Alex Home Supplies Inc. is specialized in selling paint, carpet, and flooring supplies. Company has experienced net operating losses in its Flooring Supplies line during the last few periods. Company management team thinks that the store will improve its profitability if it discontinued the Flooring Supplies line. The operating results from the most recent period are as follows.

Currently, the store support expenses are allocated among the three product line based on sales dollars of the product lines.

Product Profitability Analysis Paint Supplies Carpet Supplies Flooring Supplies Total

Sales $295,000 $214,900 $167,900 $677,800

Cost of goods sold ($165,000) ($150,000) ($135,250) ($450,250)

Gross Profit $130,000 $64,900 $32,650 $227,550

Store support expenses (S & A) ($70,800) ($51,576) ($40,296) ($162,672)

Product line operating income (loss) $59,200 $13,324 ($7,646) $64,878

Product line profit margin ratio 20.07% 6.20% -4.55% 9.57%

Lisa, the new accountant who is a graduate of CSU, believes that not every sales dollar requires or uses the same amount of store support activities. She believes that company should look for other means for the allocation of store support expenses among the three product lines such as Activity Based Costing. Her preliminary investigation and analysis results are as follows:

Store Support Activities Activity Cost Suggested Cost Driver

Customer Order Processing $94,500 Number of orders placed

Receiving 41,400 Number of deliveries

Customer Support 26,772 Sales Hours

Total store support expenses 162,672

She also has compiled the following additional data in regard to usage of activities by the three product lines:

Paint Supplies Carpet Supplies Flooring Supplies

Order processing (number of sales orders) 425 150 100

Receiving (number of deliveries) 50 120 60

Customer support (hours required per sales order) 0.50 8.00 0.75

Requirements:

a. Complete the table on the Answers Sheet by allocation store support expenses using Lisas proposed activity based costing. b. Should Alex Home Supplies Inc. discontinue the Flooring Supplies line? Why?