Question
Henderson Company has three product lines: baked goods, milk and fruit juice, and frozen foods. Company has experienced net operating losses in its Milk &
Henderson Company has three product lines: baked goods, milk and fruit juice, and frozen foods. Company has experienced net operating losses in its Milk & Fruit Juice line during the last few periods. Company management thinks that the store will improve its profitability if it discontinued the Milk & Fruit Juice line. For product line profitability analysis purposes, currently company is allocating operating expenses as a percentage of sales dollars which approximately is 30% of sales dollar.
Sales Revenues $89,250 $99,000 $76,500
Cost of goods sold $54,000 $72,000 $51,000
Operating costs (30% of sales revenues) $26,775 $29,700 $22,950
Profit Margin $8,475 ($2,700) $2,550
Profit Margin Ratio 9.5% -2.7% 3.3%
However, Rose, the new accountant who is a graduate of CSU, believes that not every sales dollar requires or uses the same amount of store support activities. She believes that company should look for other means for the allocation of store operating costs among the product lines such as ABC. Based on her preliminary investigation and analysis, she could identify four store support operating activities and breakdown total store operating activities by these activities as follows:
Activity-area usage (cost allocation base) Annual Activity Costs Cost Driver
Ordering (purchase orders) $12,600 number of purchase orders
Delivery (deliveries) $22,475 number of deliveries Shelf-stocking (hours) Shelf-stocking hours $20,200
Customer support (items sold) $24,150 number of units sold
Total $79,425
Rose also has compiled the following annual data on usage of store support activities by each product line:
Activity-area usage (cost allocation base)
Baked Goods Milk&Fruit Juice Frozen Products
Ordering (purchase orders) 25 20 15
Delivery (deliveries) 90 35 30
Shelf-stocking (hours) 190 174 40
Customer support (items sold) 13,500 18,450 8,300
. In the space provided on Answers Sheet, complete the product-line profitability report for
Henderson using ABC for the allocation of store support operating costs among the three products.
1. In the space provided on Answers Sheet, complete the product-line profitability report for
Henderson using ABC for the allocation of store support operating costs among the three products.
2. What new insights does the ABC system provide to Henderson Company managers? Explain.
26. Profitability Analysis | Baked Goods | Milk and Fruit Juice | Frozen Products |
Sales Revenues | $89,250 | $99,000 | $76,500 |
Cost of goods sold | $54,000 | $72,000 | $51,000 |
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