=+6-34 K Activity-based costing, wholesale, customer profitability OBJECTIVE 7 Erut Wholesalers operates at capacity and sells furniture items to four department store chains (customers). Mr Erut commented:

‘We apply ABC to determine product line profitability. The same ideas apply to customer profitability, and we should find out our customer profitability as well.’ Erut Wholesalers sends catalogues to company 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:

Chain 1 2 3 4 Gross sales $55 000 $25 000 $100 000 $75 000 Sales returns:

Number of items 101 25 65 35 Amount $11 000 $3 500 $7 000 $6 500 Number of orders:

Regular 45 175 52 75 Rush 11 48 11 32 248 Chapter 6: Activity-based costing and activity-based management M06_HORN3377_02_LT_C06.indd 248 2/09/13 3:26 PM Erut Wholesalers has calculated the following activity rates:

Activity Cost-driver rate Regular order processing $25 per regular order Rush order processing $125 per rush order Returned items processing $15 per item Catalogues and customer support $1100 per customer Customers pay the transportation costs. The cost of goods sold averages 80% of sales.

Required Determine the contribution to profit from each department store chain last year. Comment on your solution.