Lakeside Paper produces cardboard boxes. The boxes require designing, cutting, and printing. (The boxes are shipped flat and customers fold them as necessary.) Lakeside has a reputation for providing high- quality products and excellent service to customers, who are major U.S. manufacturers. Costs are assigned to products based on the number of machine hours required to produce them.
Three years ago, a new marketing executive was hired. She suggested the company offer custom design and manufacturing services to small specialty manufacturers. These customers required boxes for their products and were eager to have Lakeside as a supplier. Within one year Lakeside found that it was so busy with orders from small customers, that it had trouble supplying boxes to all its customers on a timely basis. Large, long-time customers began to complain about slow service and several took their business elsewhere. Within another 18 months, Lakeside was in financial distress with a backlog of orders to be filled.
Required
1. What do you believe are the major costs of making its boxes? How are those costs related to the volume of boxes produced?
2. How did Lakeside’s new customers differ from its previous customers?
3. Would the unit cost to produce a box for new customers be different from the unit cost to produce a box for its previous customers? Explain.
4. Could Lakeside’s fate have been different if it had used ABC for determining the cost of its boxes?
5. What information would have been available with ABC that might have been overlooked using a traditional volume-based costing method?
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