Question

. CHAPTER 5 ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT Required Under its simple costing system, FS allocated support costs to products at the rate of 30% of cost of goods sold. 1. Use the simple costing system to prepare a product-line profitability report for FS. 2. Use the ABC system to prepare a product-line profitability report for FS. 3. What new insights does the ABC system in requirement 2 provide to FS managers? 5-25 ABC, wholesale, customer profitability. Ramirez Wholesalers operates at capacity and sells furni- ture items to four department store chains (customers). Mr. Ramirez commented, "We apply ABC to deter- mine product-line profitability. The same ideas apply to customer profitability, and we should find out our customer profitability as well." Ramirez Wholesalers sends catalogs to corporate purchasing departments on a monthly basis. The customers are entitled to return unsold merchandise within a six-month period from the purchase date and receive a full purchase price refund. The following data were collected from last year's operations 1 $55,000 Chain 2 3 $25,000 $100,000 4 $75,000 Gross sales Sales returns Number of items Amount Number of orders: Regular Rush 101 $11,000 2565 $3,500 $ 7,000 $ 6,500 45 175 1148 52 11 75 32 Ramirez has calculated the following activity rates: Activity Regular order processing Rush order processing Returned items processing Catalogs and customer support Cost-Driver Rate $25 per regular order $125 per rush order S15 per item $1,100 per customer

Answer 1

Answer is given below

1 Customer profitability analysis 1 $55,000 $11,000 $44,000 $33,000 $11,000 Chain 2 $25,000 $3,500 $21,500 $16,125 3 $100,000 $7,000 $93,000 $69,750 $23,250 4 $75,000 $6,500 $68,500 $51,375 $17,125 Total $255,000 $28,000 $227,000 B $170,250 $56,750 $5,375 Gross sales Returns Net Sales Cost of goods sold-70% Gross profit Less: Customer service cost Regular order processing Rush order processing Returned items processing Catalogs and Customer service Total customer service costs Customer profitability Customer wise return on Net sales $4,375 $6,000 $1,300 $1,375 $375 $975 $1,125 $1,375 $1,515 $1,100 $5,115 $5,885 13.4% $1,100 $11,850 $6,475 -30.1% $1,100 $4,750 $18,500 19.9% $1,875 $4,000 $525 $1,100 $7,500 $9,625 14.1% $8,675 $12,750 $3,390 $4,400 $29,215 $27,535 A 12.1% A/B Chain 2 is having negative customer profitability. The costs of this customers should be reviewed to make it profitable The sales is also lower to this customer The number of orders have to be reduced to make it profitable rest of the 3 customers are profitable Working note: Activities consumed Customer wise Total Activities 347 Regular order processing Rush order processing Returned items processing 102 226 Regular order processing -$25 per order Rush order processing - $125 per order Returned items processing -$15 per order $1,125 $1,375 $1,515 $4,375 $6,000 $1,300 $1,375 $975 $1,875 $4,000 $525 Total Activities $8,675 $12,750 $3,390 $375