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	$	431,400		$	261,000		$	196,000
Cost of goods sold		132,000			155,000			161,000

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)		490			210			120
Receiving (number of deliveries)		37			190			57
Customer support (hours required per sale)		0.40			6.0			0.80

Harish estimates activity-cost rates for each activity as follows:

Order processing	$	150	per purchase order
Receiving		185	per delivery
Customer support		30	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.

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Prepare a product-line profitability report for SPF under the current costing system. (Loss amounts should be indicated by a minus sign. Round operating margin (loss) to 2 decimal places (i.e. 0.2134 should be entered as 21.34%).)

	Paint & Paint Supplies Carpet Other Flooring Products Operating income (loss) Operating margin (loss) % % %

• 	Paint & Paint Supplies Carpet Other Flooring Products Store support: Total store support Operating income (loss) Operating margin (loss) % % %

Answer 1

Requirement 1 | Product Line Profitability under Current Costing System Paint & Paint Other Flooring Particulars Carpet Supplies Products Sales $ 431,400 $ 261,000 $ 196,000 Cost of Goods Sold $ 132,000 $ 155,000 $ 161,000 Gross Margin $ 299,400 $ 106,000 $ 35,000 Store Support Expenses $ 107,850 $ 65,250 $ 49,000 Operating Income / (Loss) $ 191,550 $ 40,750 $ (14,000) Operating Margin 44.40% 15.61% -7.14% Requirement 2 | Product Line Profitability under ABC Costing System Particulars Paint & Paint Other Flooring Carpet Supplies Products Sales $ 431,400 $ 261,000 $ 196,000 Cost of Goods Sold $ 132,000 $ 155,000 $ 161,000 Gross Margin $ 299,400 $ 106,000 $ 35,000 Store Support Expenses : - Order Processing $ 73,500 $ 31,500 $ 18,000 - Receiving $ 6,845 $ 35,150 $ 10,545 - Customer Support $ 5,880 $ 37,800 $ 2,880 Total Store Support Cost $ 86,225 $ 104,450 $ 31,425 Operating Income / (Loss) $ Operating Margin 213,175 $ 49.41% 1,550 $ 0.59% 3,575 1.82%

A B с D E 1 2 3 4 3 4 5 6 7 8 9 Requirement 1 | Product Line Profitability under Current Costing System Particulars Paint & Paint Supplies Carpet Other Flooring Products Sales 431400 261000 196000 Cost of Goods Sold 132000 155000 161000 Gross Margin =C4-C5 =D4-D5 =E4-E5 Store Support Expenses =C4*25% =D4*25% =E4*25% Operating Income / (Loss) =C6-C7 =D6-D7 =E6-E7 Operating Margin =C8/C4 =D8/D4 =E8/E4 10 11 Other Flooring Products Requirement 2 | Product Line Profitability under ABC Costing System Particulars Paint & Paint Supplies Carpet Sales 431400 261000 Cost of Goods Sold 132000 155000 Gross Margin =C13-C14 =D13-D14 Store Support Expenses : - Order Processing =490*150 =210*150 - Receiving =37*185 =190*185 - Customer Support =490*0.4*30 =210*6*30 Total Store Support Cost =SUM(C17:C19) =SUM(D17:D19) 12 13 14 15 16 17 18 19 20 21 22 23 24 196000 161000 =E13-E14 =120*150 =57*185 =120*0.8*30 =SUM(E17:E19) Operating Income / (Loss) Operating Margin =C15-C20 =C22/C13 =D15-D20 =D22/D13 =E15-E20 =E22/E13