Mountain Outfitters operates a larger outdoor clothing and equipment store with three main product lines: clothing, equipment, and shoes. Mountain Outfitters operates at capacity and allocates selling, general, and administration (SG&A) costs to each product line using the cost of merchandise of each product line. The company wants to optimize the pricing and cost management of each product line and is wondering if its accounting system is providing it with the best information for making such decisions. Store manager Aaron Budd gathers the following information regarding the three product lines for the year 2019:

Clothing Equipment Shoes Total Revenues $1,440,000 $1,840,000 $720,000 $4,000,000 Cost of Merchandise $850,000 $1,250,000 $400,000 $2,500,000

For 2019, Mountain Outfitters budgets the following SG&A costs: SG&A Costs for 2019

Purchasing department expense Receiving department expense Customer support expense (cashiers) Rent

General store advertising Store managers salary

$320,000 $210,000 $250,000 $240,000 $100,000 $125,000

$1,245,000

A. Currently Mountain Outfitters uses a simple costing system using the cost of merchandise to allocate SG&A costs. Using the simple costing system, prepare a profitability report (Income statement) by product-line and in total for 2019.

B. After doing some research on the resource consumption of each product line, it is determined that the product lines use different amounts of resources and that these differences are not adequately captured using the simple allocation method. Aaron decides that a more sophisticated model for allocating SG&A costs needs to be designed and implemented. You are hired to create and implement an ABC model for the SG&A costs of Mountain Outfitters. Design an ABC model. Given the listed SG&A costs, what are the activity cost pools you would use for your ABC model? What cost drivers would you use and why (be specific)?

C. After reviewing your ABC model, Aaron is concerned that collecting the additional data and implementing your proposed model will be too costly. He asks you to revise your model and come up with budget-friendly ABC model. Revise your ABC model in part B, considering the potential cost of collecting and implementing the model. How would you streamline your model in part B? Do you believe that your new model would add value to Mountain Outfitters or should the company stick with their simple costing system? Explain.