Case Study: Improving Business Performance through Life-Cycle Costing | A-Trust Bhd.

About A-Trust Bhd.

A-Trust Bhd. (AB) produces healthcare equipment, which consists of two Non-Clinical (NC) categories and one Clinical (CL) category. The products are marketed and distributed throughout the Malaysia, Singapore, Brunei and Indonesia region. Each product category is managed by a separate business division. AB products are well known for innovation, quality and reliability.

All of AB’s product categories are leaders in their respective market segments. Each category earns a gross profit margin of more than 60%, and contributes almost equally to the total company sales revenue. The NC categories have higher volume of sales but with lower selling price per unit. NC products are marketed to consumers, households and business organisations. In contrast, CL products are targeted at customers who operate in the medical industry.CL category has lower sales volume but are sold at much higher prices.

In recent years, AB has enjoyed double-digit growth in sales as well as consistent improvement in its profit margin. However, despite the higher sales value and gross margin, profit growth in the CL category have been slower than that in the NCs. To solve this problem, the senior management has formed a task force comprising cross-functional managers. This task force includes experts in medical field, sales, marketing, production, supply chain, and management accounting.

After a thorough review of the business strategies, value chain, business processes and activities of the CL division, the task force has made the following findings:

1.Investment: Producing clinical equipment requires sophisticated technology and production process. The heavy investment involved is not just for the production machinery and tools that make the clinical equipment. Almost every type of clinical equipment needs a different production process and assembly line, as well as a team of specially trained production employees.

2.Research and development: Even before the decision to acquire the right machines and tools for production, every innovation that AB creates begins with extensive research and development work. The research effort requires a balance of medical science, market insight and product design and engineering elements.

3.Marketing: The marketing of the innovation must be carefully planned and exercised. Different kinds of plans and resources will be needed for product launch, compared to the plans and resources needs for maintaining the market, and also for managing its replacement by a newer technology.

4.After-sales support: As much as the sales process is generally interpreted as the process that secures customer orders, customers in the CL market segment also take into consideration the quality and reliability of after-sales support in their purchase decisions. AB commits significant resources every year to ensure this customer requirement is met.

5.Accounting: The current evaluation of new product in AB is based on traditional management accounting, which emphasizes on the cost of production. A new product will be approved as long as it is estimated to achieve or exceed the expected gross profit margin. Non-production costs are treated as period costs.

The task force is considering to introduce product life-cycle costing to AB to better facilitate product launch and management decisions. As important as planning for the successful launch of a new product, monitoring, review and control of the implementation of the plan must be equally emphasized. Therefore, the task force will recommend the use of non-financial performance indicators to complement the current use of financial performance indicators for performance measurement.

Explain life-cycle costing and how it can help improve the business performance of AB. 

-Any 4 relevant points, with example and related to the case.