Problem 2 ABC (Product Mix of Retail Company)

Super Bookstore (SB) is a large city bookstore that sells books and music CDs, and has a caf. SB operates at capacity and allocates selling, general, and administration (SG&A) costs to each product line using the cost of merchandise. SB wants to optimize its pricing and cost management of each product line (books, CDs and caf). Mary Evans, the controller of SB, is wondering if its accounting system is providing it with the best information for making such decisions, i.e., pricing and cost management. Mary heard about activity-based costing (ABC) and decided to evaluate profitability of each product line using ABC. She collected the following information for her ABC analysis.

Budgeted Product Line Information for the year ended Dec. 31, 2017

Books CDs Caf Total

Revenue $3,720,480 $2,315,360 $736,216 $6,772,056

Cost of merchandise $2,650,000 $1,720,000 $272,450 $4,642,450

Cost of caf cleaning - - $ 18,250 $ 18,250

SG&A $1,485,584

Operating Income $ 625,772

Activities related to SG&A: Books CDs Caf Total

Number of purchase orders 2,800 2,500 2,000 7,300

Number of deliveries received 1,400 1,700 1,600 4,700

Hours of shelf stocking time 15,000 14,000 10,000 39,000

Items sold 124,016 115,768 368,108 607,892

Mary estimates the following SG&A costs for 2017:

Purchasing department expenses.$ 474,500

Receiving department expenses .. 432,400

Shelf stocking labor expenses 487,500

Customer support (cashiers and floor employees) ...... 91,184

Total SG&A $1,485,584

Required Round up to the 2nd decimal point.

1. Determine the budgeted profitability of the bookstore (i.e., Operating Income/Revenue).

2. Determine the profitability of each product line, using SBs current costing system, i.e., allocate SG&A based on cost of merchandise.

3. Determine the budgeted profitability of each product line, using ABC.

4. 1) What new insights do you learn by comparing your answer for question 2) with your answer for question 3) above? Based on the comparison, what changes (e.g., product mix or cost management) would you recommend to improve the companys profitability, if you were Mary?