3. As vice product-cost accuracy and its the new ABC system satisfy your concerns? Expla 4-48 Activity-Based Costing and Product Line Profitability rol. Do ment to be the most profitable, so the company plans to increase its space the most. expansion of its store in central Madrid. A preliminary analysis has shown the packaged food depen Hipercor is a grocery company with stores throughout Spain. Suppose the company is planning most recent annual report for the store showed sales of 3,283,200, which generated a gross margin Assume that the Madrid store has just three departments: produce, packaged food, and meat. The 883,200. Sales and gross margins of the three departments were as follows: Meat Total 3,283,200 2,400,000 Produce Packaged Food 634,800 1,680,480 967,920 Revenues Cost of products sold 480,000 1,200,000 720,000 Gross margin 154,800 480,480 247,920 883,200 In addition to cost of products sold, the store has 720,000 of support costs, so operating income 883,200 720,000 = 163,200. Hipercor currently uses an accounting system that uses cost of prod ucts sold as a cost-allocation base for allocating support costs. Ramon Flores, controller of Hipercor, recently attended a seminar on activity-based costing. He sug gests that Hipercor management should undertake further analysis before deciding which product ge the largest increase in space in the expansion. He has asked you, his assistant, to lead this analysis. 1. The starting point of your analysis is to determine product profitability under the existing cost accounting system. Compute the operating income and the operating income as a percent of sales for each department using Hipercor's existing system. Use this information to assess the relative profitability per dollar of sales of each of the three departments. 2. Flores asks you next to develop product costs using an activity-based accounting system. You determine that there are five major activities, each with a different cost driver to be used as a cost-allocation base a. Ordering-Placing of orders for purchases b. Delivery Physical delivery and receipt of merchandise c. Shelf-stocking-Stocking of merchandise on store shelves, including ongoing restocking d. Customer support-Assistance to customers, including check out and bagging e. Produce monitoring-Constantly checking on the stacking and freshness of produce The cost drivers for each activity are as follows: Ordering Delivery Shelf-stocking Number of purchase orders Number of deliveries Hours of stocking time Customer support Number of items sold Produce monitoring Direct trace to the Produce Department You have determined the following information about the cost drivers: Packaged Produce Food Meat Total Number of purchase orders 1,440 Number of deliveries 3,360 1,440 6,240 Hours of shelf-stocking 1,200 8,760 2,640 12,600 Items sold 216 2,160 1,080 3,456 50,400 441,600 122,400 614,400 The total cost of each activity was as follows: Ordering Delivery Shelf-stocking Customer support Product monitoring Total 124,800 201,600 138,240 245,760 9,600 720,000 Using these data and activity-based costing, calculate the operating income and operating income as a percent of sales for each product. (For example, note that each purchase order costs 124,800 6,240 = 20 to process.) 3. Propose a strategy for expansion. Which information, that based on the current costing system or that based on the activity-based costing system, is most useful? Why? What additional information would you like to have before making a more definitive recommendation on an expansion strategy?