THE RETAIL SUPPLY CHAIN OF HOUSE OF DEBLEWIS LTD

Overview of Case Study: This case study is related with the retail supply chain operations of a firm named
House of Deblewis Ltd. You have been hired as a logistics manager for their Coventry Distribution Centre.
The major distribution products are sanitary ware, supplied throughout the UK. There is a distribution
center and a warehouse situated in Coventry, which is running 10 trucks of various configurations. The
Managing Director is wishing to expand the existing fleet due to expansion plans of the business.

Summary Statistics: Key costing figures of the company provided by the accountant are as follows
assuming a 250 days working period in a year.

Fleet Costing

Type Description Rate

Rental Price per rigid vehicle per 5 day week £330
Contract Hire Price per Rigid per 5 day week for 1 year contract 360
Driver Agency Costs One driver per 8 hour day (over time after 40 hours at time and a half) 95
Leasing Price per Rigid per 5 day week for 6 year operating lease 260
Purchase Depreciated to zero over 6 years (New Volvo FL10 320 bhp 6x2 Rigid 73,200
Curtainsider)

Other Related Costs

Type Description Rate/Cost

Driver Salary 8 Hours a Day/Fixed £20, 000/year
Fuel Cost Fuel Economy Average 12 miles per gallon £5.47/gallon and £1.20 per liter
Management cost For Supervisor 27, 000/year
Overhead cost Telephones and telematics technologies 325/year

ANALYSIS
1. Evaluation of Management Accounting Costing Methods for House of Deblewis: Management
accounting is a branch of accounting which deal with making decisions based on costing data. It
combines accounting, finance and management in order to perform business processes more
efficiently. (CIMA, 2017). There are several applications of management accounting practices and
one of those practices includes the costing procedures for a firm. In our case of House of Deblewis
we are provided with a data of logistics supply firm who requires a good management accounting
costing method. So from a broader point of view we can use either marginal or absorption costing
schemes.
a. Marginal Product Cost: The marginal product cost is the sum of direct materials cost,
direct labor cost, direct expenses including variable overhead cost. (KAPLAN FINANCIAL,
2017). The fixed portion of the cost is dealt later so an income statement when prepared
under marginal costing will look like as follows:
 Image Source: Kaplan Financial Knowledge Bank

b. Absorption Costing: The absorption costing is also called full costing. It is a costing
method of expensing all costs associated with manufacturing a particular product. It is a
peculiar requirement of GAAP. (Investopedia, 2017). An income statement prepared
under absorption costing looks like:

Image Source: Financial Accountancy.Org

 c. Appropriate Method for House of Deblewis: In our scenario of House of Deblewis we
have to analyze the nature of business and key cost figures which are provided to us. As
we can see most of the fleet costing data consists of variable costing items. And other
related costs are also mostly variable cost oriented. So the company should use Variable
costing for its profitability analysis in short run.
2. Evaluating Investment Appraisal Methods and Difference b/w Marginal and Activity Based
Costing: Now managing director wants us to make further analysis in order to purchase a new
warehouse in Manchester. For which we will evaluate two investment appraisal methods.
Investment appraisal is a collection of techniques which is used in order to check either
investment is worthy or not. (APM, 2017). There are several major and minor investment
appraisal methods but for our case of House of Deblewis where a new warehouse is to be
purchased we can use two Discounted Cash Flow techniques of Net Present Value (NPV) and
Internal Rate of Return (IRR).
a. Net Present Value (NPV): Net Present Value (NPV) is the present value of cash flows at a
given discount rate minus the Initial investment. (Gallo, 2014). The NPV formula for a
given period is NPV= PV of CFs – Initial Investment. The decision criteria for NPV for an
investment project is quite straightforward. If NPV of a project is greater than 0 or its
positive the project will be accepted and if NPV of a project is less than 0 or its negative
then the project will be rejected. So the Warehouse purchase will be analyzed based on
this decision.
b. Internal Rate of Return (IRR): The IRR is the rate at which the project break even. (Gallo,
2016). IRR technique is quite similar to NPV but in IRR we don’t use a particular discount
rate instead we use the hurdle rate through a trial and error approach in order to arrive
a required rate of return of the project. The decision criteria for IRR is based on
comparison with cost of capital. If IRR > Cost of Capital then accept the project and if IRR
< Cost of Capital then we can reject the project. So the warehouse purchase will be
analyzed based on that decision.
c. Best Technique for use: By comparing two techniques of investment appraisal, every
technique has its own pros and cons. But in a broader context IRR is considered as it gives
the real rate of return which can be earned through an investment.
d. Marginal and Activity Based Costing for New Warehouse: As described earlier in
marginal costing we account for the variable cost first and then go for the fixed cost
component in making financial statements. Whereas the ABC (Activity Based Costing) is a
more logical method of assigning overhead costs to the production. (Averkamp, 2017).
ABC first assigns the costs to those activities which are the real cause of overhead. And
then assigns costs to only those products which are actually demanding the activities. As
the House of Deblewis operations are mostly variable cost oriented then they should
follow the marginal costing technique in the purchase of the warehouse.
3. Appraising Costing and Pricing Techniques: In this part of the document there are two things
which are to be dealt as:
a. Price of Transport: The activity of transport is to transfer a kitchen counter from
Worcester to Bristol. It is journey of 64 miles and to be done using the costs for rentals
including a markup of 60%. The rental information is as follows:
 Type Description Rate
Rental Price per rigid vehicle per 5 day week £330
Price =Transport cost +Driver Salary + Fuel + Cost Markup
=(330/5)+(20, 000/250)+(5.47×5)+(60% of transport cost)
= (66) + (80) + (27.35) + (60%)
= (173.35) + (60%)
= £ 277.36

Final Price Moving a Kitchen Counter £277.36

b. Appraising Costing and Pricing Assumptions: In the Part A, we have calculated the cost
of moving a kitchen counter from Worcester to Bristol which is done by using a rental
vehicle whose rate is £330 and with a markup of 60% we have incurred a cost of £277.36.
So while appraising costing and pricing assumptions we need to observe other available
options as well. Other than the rental option, the company has the following options:

Contract Hire Price per Rigid per 5 day week for 1 year contract £360
Driver Agency Costs One driver per 8 hour day (over time after 40 hours at time and a half) 95
Leasing Price per Rigid per 5 day week for 6 year operating lease 260
Purchase Depreciated to zero over 6 years (New Volvo FL10 320 bhp 6x2 Rigid 73,200
Curtainsider)

So in order to get a complete picture we should check the price of transport by each option.

Type Appraisal
Contract Hire The cost of contract hire is around the same which is by rental and it can be
beneficial as we don’t need to involve much of the company’s staff but it can create
problem when the terms of contract are violated by either party.
Driver Agency Costs The costs of this method are low but the driver will be only available for 8 hours
and after which there will be an overtime which has to be paid so it is not much
viable in terms of cost.
Leasing It’s good for a long term project as the lease will give us a more comprehensive
chance of managing the delivery of goods as the trucks will be in the company’s
possession but the lease rental expense can be a problem for the firm.
Purchase The purchase of a new truck will incur a huge capital expenditure and a cash outflow
but in the long run it will eliminate the other factors associated with delivery like
rental, contract hire etc.

4. Justifying the Financial Performance of House of Deblewis: In the last part of our discussion we
will highlight the financial performance of House of Deblewis based on the factors of costing,
pricing, investment and accounting appraisal methods. So this discussion is made in the following
4 headings:
a. Costing Methods: In our discussion we have discussed about the marginal and absorption
costing. Marginal cost applies to a specific unit while the absorption applies to the whole
set of products. (Accounting tools, 2016). In our case of House of Deblewis, we have
focused on marginal costing as the most of the costing data of the company is variable
 cost oriented and for such a company the determination of contribution margin is
necessary as they want to know how much they are earning against their variable cost
and fixed cost. An efficient contribution margin is one that can pass the costs of creating
the product and generate a profit. If the contribution margin is negative, this will mean
loss for the company. (Debitoor, 2017). So the company can use this method in its logistics
and supply chain operations.
b. Pricing Mechanism: In the later portion of the document, we have studied the price
mechanism of the company for the delivery of various products over various distances.
There are a number of delivery and transport options available for the company, but the
most viable can be decided by an Even-Swaps method. (Hammond & Keeney, 1998).
Through Even swaps various trade-offs can be made and the best possible alternate can
be selected which will ultimately improve the financial position of the concerned
company.
c. Investment Appraisal: As we have used Net Present Value and Internal Rate of Return for
appraising the project of new warehouse in Manchester. So both of the methods are good
when they are used in their respective capacity but the method of IRR is more preferable
as it gives a real return over an investment horizon. So we can use it in other scenarios as
well for the purpose of analysis. But the one problem with IRR is that we must know the
exact rate at which DCF model is to be applied otherwise we can’t calculate the IRR.
d. Accounting Appraisal: The accounting approach is not much similar from the costing
approach the companies like House of Deblewis which are logistics and supply chain
companies must prepare their accounts and financial statements in the light of IFRS
(International Financial Reporting Standards) and IAS (International Accounting
Standards) in compliance with GAAP (Generally Accepted Accounting Principles). Principe
of full disclosure is required in financial statements of a company. So the compliance with
these systems is mandatory in order to prepare good financial statements. (IFRS, 2017)

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