CASE 13.1 ABCM AND CUSTOMER PROFITABILITY. Bright Forever Flowers is a producer of silk flowers used in all forms of arrangements. It sells its products to retail stores, through a cat- alog supported by an internet website, and floral shops. While the company makes a wide variety of flowers, they all come down to a few basic materials-the silk, some beads, and a cloth-wrapped "stem" made of wire. The results of the last year's operations are in the income statement below. Revenue Cost of goods sold Gross margin Less: SG&A Income before tax Income percentage Bright Forever Flowers Income Statement by Segment Retail Stores Catalog and Internet $25,000,000 $35,000,000 $12,000,000 $16,450,000 $13,000,000 $18,550,000 $7,500,000 $8,000,000 $5,500,000 $10,550,000 22.00% 30.14% Floral Shops $30,000,000 $15,000,000 $15,000,000 $8,500,000 $6,500,000 21.67% Total $90,000,000 $43,450,000 $46,550,000 $24,000,000 $22,550,000 25.06% The president of Bright Forever Flowers, Cheryl Bedford, is not comfortable with the way SG&A is currently being charged out. She decides to enlist the help of her business planning ana- lysts to conduct an activity-based study of SG&A activities and trace them to specific customers, The results of the study are in the two tables below. Activities Take orders Handle customer inquiries Process invoices Process payment Maintain customer database Develop and print catalogs Mail catalogs Activities for SG&A Cost Driver $2,500,000 Orders taken $1,500,000 Customer calls $2,000,000 Invoices sent $2,000,000 Payments processed $3,000,000 Customers $8,000,000 Catalogs printed $1,500,000 Catalogs mailed $1,200,000 Sales calls $2,300,000 Sales Revenue $24,000,000 Driver Frequency 1,000,000 500,000 1,200,000 2,000,000 500,000 2,500,000 1,800,000 250,000 $90,000,000 Activity Cost $2.50 $3.00 $1.67 $1.00 $6.00 $3.20 $0.83 $4.80 2.56% Make sales calls General overhead Catalog and Internet 600,000 300,000 Activity Drivers Orders taken Customer calls Invoices sent Payments processed Customers Catalogs printed Catalogs mailed Sales calls Sales Revenue Retail Stores 250,000 75,000 400,000 750,000 75,000 400,000 150,000 100,000 $25,000,000 600,000 300,000 1,400,000 1,400,000 Floral Shops Total 150,000 1,000,000 125,000 500,000 800,000 1,200,000 650,000 2,000,000 125,000 500,000 700,000 2,500,000 250,000 1,800,000 150,000 250,000 $30,000,000 $90,000,000 $35,000,000 What was left was to calculate the profitability of the various types of customers using the ABCM analysis. What would make this analysis tricky is the managers of each segment currently got a bonus dependent on their income before tax results. If these went up or down significantly, there could be trouble, especially since it would be a zero sum game with some winners and some losers in the costing scheme. This did not deter Cheryl, who wanted the numbers to reflect the realities of the business. It would just have to be dealt with. REQUIRED: a. Calculate the profitability of each customer segment using the information derived from the ABCM study. b. Which divisions benefit from the new costing scheme? Which lose? C. How would you explain the shift in profitability? What seemed to be the cause? d. How would you approach implementing this new scheme knowing that individ- ual managers may not be overly excited by the results? Would you change your incentive system or simply let the chips fall where they may