Betty's Grocery Store

Betty's Grocery Store is a medium sized store that stocks two groups of food, Home Cooked Meals and Frozen Meals. Betty's is planning an expansion of its store and is looking for information on how profitable each of its two product lines are. The records for last month's accounting is pictured below:

	Home Cooked Meals	Frozen Meals
Sales	$1,500,000	$4,500,000
Less cost of goods sold	$370,000	$3,100,000
Less overhead costs	$268,000	$1,340,000
Net operating profits	$522,000	$(170,000)
Profit margin % (Net operating profit/sales)	46%	(8%)

Cost of Goods sold is only made up of the expenses that are directly traceable to each product line, including the purchasing price of grocery items. All overhead costs are assigned to product lines in proportion to the cost of good sold.

The accountant, Ms. Smith, is concerned about the way in which overhead costs are currently assigned. Since Home Cooked Meals are highly perishable, it must be delivered to Betty's often and must be carefully re-shelved several times a day. Smith is unsure if these and other facts are currently being reflected in the current overhead cost assignment. Smith decided to do a thorough analysis of the store's overhead costs, using the principles of activity based costing.

Smith determines that overhead costs are as follows:

Order Placement	$125,000
Receiving Deliveries	$895,000
Stocking the Shelves	$348,000
Bagging/CheckOut	$405,000
Occupancy	$149,000
Total	$1,922,000

The occupancy cost listed above consists of the following: rent, property taxes, heating, lighting, insurance, etc. on the space accessible to customers. The cost of space taken up by back office corporations such as: receiving, etc., is included in the cost of the following support activities.

Smith notes the following data on driver volumes:

	Home Cooked Meals	Frozen Meals	Total
Number of Vendors	30	65	95
Number of Purchase Orders	210	150	360
Number of Deliveries	90	60	150
Tons of Groceries Delivered	340	1400	1740
Hours of shelf-stocking labor	1600	1500	3100
Shelf-space in square feet	7500	28000	35500
Number of items checked out	700000	850000	1550000
Square feed of floor space used	9000	15000	24000

Smith also discovers the following information:

-Although there are many more vendors from which frozen meals are purchased than is the case for the home cooked meals, the home cooked meals are ordered much more often. Each order placed requires about the same amount of information processing and amount of attention

-Deliveries of the home cooked meals occur separately from deliveries of the frozen meals (they are not transported in the same vehicle). More tonnage is involved in the delivery and unloading of the frozen meals, but the home cooked meals are delivered in smaller cartons that cannot be stacked and the unloading and stocking operations require much more care and is more labor intensive

-Most of the shelf-stocking cost is labor cost, but there are also other costs such as the cost of equipment used and labeling costs

-Frozen meals are displayed on multiple layers of shelves arranged one on top of the other, but fresh produce is displayed on a single layer of shelves and cannot be stacked very deeply.

Questions:

1) Use the Activity Based Costing Method for Betty's Grocery and reassess the profitability of both lines.

2) For each support activity, choose two drivers and use the facts given in this case to explicitly assess the pros and cons of each of the possible cost drivers

2a) Choose the driver that you think best fits the situation