Page of 2 ZOOM + Emily: Yes, we can. Emily has conducted research using the accounting records of 2019 and built the following database in relation to indirect costs: Table 2 Activity Indirect costs Cost driver Regular order processing Rush order processing Returned item processing Catalogue & customer support Total $ $ $ 10,860 16,240 6,125 number of orders number of rush orders Number of returned items Utilisation of cost drivers Loxton Renmark Waikerie Berri 50 185 57 70 13 50 14 35 105 30 70 40 number of customers $ $ 6,000 39,225 Requirement: 3. Calculate profitability of each of the customers for Adelaide Limited using ABC system. 7 marks 4. Explain the reasons for the different customer profitability which you calculated for requirement 1 and 3. Explain the advantages and disadvantages of each method of determining customer profitability? 3 marks The discussion continued...... Alex: Congratulations Emily! You have done a great job! I am impressed about the new database that you have created. Emily: Thank you. The benefits of this data go beyond the calculation of unit costs. Alex: Really...... Looking forward to hearing about it. Requirement: 5. Explain two benefits of ABC in addition to determining unit costs. Use the data (Table 2) and context of this case study to illustrate your arguments. 4 marks Page 1 > of 2 ZOOM + ** Adelaide Limited is a wholesale business. It supplies products to four department stores operating in the Riverland towns of South Australia. The names of the stores are: Loxton, Renmark, Waikerie and Berri. These four businesses are the customers of Adelaide Limited. Adelaide Limited send catalogues to its customers (retail stores) on a monthly basis. The stores are entitled to return unsold products within a six-month period from the purchase date. The following data were collected from last year's (2019) operations: Table 1 Loxton Net Sales (Sales minus $ 65,000 sales return) Renmark $ 30,000 Customers Waikerie $ 120,000 Berri $ 80,000 The direct costs (cost of goods sold) averages 70% of net sales. Adelaide Limited incurred indirect costs of $39,225 in 2019. Alex Stuart, Chief Executive Officer of Adelaide Limited, is having a discussion with Emily Jones, Finance Director. Following is the conversation: Alex: Overall, our business is profitable. I wish to know more about our customer profitability. Emily: We usually calculate the organisational profit. Certainly we can find out customer profitability. Requirement: 1. Calculate profitability of each of the customers for Adelaide Limited. Allocate indirect costs based on the net sales ($) to the four retail stores (customers). 4 marks 2. Explain the benefits of knowing the customer profitability for Adelaide Limited? 2 marks The conversation continued.......... Emily: We have calculated the customer profitability by allocating indirect costs to retail stores based on our net sales
