Question

Studemeir Paint & Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks that the store will improve its profitability if it discontinues the Other Flooring Products line. The operating results from the most recent period are: Paint and Paint Supplies Carpet Other Flooring Products Sales $ 174,100 $ 280,000 $ 216,000 Cost of goods sold 100,000 195,000 172,000 SPF estimates that store support expenses are approximately 25% of revenues. Harish Rana, SPF’s controller, states that while every sale has one purchase order, not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows: Activity (cost driver) Paint and Paint Supplies Carpet Other Flooring Products Order processing (number of purchase orders) 250 195 113 Receiving (number of deliveries) 38 165 60 Customer support (hours required per sale) 0.30 5.0 0.75 Harish estimates activity-cost rates for each activity

as follows: Order processing $ 170 per purchase order Receiving 190 per delivery Customer support 20 per hour Required: 1. Prepare a product-line profitability report for SPF under the current costing system. 2. Prepare a product-line profitability report for SPF using the ABC information the controller provides.

Answer 1

Under Current Costing System
	Particulars	Paint and Paint Supplies	Carpet	Other Flooring Product
	Sales	$                 174,100	$        280,000	$                             216,000
Less	Cost of Goods Sold	$                 100,000	$        195,000	$                             172,000
	Gross Margin	$                   74,100	$          85,000	$                               44,000
	Store Support Expenses (25% of Sales)	$                   43,525	$          70,000	$                               54,000
	Net Profit	$                   30,575	$          15,000	$                             (10,000)
Under Activity Based Costing
	Particulars	Paint and Paint Supplies	Carpet	Other Flooring Product
	Sales	$                 174,100	$        280,000	$                             216,000
Less	Cost of Goods Sold	$                 100,000	$        195,000	$                             172,000
	Gross Margin	$                   74,100	$          85,000	$                               44,000
	Purchase Order Cost
	No of Purchase Orders	250	195	113
	Activity Cost Rate	$                         170	$                170	$                                     170
	Purchase Order Cost (a)	$                   42,500	$          33,150	$                               19,210
	Receiving Cost
	Number of Deliveries	38	165	60
	Activity Cost Rate	$                         190	$                190	$                                     190
	Receiving Cost (b)	$                      7,220	$          31,350	$                               11,400
	Customer Support Cost
	Customer Support Hours Required	11.40	82.50	45.00
	Activity Cost Rate	$                      20.00	$            20.00	$                                  20.00
	Customer Support Cost ( c )	$                         228	$            1,650	$                                     900
	Total Store support Expenses (a+b+c)	$                   49,948	$          66,150	$                               31,510
	Net Profit	$                   24,152	$          18,850	$                               12,490