Bright Forever Flowers is a producer of silk flowers used in all forms of arrangements. It sells

Question:

Bright Forever Flowers is a producer of silk flowers used in all forms of arrangements. It sells its products to retail stores, through a catalog supported by an internet website, and floral shops. While the company makes a wide variety of flowers, they all come down to a few basic materials—the silk, some beads, and a cloth-wrapped “stem” made of wire. The results of the last year’s operations are in the income statement below.

The president of Bright Forever Flowers, Cheryl Bedford, is not comfortable with the way SG&A is currently being charged out. She decides to enlist the help of her business planning analysts to conduct an activity-based study of SG&A activities and trace them to specific customers.

The results of the study are in the two tables below.

What was left was to calculate the profitability of the various types of customers using the ABCM analysis. What would make this analysis tricky is the managers of each segment currently got a bonus dependent on their income before tax results. If these went up or down significantly, there could be trouble, especially since it would be a zero sum game with some winners and some losers in the costing scheme. This did not deter Chery l, who wanted the numbers to reflect the realities of the business. It would just have to be dealt with.

REQUIRED:

a. Calculate the profitability of each customer segment using the information derived from the ABCM study.

b. Which divisions benefit from the new costing scheme? Which lose?

c. How would you explain the shift in profitability? What seemed to be the cause?

d. How would you approach implementing this new scheme knowing that individual managers may not be overly excited by the results? Would you change your incentive system or simply let the chips fall where they may?