Quick Supply distributes office supplies to small to medium sized offices throughout the Region of Waterloo, Ontario. Quick Supply sets its prices by marking up its cost of goods sold by 5%. For example, if Quick Supply paid $100  to buy supplies from manufacturers, Quick Supply would charge its customers $105 to purchase these supplies.

For years, Quick Supply believed that the 5% markup covered its selling and administrative expenses and provided a reasonable profit. However, in the face of declining profits, Quick Supply decided to implement an ABC system to help improve its understanding of customer profitability. The company broke its selling and administrative expenses into five activities, as shown below:

Quick Supply gathered the data below for two typical offices that it serves-City Office and County Office (both offices purchased a total quantity of office supplies that had cost Quick Supply $30,000 to buy from manufacturers):

Required:

1.  Compute the total revenue that Quick Supply would receive from City Office and County Office. 

2.  Compute the activity rate for each activity cost pool.

3.  Compute the total activity costs that would be assigned to City Office and County Office.

4.  Compute Quick Supply's customer margin for City Office and County Office. (Hint: Do not over-look the $30,000 cost of goods sold that Quick Supply incurred serving each office.)

5.  Describe the purchasing behaviours that are likely to characterize Quick Supply's least profitable customers.

Transcribed Image Text:

Activity Cost Pool Activity Measure Total Cost Total Activity Customer deliveries. Manual order processing Electronic order processing Line item picking Other organization-sustaining costs Total selling and administrative expense Number of deliveries $ 400,000 5,000 deliveries 4,000 orders Number of manual orders 300,000 Number of electronic orders 200,000 12,500 orders Number of line items picked 500,000 400,000 line items 600,000 $2,000,000 NA