Question

Problem 2 – ABC (Product Mix of Retail Company)

Super Bookstore (SB) is a large city bookstore that sells books and music CDs, and has a café. SB operates at capacity and allocates selling, general, and administration (SG&A) costs to each product line using the cost of merchandise. SB wants to optimize its pricing and cost management of each product line (books, CDs and café). Mary Evans, the controller of SB, is wondering if its accounting system is providing it with the best information for making such decisions, i.e., pricing and cost management. Mary heard about activity-based costing (ABC) and decided to evaluate profitability of each product line using ABC. She collected the following information for her ABC analysis.

Budgeted Product Line Information for the year ended Dec. 31, 2017

Books CDs Café Total

Revenue $3,720,480 $2,315,360 $736,216 $6,772,056

Cost of merchandise $2,650,000 $1,720,000 $272,450 $4,642,450

Cost of café cleaning - - $ 18,250 $ 18,250

SG&A $1,485,584

Operating Income $ 625,772

Activities related to SG&A: Books CDs Café Total

Number of purchase orders 2,800 2,500 2,000 7,300

Number of deliveries received 1,400 1,700 1,600 4,700

Hours of shelf stocking time 15,000 14,000 10,000 39,000

Items sold 124,016 115,768 368,108 607,892

Mary estimates the following SG&A costs for 2017:

Purchasing department expenses……………………………….$ 474,500

Receiving department expenses ……………………………….. 432,400

Shelf stocking labor expenses …………………………………… 487,500

Customer support (cashiers and floor employees) ...... 91,184

Total SG&A $1,485,584

Required – Round up to the 2nd decimal point.

1. Determine the budgeted profitability of the bookstore (i.e., Operating Income/Revenue).

2. Determine the profitability of each product line, using SB’s current costing system, i.e., allocate SG&A based on cost of merchandise.

3. Determine the budgeted profitability of each product line, using ABC.

4. 1) What new insights do you learn by comparing your answer for question 2) with your answer for question 3) above? Based on the comparison, what changes (e.g., product mix or cost management) would you recommend to improve the company’s profitability, if you were Mary?

Answer 1

Ques 1
Revenue	$        6,772,056
Cost of merchandise	$        4,935,723
Gross profit	$        1,836,333
Cost of café cleaning	$              18,250
S,G & A costs	$        1,485,584
Operating income	$            332,499
Ques 2
	Books	CDS	Café	Total
Revenue	$        3,720,480	$        2,315,360	$        736,216	$        6,772,056
Cost of merchandise	$        2,656,727	$        1,722,311	$        556,685	$        4,935,723
Gross profit	$        1,063,753	$            593,049	$        179,531	$        1,836,333
Cost of café cleaning			$          18,250	$              18,250
S,G & A costs	$            799,638	$            518,392	$        167,554	$        1,485,584
Operating income	$            264,115	$              74,657	$          (6,273)	$            332,499
notes:
a)$1485584*2656727/4935723
b)$1485584*1722311/4935723
a)$1485584*556685/4935723
Ques 3
	Books	CDS	Café	Total
Revenue	$        3,720,480	$        2,315,360	$        736,216	$        6,772,056
Cost of merchandise	$        2,656,727	$        1,722,311	$        556,685	$        4,935,723
Gross profit	$        1,063,753	$            593,049	$        179,531	$        1,836,333
Cost of café cleaning			$          18,250	$              18,250
S,G & A costs
Purchasing department expenses	$            182,000	$            162,500	$        130,000	$            474,500
Receiving department expenses	$            128,800	$            156,400	$        147,200	$            432,400
Shelf stock labour expense	$            187,500	$            175,000	$        125,000	$            487,500
customer support expenses	$              18,602	$              17,365	$          55,216	$              91,184
Operating income	$            546,851	$              81,784	$     (296,135)	$            332,500
notes
a.474500*2800/7300
b.474500*2500/7300
c.474500*2000/7300
d.432400*1400/4700
e.432400*1700/4700
f.432400*1600/4700
g.487500*15000/39000
h.487500*14000/39000
i.487500*10000/39000
j.91184*124016/607892
k.91184*115768/607892
j.91184*368108/607892
Ques 4
	Books	CDS	Café
Cost of merchandise as base	$            264,115	$              74,657	$          (6,273)
ABC costing	$            546,851	$              81,784	$     (296,135)
the books are much more profitable and the café loses a lot more money in
ABC system as compare to traditional method

if i were mary i would ask management to use traditional approach or if it were to insisit on using ABC system then there must be changes made in the activities identified for each of the divisions