Question
Harvey Farm Juice is a fruit juice wholesaler supplying to a range of different customers. With concerns about sources of profitability from these different customers,
Harvey Farm Juice is a fruit juice wholesaler supplying to a range of different customers. With concerns about sources of profitability from these different customers, Harvey Farm has embarked on a relatively simple customer analysis exercise. In the first instance, customers are classified as supermarkets, juice bars and individual sale. The results of this analysis are provided in the following table.
Sales in Units by customer Category | ||||
Supermarket | Juice bar | Individual | Total | |
Sales revenue | $2,600,000 | $1,750,000 | $1,450,000 | $5,800,000 |
Cost of sales | $1,550,000 | $885,000 | $870,000 | $3,305,000 |
Gross Profit | $1,050,000 | $865,000 | $580,000 | $2,495,000 |
Activities costs: | ||||
Order filling costs | Assigned based on number of orders | $433,000 | ||
Distribution-related costs | Assigned based on number of deliveries | $840,000 | ||
Marketing/Promotion/sales | Assigned on sales dollars | $945,000 | ||
Administration-related costs | Assigned on number of deliveries | $466,000 | ||
Total expenses | $2,684,000 | |||
Profit (Loss) | -$189,000 | |||
Cost Driver: | ||||
No. of order received | 40 | 46 | 82 | 168 |
No. of deliveries made | 55 | 65 | 105 | 225 |
Required:
Using the the activity-based costing (ABC) approach:
- Calculate the activity cost rate for each activity.
- Assign the activity costs to each of the three (3) customers.
- Calculate the contribution for each customer category.
- Advise the management of Harvey Farm Juice as to whether any changes should be made in its relationships with customers. Advise the management as to how they should go about executing these changes?
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