2 (30 marks) David, who is working as a Management accountant at LMN Ltd., decided to undertake an analysis of customer profitability. David decided to examine three different markets for the recently introduced Air fryers. The three market segments are: National electrical retailers (NER) State-wide electrical retailers (SER) Council-wide electrical retailers (CER) For many years LMN Ltd. has used Gross profit margin percentage as the measure of the profitability of different market segments. Linda, the assistant to David, has provided the following data for the year ending 30 June 2022. NER Sales revenue $30,000,000 Cost of sales $24,000,000 SER $6,000,000 $4,200,000 CER $2,400,000 $1,440,000 After a detailed discussion with the divisional managers and their assistants, all of them have agreed that there are five key activity areas performed by LMN Ltd. in serving all three different market segments (NER, SER, CER). The table below provides the details of each cost pool and the cost driver: Cost pool Order processing Line-item ordering Delivery Cartoons Customer service Cost driver Number of orders Number of line items ordered Number of deliveries made Number of Cartoons shipped Number of hours spent The total indirect service cost for the year ending 30 June 2022 amounts to $2,760,000. The division of this cost into the 5 cost pools is shown in the table below: Cost pool Customer cost ($) in the year ended 30 June 2022 Cost driver Order processing Line-item ordering Delivery Cartoons Customer service Total 600,000 12,000 orders 420,000 105,000 line items ordered 720,000 7,200 deliveries 660,000 132,000 cartoons shipped 360,000 1,800 hours 2,760,000 The number of transactions in each cost pool by three types of customers (NER, SER, CER) during the financial year ending 30 June 2022 are shown in the following table: Transaction Number of orders processed Average number of line items per order Total line items ordered Deliveries made Average cartoons per delivery Total cartoons Customer service NER SER CER Total 1,200 1,800 9,000 12,000 20 15 20 188 6 54,000 105,000 24,000 27,000 600 600 6,000 7,200 150 20 5 90,000 12,000 30,000 132,000 1,170 510 120 1,800 Required: a) Calculate the gross margin for each of the market segments. (4 marks) b) Determine the cost pool rate for each of the five cost pools. (4 marks) c) Determine the total customer cost for each market segment. (5 marks) d) Determine the most profitable market segment using first dollars and, second, net margin %. Compare the results to those in (a) and comment on your findings. (10 marks) e) Identify and describe two major problems that would be faced by both David and Linda in allocating the customer cost to the activity areas and market segment. (7 marks) (Chapter 11, 30 marks)