Lakeside Mini-mart (LMM) operates at capacity and decides to apply Activity-based Costing (BC) analysis to two product lines: bakery items and frozen foods. It identifies four activities and their activity-cost rates as follows:

Ordering	$95 per purchase order
Delivery and receipt of merchandise	$76 per delivery
Shelf-stocking	$19 per hour
Customer support and assistance	$0.15 per item sold

The revenues, cost of goods sold, store support costs, activities that account for the store support costs and activity-area usage of the two product lines are as follows:

	Bakery items	Frozen products
Financial data
Revenues	$60 000	$50 500
Cost of goods sold	$41 000	$32 000
Store support	$12 300	$9 600
Data on activities
Ordering (purchase orders)	44	14
Delivery (deliveries)	120	36
Shelf-stocking (hours)	170	20
Customer support (items sold)	15 400	7 960

Under its present traditional costing system, LMM allocated support costs to products at the rate of 30% of cost of goods sold.

Required:

1. Use the traditional costing system to prepare a product-line profitability report for LMM.

Show clearly the calculation of Gross profit, operating profit, store support costs, Gross profit ratio and Operating Profit ratio (round to 2 decimal places. e.g., 12.85%) for each product line and in total.

(6 marks)

2. Use the ABC system to prepare a product-line profitability report for LMM.

Show clearly the calculation of Gross profit, operating profit, store support costs and Operating Profit ratio (round to 2 decimal places. e.g., 12.85%) for each product line and in total.

(9 marks)

3. Comment on the profitability of the two product lines under the two systems, explain why the profitability changed.

(6 marks)

4. What would you recommend to management to improve the profitability of LMM? Give at least two suggestions

(4 marks)