M-L Fasteners GmbH: Teaching Commentary

Essay by EMBA2007University, Master's April 2006

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This heavily disguised case is very rich in cost analysis opportunities with a strong strategic dimension. We use it as the first case in a segment on cost system design in the required Managerial Accounting course at Tuck.

The setting is 1986 in a German manufacturer of snap fasteners (for garments) and of the machines which attach the fastener to garments. This is a classic example of a "bundled business"--the company's strategy is to sell or lease machines cheap and make it up from fastener profits. Business history is filled with examples of firms which have "bundled" their product offerings with explicit realization that profitability differed markedly across the bundle:

Gillette - razors and blades

Kodak - cameras and film

AT&T - local and long distance service

General Electric - steam turbines and maintenance service

In these cases, the less profitable segment was consciously used as a market entree.

Individual component costing and profitability was not as important for the overall strategy as bundled profitability. For these firms, the strategy was very successful for many years.

The problem in the ML case is a company with a bundled business strategy coupled with an accounting system that does not accurately reflect the profit implications of the bundling. Unfortunately, this situation is all too common--the "full line" producer whose conception of product profitability is dangerously flawed by inaccurate product costing. Developing strategic positioning and the related implementation tactics is difficult enough when one is working from reasonably solid financial information. When the financial information is itself badly flawed, the resulting strategic and tactical assessments can be potentially disastrous, as the ML case shows.

We use the case with three purposes in mind:

* to demonstrate a very common way that flawed financial information arises in a firm.

* to illustrate the...