigating the sales potential for boats designed to deliver higher performances in terms of speed and sailing experience. The research revealed that there are significant market opportunities for high performance sailboats targeted to experienced sailors. These potential new clients look for more innovative, sophisticated, and high quality/superior boats, along with excellent and expert customer service. These clients are willing to pay more for these attributes, although they still expect prices to be competitive. The market research also revealed that the demand for low cost sailing boat will decline in the medium to long term as the recent economic crisis is affecting to a large extent middle class families, thus decreasing their purchasing power.
On the basis of the market research, and after a careful evaluation of the internal strengths and weaknesses of Blue Moon, Rob realised that the company has to implement a new strategy if it wants to survive. Rob’s idea is to move his business into the higher end of the recreational boat industry. Rob realised that a number of changes would need to be introduced at Blue Moon. These changes include the following:
Reduce Blue Moon’s actual range of sailing boats by focusing on the best performing ones (see Exhibit 3), increase selling prices and, therefore, improve profit margins.
Change Blue Moon’s organisational culture. The current culture that valued time and cost efficient boat production would not be appropriate anymore. The Creative and Production Department employees would now have to change their approach to the creative and production processes. Innovation and sophistication would need to become the most important attributes when designing and producing sailing boats. True superior design skills and technical production capabilities would be crucial to these processes.
Improve boat design. Design would become more detailed (and more time-consuming), following higher engineering and aesthetic standards.
Develop new skills. Some Creative and Production Department employees need to develop new skills by attending training courses. Positive attitude towards innovation and experimentation of advanced technologies would be needed at Blue Moon.
Change sub-contracting strategies. Blue Moon would no longer target the cheapest sub-contractors. Implementing the new strategy would require selecting fiberglass manufacturers that are focused on product innovation and quality, even if they are more expensive.
Change the job costing system. The design and production processes will become more detailed, time-consuming and expensive. The Accounting Department needs to adjust to these changes. More specifically, the Accounting Department would need to consider multiple indirect cost pools and allocation bases for the manufacturing overheads.
Change the approach to distribution. Time and resources need to be invested to inform yacht dealers about the new features of Blue Moon’s boat. Dealers would need to target especially experienced sailors who are more knowledgeable about materials and interested in a superior “sailing experience”. At the same time the Distribution department should try to advertise Blue Moons products at sailing competitions and international sailing fairs. Blue Moon’s reputation would depend on the Distribution department’s ability to improve the brand and embrace the new strategy.
Rob is thrilled about the new strategic direction. However he is also aware that other aspects of his business need to be reviewed along with the issues listed above. One of these aspects is the Management Accounting System.