C 3. Refer to the income statement in C 2 for the State Institutions customer group for the year ended December 31. Sandee Star, the owner of Star Bakery, is in the process of budgeting income for next year. She has asked the controller to prepare a budgeted income statement for the State Institutions customer group.

She estimates that the selling price per case, the number of cases sold, the cost of goods sold per case, and the activity costs for making sales calls, preparing sales orders, and handling inquiries will remain the same next year. She has contracted with a new freight company to ship the 50,000 cases at $0.60 per case sold. She has also analyzed the procedures for invoicing, processing credits, billing, and collecting and has decided that it would be less expensive for a customer service agency to do the work. The agency will charge the bakery 1.5 percent of the total sales revenue.

1. Prepare a budgeted income statement for the State Institutions customer group for next year; the year ends December 31.

2. Refer to the information in C 2. Assuming that the planned activity cost rate and planned annual cost driver level for each selling and administrative activity remain the same next year, calculate the planned activity cost for each activity.

3. Calculate the differences between the planned activity costs (determined in 2) and the State Institutions customer group’s budgeted activity costs for next year (determined in 1).

4. Evaluate the results of changing freight companies and outsourcing the customer service activities.

Lean in a Service Business