Question

Supermart Food Stores (SFS) has experienced net operating losses in its frozen food products line in the last few periods. Management believes that the store can improve its profitability if SFS discontinues frozen foods. The operating results from the most recent period are: Frozen Foods $129,000 111,000 Sales Cost of goods sold Baked Goods $102,000 75,000 Fresh Produce $170,000 118,000 SFS estimates that store support expenses, in total, are approximately 20% of revenues. The controller says that not every sales dollar requires or uses the same amount of store support activities. A preliminary analysis reveals store support activities for these three product lines are: Frozen Foods Baked Goods 44 Activity (cost driver) Order processing number of purchase orders) Receiving (number of deliveries) Shelf-stocking number of hours per delivery) Customer support (total units sold) Produce 105 127 55 32,000 0.3 35,000 70,000 The controller estimates activity-cost rates for each activity as follows: $ Order processing Receiving Shelf-stocking Customer support 82 per purchase order 109 per delivery 13.00 per hour 0.26 per item Required: 1. Prepare a product-line profitability report for SFS under the current costing system. 2. Prepare a product-line profitability report for SFS using the ABC information the controller provides. Complete this question by entering your answers in the tabs below.

Answer 1

Profitability report under current costing system Frozen Food Baked Food Fresh Produce $ 129,000 $ 102,000 $ 170,000 $ (111,000) $ (75,000) $ (118,000) $ 18,000 $ 27,000 $ 52,000 Sales Less: Cost of Goods Sold Gross Margin Less: Store support expenses (Sales * 20% ) Operating income (loss) Operating Margin ( loss) $ $ (25,800) $ (7,800) $ -6.05% (20,400) $ 6,600 $ 6.47% (34,000) 18,000 10.59% Operating margin (loss ) % = Operating income ( loss ) / Sales * 100

2) Profitability report under ABC Costing system Frozen Food Baked Food Fresh Produce Sales $ 129,000 $ 102,000 $ 170,000 Less: Cost of Goods Sold $ (111,000) $ (75,000) $ (118,000) Gross Margin $ 18,000 $ 27,000 $ 52,000 Store support Order processing cost $ 1,230 $ 3,608 $ 8,610 Delivery costs 872 $ 5,995 $ 13,843 Shelf stocking costs 312 $ 215 $ 8,255 Customer support costs 8,320 $ 9,100 $ 18,200 Total Store support cost 10,734 $ 18,918 $ 48,908 Operating income ( loss) $ 7,266 $ 8,083 $ 3,092 Operating Margin ( loss) 5.63% 7.92% 1.82% 5.639 Operating margin (loss ) % = Operating income ( loss) / Sales * 100

Frozen Food Baked Food Fresh Produce Cost Cost driver activiy Driver Rate Cost Cost Cost Driver Cost Driver Cost Driver Cost Quantity assigned Quantity assigned Quantity | assigned cost or ser cost se Order processing Receiving Shelf stocking Customer support $ 82.00 $ 109.00 $ 13.00 $ 0.26 15 8 24 32000 $ 1,230 $ 872 $ 312 $ 8,320 $ 10,735 44 55 16.5 35000 $ 3,608 $ 5,995 $ 215 $ 9,100 $ 18,918 127 635 70000 $ 13,843 $ 8,255 $ 18,200 $ 48,908 No. of hours for shelf stocking Frozen Food Baked Food Fresh Produce 127 No. of delivieries No. of hours per delivery Total hours 0.3 16.5 635 Cost assigned = Cost driver quantity alloted "Cost driver rate Activate Window