Question
2. Copy the master budget you prepared in question 1 and paste into a new sheet in the same Excel file. Buyers at Jung So
2. Copy the master budget you prepared in question 1 and paste into a new sheet in the same Excel file.
Buyers at Jung So Min have come forward with new information from the main supplier of inventory. They are willing to hold the purchase price of the inventory for the first two quarters of 2021, but will be raising the purchase price of the inventory from $36 to $41 in the third quarter.
Required:
a) What impact will this have on the profit for 2021 and the ability to repay the line of credit or incur additional borrowings, if the selling price charged by Jung So Min does not change?
b) Do you recommend any change in the selling price charged by Jung So Min, in response to the change in its cost of inventory? Explain your plan (timing of increase, etc) and reasoning in full.
3. Pyrohy Industries Ltd. has experienced growth recently, with its sales staff successfully adding new customers to its existing customer base. Although revenues have increased significantly, operating profits have not. The manager of the sales department is extremely happy with the additional commissions that he and his staff have earned, but the division manager is not pleased at all. After a heated discussion during a management meeting, the cost accountant was asked to provide information on two recently-added customers. Given the concerns of the division manager, the accountant recommended the use of activity-based accounting for this analysis and the data gathered is presented below:
| Alma Industries Ltd. |
| Barbara Supplies Inc. |
Sales revenue, last quarter | $180,000 |
| $220,000 |
Contribution margin percentage | 40% |
| 25% |
Number of sales visits during quarter | 2 |
| 6 |
Number of regular orders placed | 2 |
| 12 |
Number of rush orders placed | 0 |
| 2 |
Number of unique items per regular order | 100 |
| 15 |
Number of unique items per rush order | 0 |
| 3 |
The cost accountant noted that the lower contribution margin on sales to Barbara is because receives a discount on its purchases because they exceed $200,000 per quarter. There are two separate activities involved in processing a sales order. Time spent to accept the order and verify the customer status is the same for each order, regardless of the size of the order or whether it is a rush or regular order. Time spent on data entry for the order differs significantly though, based on the number of unique items in the order. Rush orders disrupt normal data processing, stock retrieval and deliveries, resulting in costs that do not occur for regular orders. All of these extra costs have been combined in the estimated costs for rush deliveries presented below. Additionally, each order, whether regular or rush, is sent to the customer as a single delivery.
Activity | Total cost of activity | Allocation base | Expected total volume |
Sales visits | $300,000 | Number of sales visits | 300 |
Order acceptance | $64,000 | Number of orders | Regular 160 Rush 25 |
Data entry | $28,600 | Number of unique items | 13,000 |
Rush order processing | $18,750 | Number of rush orders | 25 |
Deliveries | $66,600 | Number of deliveries | 185 |
Total | $477,950 |
|
|
Required:
a) Calculate the cost per unit of the allocation base for each activity.
b) Determine the profitability of each of these two customers, using activity-based costing.
c) Describe two ways in which the less profitable of these two customers could be made more profitable. Be specific as to what management should do to achieve this result.
d) An alternate way of allocating the customer service costs would be to use a single rate based on the number of customers. If Pyrohy has 80 customers, calculate the overhead rate, assuming the total overhead cost is the same as the total activity costs. Determine the cost assigned to each of the two customers.
e) Evaluate whether the use of activity-based costing or a single rate provides more accurate information for assessing the profitability of a specific customer.
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