Question

Wearwell Carpet Company is a small residential carpet manufacturer started by Don Stegall, a long-time engineer and manager in the carpet industry. Stegall began Wearwell in the early 1990s after learning about ABC, JIT, total quality management, and several other manufacturing concepts being used successfully in Japan and other parts of the world. Although it was a small company, he believed that with his many years of experience and by applying these advanced techniques, Wearwell could very quickly become a world-class competitor.

Stegall buys dyed carpet yarns for Wearwell from three different major yarn manufacturers with which he has done business for many years. He chose these companies because of their reputation for producing high-quality products and their state-of-the art research and development departments. He has arranged for two carpet manufacturing companies to produce (tuft) all of his carpets on a contractual basis. Both companies have their own brands, but they also do contract work for other companies. For each manufacturer, Stegall had to agree to use the full output of one manufacturing production line at least one day per month. Each production line was dedicated to producing only one style of carpet, but each manufacturer had production lines capable of running each type of carpet that Wearwell sold.

Stegall signed a contract with a large transport company (CTC), which specializes in carpet-related shipping, to pick up and deliver yarn from the yarn plants to the tufting mills. This company will then deliver the finished product from the tufting mills to Wearwell’s ten customers, which are carpet retailers in the ten largest residential building markets in the country. These retailers pay the shipping charges to have the carpets delivered to them. Wearwell maintains a small sales staff (which also doubles as a customer service staff) to deal with the retailers and occasionally with the end customers on quality problems that arise.

Wearwell started selling only one line of carpet, a medium-grade plush, but as new carpet styles were developed, it added two additional ines, a medium-grade berber carpet and a medium-grade textured carpet. Three colors are offered in each carpet style. By selling only medium grades with limited color choices, Stegall felt that he would reach a very large segment of the carpet market without having to deal with a large number of different products. As textured (trackless) carpets have become more popular, sales of plush have diminished substantially.

Required: Does Wearwell seem to be an appropriate setting for implementing ABC? Explain why or why not. If ABC is implemented what are likely to be the most important activities and related cost drivers?

Answer 1

Yes, Wearwell seems to be an appropriate setting for implementing ABC. This is because Wearwell has several different activities in its operations that lead to the overall finished products. Dyed carpet yarns are purchased from different yarn manufacturers, carpet related shipping is done through a large transport company, and a team of salesmen are on payroll to properly deal with retailers. Thus Wearwell seems to be an appropriate setting for implementing ABC as there is a need to identify resources that are consumed by different activities which support the production of the end product i.e. the medium-grade plush carpet.

The most important activities and related cost drivers for Wearwell will be:

Activity	Cost driver
Labor costs	Direct labor hours
Transportation costs	Weight of the carpets
Tuft production	Volume of the carpets
Selling expenses	Number of salesmen