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 catalog 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 materialsthe silk, some beads, and a cloth-wrapped stem made of wire. The results of the last years operations are in the income statement below.

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 analysts 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.

What was left was to calculate the profitability of the various types of customers using the A BCM 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 individual managers may not be overly excited by the results? Would you change your incentive system or simply let the chips fall where they may?

Bright Forever Flowers Income Statement by Segment Retail Stores Catalog and Internet Floral Shops Total \begin{tabular}{lrrrr} Revenue & $25,000,000 & $35,000,000 & $30,000,000 & $90,000,000 \\ Cost of goods sold & $12,000,000 & $16,450,000 & $15,000,000 & $43,450,000 \\ \cline { 2 - 5 } Gross margin & $13,000,000 & $18,550,000 & $15,000,000 & $46,550,000 \\ Less: SG\&A & $7,500,000 & $8,000,000 & $8,500,000 & $24,000,000 \\ \cline { 2 - 5 } Income before tax & $5,500,000 & $10,550,000 & $6,500,000 & $22,550,000 \\ \cline { 2 - 5 } Income percentage & 22.00% & 30.14% & 21.67% & 25.06% \end{tabular} \begin{tabular}{|lrcrr|} \hline \multicolumn{1}{c}{ Activities for SG\&A } & & & \\ \hline \multicolumn{1}{c}{ Activities } & \multicolumn{1}{c}{ Cost } & Driver & Driver Frequency & Activity Cost \\ \hline Take orders & $2,500,000 & Orders taken & 1,000,000 & $2.50 \\ \hline Handle customer inquiries & $1,500,000 & Customer calls & 500,000 & $3.00 \\ \hline Process invoices & $2,000,000 & Invoices sent & 1,200,000 & $1.67 \\ \hline Process payment & $2,000,000 & Payments processed & 2,000,000 & $1.00 \\ \hline Maintain customer database & $3,000,000 & Customers & 500,000 & $6.00 \\ \hline Develop and print catalogs & $8,000,000 & Catalogs printed & 2,500,000 & $3.20 \\ \hline Mail catalogs & $1,500,000 & Catalogs mailed & 1,800,000 & $0.83 \\ \hline Make sales calls & $1,200,000 & Sales calls & 250,000 & $4.80 \\ \hline General overhead & $2,300,000 & Sales Revenue & $90,000,000 & 2.56% \\ & $24,000,000 & & & \\ \hline \hline \end{tabular} \begin{tabular}{|lrrrr|} \hline Activity Drivers & Retail Stores & Catalog and Internet & Floral Shops & \multicolumn{1}{c|}{ Total } \\ \hline Orders taken & 250,000 & 600,000 & 150,000 & 1,000,000 \\ \hline Customer calls & 75,000 & 300,000 & 125,000 & 500,000 \\ \hline Invoices sent & 400,000 & - & 800,000 & 1,200,000 \\ \hline Payments processed & 750,000 & 600,000 & 650,000 & 2,000,000 \\ \hline Customers & 75,000 & 300,000 & 125,000 & 500,000 \\ \hline Catalogs printed & 400,000 & 1,400,000 & 700,000 & 2,500,000 \\ \hline Catalogs mailed & 150,000 & 1,400,000 & 250,000 & 1,800,000 \\ \hline Sales calls & 100,000 & - & 150,000 & 250,000 \\ \hline Sales Revenue & $25,000,000 & $35,000,000 & $30,000,000 & $90,000,000 \\ \hline \end{tabular}