Question

MininHot is a distributor of specialty sauces to the HORECA sector. MininHot operates at capacity and serves three main segments: a. Key accounts, comprising large hotel and restaurant chains as well as catering firms b. Multilocation, comprising medium size hotel and restaurant chains C. Owner operated, comprising HORECA customers owning a single location Erik Gonzalez, MininHot's controller, reported the following data for 2019: Revenues COGS Gross Margin Other Operating Costs Operating Income Key accounts $7,416,000 7,200,000 $216000 Multilocation $6,300,000 6,000,000 $300,000 Owner operated $3,960,000 3,600,000 $360,000 MininHot $17,676,000 8,400,000 $876,000 602,160 $273.840 Traditionally, MininHot has used gross margin percentage [(Revenue - COGS)/Revenue) to evaluate the relative profitability of its market segments. However, Gonzalez recently attended a course on activity-based costing and is considering using it at MininHot to analyze and allocate "other operating costs." He meets with all the key managers and several of his operations and sales staff and they agree that there are five key activities that drive Other Operating costs at MininHot: Activity Order processing Line-item processing Delivering to customer premises Boxes shipped to customers Recipe development with customers Cost Driver Number of customer purchase orders Number of line items ordered by customers Number of store deliveries Number of cartons shipped Hours of recipe development Each customer order consists of one or more line-items. A line-item represents a single product (such as Extra Hot Habanero Sauce). Each product line-item is deliver in one or more separate boxes. Each customer premises delivery entails the delivery of one or more cartons of products to a customer. MininHot's staff also develops recipes or user experiences in collaboration with the customers. Currently there is no extra charge for this recipe development and not all customers use MininHot for this purpose. The level of each activity in the three market segments and the total cost incurred for each activity in 2019 is as follows:

Answer 1

1)	Calculation of Gross Margin Percentage for each of MininHot's three major customer segments
		Key Accounts	Multilocation	Owner Operated	Total
	Revenues	$7,416,000	$6,300,000	$3,960,000	$17,676,000
	Cost of Goods Sold	$7,200,000	$6,000,000	$3,600,000	$16,800,000
	Gross Margin	$216,000	$300,000	$360,000	$876,000
	Gross Margin Percentage [(Revenue-COGS)/Revenue	2.91%	4.76%	9.09%	4.96%
2)	Calculation of cost driver rates for each of the five activity areas
	Activity	Activity Expenses	Activity cost driver	Activity cost driver quantity	Activity cost driver rates
	Order Processing	$160,000	Number of customer purchase order	4,000	$40
	Line-item Processing	$127,680	Number of Line-items ordered by customers	42,560	$3
	Delivering to Customer premises	$142,000	Number of store deliveries	2,960	$47.97
	Boxes shippedto customers	$152,000	Number of cartons shipped	152,000	$1
	Recipe development with customer	$20,480	Hours of recipe development	1,280	$16
3)	Calculation of Operating income for each market segment using Activity Based Costing
		Key Accounts	Multilocation	Owner Operated	Total
	Revenues	$7,416,000	$6,300,000	$3,960,000	$17,676,000
	Cost of Goods Sold	$7,200,000	$6,000,000	$3,600,000	$16,800,000
	Gross Margin	$216,000	$300,000	$360,000	$876,000
	Less: Other Operating Cost (Number of Activities X Overhead cost per activity)
	Order Processing Cost	$11,200	$28,800	$120,000	$160,000
	Line-item Processing cost	$11,760	$25,920	$90,000	$127,680
	Delivering to customer premises	$11,513	$34,538	$95,949	$142,000
	Boxed shipped to customers	$72,000	$48,000	$32,000	$152,000
	Recipe development cost	$11,520	$5,760	$3,200	$20,480
	Operating Income	$98,007	$156,982	$18,851	$273,840
4)	Activity-based costing identifies the activities generating costs and assigns costs to those activities. As a manager, Using activity-based costing we can identify which activities consume resources. The focus is then to effectively manage costly activities with the goal of reducing costs and improving quality.