43. (Activity-based costing and pricing) Joey Lutz owns and manages a commercial cold-storage warehouse. He stores a vast variety of perishable goods for his customers. Historically, he has charged customers using a flat rate of $0.04 per pound per month for goods stored. His cold-storage warehouse has 100,000 cubic feet of storage capacity.

In the past two years, Lutz has become dissatisfied with the profitability of the warehouse operation. Despite the fact that the warehouse remains relatively full, revenues have not kept pace with operating costs. Recently, Lutz approached his accountant, Jill Green, about using activity-based costing to improve his understanding of the causes of costs and revise the pricing formula.

Green has determined that most costs can be associated with one of four activities.

Those activities and their related costs, volume measures, and volume levels for 2001 follow:

Activity Cost Monthly Volume Measure Send/receive goods $6,000 Weight in pounds—500,000 Store goods 4,000 Volume in cubic feet—80,000 Move goods 5,000 Volume in square feet—5,000 Identify goods 2,000 Number of packages—500 SOURCE: Adapted from Harold P. Roth and Linda T. Sims, “Costing for Warehousing and Distribution,” Management Accounting (August 1991), pp. 42–45. Reprinted from Management Accounting. Copyright by Institute of Management Accountants, Montvale, N.J.

a. Based on the activity cost and volume data, determine the amount of cost assigned to the following customers, whose goods were all received on the first day of last month.

Customer Weight of Order Cubic Feet Square Feet Number of Packages Jones 40,000 3,000 300 5 Hansen 40,000 2,000 200 20 Assad 40,000 1,000 1,000 80

b. Determine the price to be charged to each customer under the existing pricing plan.

c. Determine the price to be charged using ABC, assuming Lutz would base the price on the cost determined in part

(a) plus a markup of 40 percent.

d. How well does Lutz’s existing pricing plan capture the costs incurred to provide the warehouse services? Explain.