Adonis manufacturers sell furniture items to four department store chains (customers). Mr. Adonis stated that the company applies ABC to determine product-line profitability and these same ideas apply to customer profitability. Adonis manufacturers send catalogs to companies purchasing departments monthly. The customers are entitled to return unsold merchandise within a six-month period from the purchase date and receive a full purchase price refund. The following data were collected from last years operations:

Chain

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1 2 3 4

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Gross sales $500,000 $300,000 $1000, 000 $700,000

Sales returns:

Number of items 100 26 60 40

Amount $20,000 $ 10,000 $ 5,000 $ 6,000

Number of orders:

Regular 40 150 50 70

Rush 10 50 10 30

Adonis has calculated the following activity rates.

Activity Cost-Driver Rate

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Regular order processing $200 per regular order

Rush order processing $1000 per rush order

Returned items processing $100 per item

Catalogs and customer support $1,000 per customer

Customers pay the transportation costs. The cost of goods sold averages 80% of sales.

Required

Determine the contribution to profit from each chain last year (15 marks).

What can you deduce from your solution? (10 marks)

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