GoGo is a medium sized grocery store that stocks two groups of foods, Fresh Produce, and Packaged Foods. Riverside is planning an expansion of its grocery store and seeks information on the profitability of each of its two product lines. The accounting records for the most recent month indicate the following profitability picture.

Fresh Produce Packaged Foods

Sales $1,200,000 $3,500,000

Less cost of goods sold $ 360,000 $2,100,000

Less overhead costs $ 288,000 $ 1,680,000

Net operating profits $ 552,000 $ (280,000)

Profit margin %

(Net operating profit/sales) 46% (8%)

Cost of goods sold consists only of those expenses that are directly traceable to each product line, including the purchase price of grocery items. All overhead costs are assigned to product lines in proportion to cost of goods sold.

The accountant, Mr. Jones has many reservations about the way in which overhead costs are currently assigned. Since Fresh Produce is highly perishable it must be delivered to the grocery store very frequently and must be carefully re-shelved several times a day. Jones is uncertain whether these and other relevant facts are reflected in the current overhead cost assignment. Jones decides to do a thorough analysis of the stores overhead costs, using the principles of activity based costing.

Jones determines that overhead costs break down as follows:

Placing orders $148,000

Receiving deliveries $799,900

Shelf stocking $448,000

Check out and bagging $420,000

Occupancy $152,100

Total $1,968,000

The occupancy cost listed above consists of rent, property taxes, heating, lighting, insurance, etc. on the space accessible to customers. The cost of space occupied by back-office operations such as the receiving department, and other support personnel is included in the cost of the corresponding support activities.

Jones has collected the following data on driver volumes:

Fresh Produce Packaged Foods Total

Number of vendors 20 80 100

Number of purchase orders 240 160 400

Number of deliveries 100 90 190

Tons of groceries delivered 320 1,280 1,600

Hours of shelf-stocking labor 1,400 1,400 2,800

Shelf-space in square feet 6,000 34,000 40,000

Number of items checked out 600,000 900,000 1,500,000

Square feet of floor space used 7,000 13,000 20,000

Jones learns the following information from interviewing senior personnel:

• Even though there are many more vendors from which packaged foods are purchased than is the case for fresh produce, fresh produce is ordered much more frequently. Each order placed requires approximately the same amount of attention and information processing.

• Deliveries of fresh produce occur separately from deliveries of packaged foods (the two are not carried in the same truck). There is more tonnage involved in the delivery and unloading of packaged foods, but fresh produce is delivered in smaller cartons that cannot be stacked and its 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.

• Packaged food is 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.

Question:

Implement activity based costing for Riverside Foods and reassess the profitability of Fresh Produce and Packaged Foods. You have deliberately been given more driver data than you will use. For each support activity, choose two drivers from those given to you that would a priori seem reasonable, then use the facts given in this case to explicitly assess the pros and cons of each of the possible cost drivers and then choose the driver that you think best fits the situation. You may supplement the facts given in the case with observations from your personal grocery shopping experience, but be as explicit and detailed as you can in making your arguments. Present all your arguments and calculations systematically.

Note: The grader will assign much greater weight to your cost driver arguments than to routine calculations.