MininHot is a distributor of specialty sauces to the HORECA sector. MininHot operates at capacity and serves three main segments: a. Key accounts, comprising large hotel and restaurant chains as well as catering firms b. Multilocation, comprising medium size hotel and restaurant chains C. Owner operated, comprising HORECA customers owning a single location Erik Gonzalez, MininHot's controller, reported the following data for 2019: Revenues COGS Gross Margin Other Operating Costs Operating Income Key accounts $7,416,000 7,200,000 $216000 Multilocation $6,300,000 6,000,000 $300,000 Owner operated $3,960,000 3,600,000 $360,000 MininHot $17,676,000 8,400,000 $876,000 602,160 $273.840 Traditionally, MininHot has used gross margin percentage [(Revenue - COGS)/Revenue) to evaluate the relative profitability of its market segments. However, Gonzalez recently attended a course on activity-based costing and is considering using it at MininHot to analyze and allocate "other operating costs." He meets with all the key managers and several of his operations and sales staff and they agree that there are five key activities that drive Other Operating costs at MininHot: Activity Order processing Line-item processing Delivering to customer premises Boxes shipped to customers Recipe development with customers Cost Driver Number of customer purchase orders Number of line items ordered by customers Number of store deliveries Number of cartons shipped Hours of recipe development Each customer order consists of one or more line-items. A line-item represents a single product (such as Extra Hot Habanero Sauce). Each product line-item is deliver in one or more separate boxes. Each customer premises delivery entails the delivery of one or more cartons of products to a customer. MininHot's staff also develops recipes or user experiences in collaboration with the customers. Currently there is no extra charge for this recipe development and not all customers use MininHot for this purpose. The level of each activity in the three market segments and the total cost incurred for each activity in 2019 is as follows: Activity Level Activity Orders processed (number) Line-items ordered (number) Deliveries made (number) Boxes shipped to customers (number) Recipe development (hours) accounts 280 3,920 240 72,000 720 Multi- location 720 8,640 720 48,000 360 Owner operated 3,000 30,000 2,000 32,000 200 Total Cost of Activity 2019 $160,000 127,680 142,000 152,000 20.480 $602,160 1. Calculate the 2019 gross-margin percentage for each of MininHot's three major customer segments 2. Calculate the cost driver rates for each of the five activity areas 3. Use the activity-based costing information to allocate the $602,160 of Other operating costs to each of the three customer segments. Compute the operating income for each market segment. 4. Comment on the results. As a manager, what new insights can you extract from the information produced with the activity-based costing system
