case 2 Greet Greetings Inc.: Activity-Based Costing Developed by Thomas L. Zeller, Loyola University Chicago, and Pazl D. Kimmel University of Wisconsin-Miheaukee THE BUSINESS SITUATION Mr. Burns, president of Greetings Inc., created the Wall Dcor unit of Greetings three years ago to increase the company's revenue and profits. Unfortunately even though Wall Dcor's revenues have grown quickly, Greetings appears to be losing money on Wall Dcor. Mr. Burns has hired you to provide consulting services to Wall Dcor's management. Your assignment is to make Wall Dcor a profitable business unit Your first step is to talk with the Wall Dcor work force. From your conver- sations with store managers you learn that the individual Greetings stores are very happy with the Wall Dcor arrangement. The stores are generating addi- tional sales revenue from the sale of unframed and framed prints. They are espe- cially enthusiastic about this revenue source because the online nature of the product enables them to generate revenue without the additional cost of carry ing inventory. Wall Dcor sells unframed and framed prints to each store at product cost plus 20%. A 20% markup on products is a standard policy of all Greetings intercompany transactions. Each store is allowed to add an additional markup to the unframed and framed print items according to market pressures. That is, the selling price charged by each store for unframed and framed prints is determined by each store manager. This policy ensures competitive pricing in the respective store locations, an important business issue because of the intense mall competition. While the store managers are generally happy with the Wall Dcor products, they have noted a significant difference in the sales performance of the unframed prints. They find it difficult to sell unframed prints at a competitive price. The price competition in the malls is very intense. On average, stores find that the profits on unframed prints are very low because the cost for unframed prints charged by Wall Dcor to the Greetings stores is only slightly be low what competing stores charge their customers for unframed prints. As a re- sult, the profit margin on unframed prints is very low, and the overall profit earned is small, even with the large volume of prints sold. In contrast, stores make a very good prolit on framed prints and still beat the nearest competitor's price by about 15%. That is, the mall competitors cannot meet at a competitive price the quality of framed prints provided by the Greetings stores. As a result store managers advertise the lowest prices in town for high-quality framed prints. One store manager refered to Wall Dcor's computer on the counter as a and the framed prints. They f cash machine" for framed prints anda In a conversation with the production manager, you learned that she be- lieves that the relative profitability of framed and unframed prints is distorted case 2 Greet Greetings Inc.: Activity-Based Costing Developed by Thomas L. Zeller, Loyola University Chicago, and Pazl D. Kimmel University of Wisconsin-Miheaukee THE BUSINESS SITUATION Mr. Burns, president of Greetings Inc., created the Wall Dcor unit of Greetings three years ago to increase the company's revenue and profits. Unfortunately even though Wall Dcor's revenues have grown quickly, Greetings appears to be losing money on Wall Dcor. Mr. Burns has hired you to provide consulting services to Wall Dcor's management. Your assignment is to make Wall Dcor a profitable business unit Your first step is to talk with the Wall Dcor work force. From your conver- sations with store managers you learn that the individual Greetings stores are very happy with the Wall Dcor arrangement. The stores are generating addi- tional sales revenue from the sale of unframed and framed prints. They are espe- cially enthusiastic about this revenue source because the online nature of the product enables them to generate revenue without the additional cost of carry ing inventory. Wall Dcor sells unframed and framed prints to each store at product cost plus 20%. A 20% markup on products is a standard policy of all Greetings intercompany transactions. Each store is allowed to add an additional markup to the unframed and framed print items according to market pressures. That is, the selling price charged by each store for unframed and framed prints is determined by each store manager. This policy ensures competitive pricing in the respective store locations, an important business issue because of the intense mall competition. While the store managers are generally happy with the Wall Dcor products, they have noted a significant difference in the sales performance of the unframed prints. They find it difficult to sell unframed prints at a competitive price. The price competition in the malls is very intense. On average, stores find that the profits on unframed prints are very low because the cost for unframed prints charged by Wall Dcor to the Greetings stores is only slightly be low what competing stores charge their customers for unframed prints. As a re- sult, the profit margin on unframed prints is very low, and the overall profit earned is small, even with the large volume of prints sold. In contrast, stores make a very good prolit on framed prints and still beat the nearest competitor's price by about 15%. That is, the mall competitors cannot meet at a competitive price the quality of framed prints provided by the Greetings stores. As a result store managers advertise the lowest prices in town for high-quality framed prints. One store manager refered to Wall Dcor's computer on the counter as a and the framed prints. They f cash machine" for framed prints anda In a conversation with the production manager, you learned that she be- lieves that the relative profitability of framed and unframed prints is distorted