Cost Management Problems & Exercises

Role of Activity-Based Costing in Implementing Strategy Laurent Products is a manufacturer of plastic
packaging products with plants located throughout Europe and customers worldwide. During the past 10
years, Laurent Products has successfully developed a line of packaging materials and a unique bagging system
that present an important opportunity to increase the productivity of checkout counters in grocery stores. The
plastic bags manufactured by Laurent are produced in several sizes and different plastic film colors and may
have attractive multicolor printed designs on one or both sides to meet the specification of a particular grocery
store. The advantages provided by the Laurent bagging system include the lower cost of bags and labor at the
checkout counter as well as improved customer service. The system has contributed to significant growth in
Laurent’s sales in recent years.
Laurent’s success in the grocery chain market has attracted an increasing number of competitors into the
market. While the company has been very successful in bringing out a series of new product types with
innovative labor-saving features for the grocery stores, Laurent’s competitors have eventually been able to
develop quite similar products. The result has been increased competition with a substantial reduction in
Laurent’s prices.
As a result of the increased competition in the grocery chain market, Laurent is planning to begin to focus on
the small independent grocery stores that purchase bags from large wholesale distributors. The potential sales
for this wholesaler segment is about the same size as the grocery chain market but includes a much larger
number of independent store customers.
Investments in manufacturing equipment in recent years have been to support two principal objectives: to
increase capacity and to reduce costs. The cost reduction initiatives principally concerned material costs and
reduced processing times. Over the years, Laurent has chosen to invest in machines that are similar to existing
equipment in order to capitalize on the fact that the process is relatively simple and that products can, with
relatively few exceptions, be processed on any machine in the plant. The only major restriction is the number
of colors that a machine can accommodate on a single pass. Future investment proposals now being
considered are based on this rationale.

Question
1.) What are the key strategic issues facing Laurent, and how can ABC costing assist in resolving these issues?