Herlocker Supermarkets (HS) is a regional supermarket chain operating in the Pacific Northwest. HSs management has recently become concerned because its Eugene, Oregon store is barely breaking even.

HS has decided to develop Activity-Based Cost (ABC) information about the profitability of the three product lines carried in the Eugene store: soft drinks, fresh produce, and packaged foods in order to assess the long-run viability of different products and how they contribute to overall profit.

HS has collected the following 2019 data about Gross Margin (Revenue less Cost of goods sold) and various support activities for each product line:

	Soft Drinks	Fresh Produce	Packaged Food	Total
Revenues	$ 357,000	$ 1,062,500	$ 533,750	$ 1,953,250
Cost of goods sold	$ 295,000	$ 807,500	$ 423,500	$ 1,526,000
Number of bottles returned	65,000	-	-	65,000
Number of purchase orders placed	144	372	164	680
Number of deliveries received	130	1,020	360	1,510
Hours of shelf-stocking time	224	2,460	1,256	3,940
Items sold	52,100	495,500	132,400	680,000

HS has also produced the following information about the support costs of running the store for 2019, arranged into various activity cost pools, and the best available cost driver (or allocation base):

Activity	Description of Activity	Support Costs	Allocation Base
Bottle returns	Returning of empty bottles to store	$ 6,500	Direct tracing to soft drink line
Shelf-stocking	Stocking of merchandise on store shelves and ongoing restocking	$ 75,120	Hours of shelf-stocking time
Delivery	Physical delivery and receipt of merchandise	$ 120,200	Number of deliveries received
Customer support	Assistance provided to customers, including checkout and bagging	$ 148,900	Number of items sold
Ordering	Placing of orders for purchases	$ 68,400	Number of purchase orders placed
	Total Support Costs	$ 419,120

1. HS has always allocated store support costs (that is, the $419,120 of costs in the table above) to product lines on the basis of the proportion of cost of goods sold for each product line. Using this approach to allocating support cost, calculate operating income (or loss) both in dollars of profit (or loss) and as a percentage of revenue for each product line.
2. What strategy does this traditional system of accounting for store support costs suggest to increase the profitability of the Eugene store?
3. Now suppose HS allocates the $419,120 of store support costs to product lines using an ABC system based on the activity cost and cost driver information provided above. Calculate the ABC operating income (or loss) both in total and as a percentage of revenue for each product line.
4. What strategy does this ABC system suggest to increase the profitability of the Eugene store?
5. What is driving the differences in profitability between the profitability you calculated using the traditional system to the profitability you calculated using the ABC system?