Qing Qing Enterprises Ltd. is a wholesaler that provides a variety of products to retailers in Manitoba and Saskatchewan. New owners purchased Qing Qing, and are unhappy with the internal reports available to them. One concern is that there is no process in place to evaluate the profitability of individual customers. The following information has been gathered:

a) When an order is received from a customer, the credit status of the customer must be checked before the order is accepted. Once accepted, the items ordered are entered into the system and the quantities ordered compared to the quantities on hand. A picking document is created for the warehouse staff, listing the quantity ordered or on hand, whichever is fewer.

b) Warehouse staff then retrieves the inventory items from the warehouse and packages them on pallets for shipment. The pallets are then shipped to the customers using Qing Qing trucks. There are established routes, so that each location has inventory delivered once per week. Shipments in Manitoba are made Mondays, Wednesdays and Fridays, with Saskatchewan shipments occurring on Tuesdays and Thursdays. If the customer requires a shipment between normal shipping dates, it can normally be accommodated but requires the driver to extend the route on the shipping date nearest the customer, which lengthens the trip significantly. The cost is dependent upon the extra time taken to deliver to the customer who placed the rush order. c) Customer support is provided through salespeople; each customer has a specific salesperson assigned. Meetings with salespeople have been carried out online during Covid. Activity Total cost of activity Cost driver Total volume of cost driver Order acceptance $27,000 # of orders received 6,000 Order entry $63,000 # of different products 180,000 Picking inventory $162,000 # of different products 180,000 Packing for shipment $81,000 # of pallets delivered 9,000 Shipping costs $168,000 # of kms driven 150,000 Rush shipments $10,000 # of hours to customer 200 Salesperson support $300,000 # of customers 240 Total overhead costs $811,000 Two customers have been selected for evaluation, and totals have been calculated for the year ended September 30, 2021. Gillespies Ltd. purchased items with a selling price of $210,000 from Qing Qing. Qing Qing paid $130,000 to acquire these inventory items. Claridge Corp. purchased items with a selling price of $80,000 from Qing Qing. Qing Qing paid $42,000 for these items. The difference in gross profit earned from each customer is due to Gillespies receiving a discount in selling price for purchasing more than $200,000 during the year. The following information was gathered on the use of each cost driver by each customer. Cost driver activity Gillespies Claridge # of orders received from 25 52 Average # of different products purchased on EACH order 100 20 Average # of pallets sent for EACH order 3 1 # of kms driven to deliver EACH order 500 600 Total time taken for delivery of rush orders in year 0

16 Required: 2 a) If activity-based costing is to be used to assign costs to customers, should the order acceptance and order processing functions be considered one activity or two? Explain your reasoning.

3.5 b) Calculate the cost per unit of cost driver for each activity pool. 8.5

c) Calculate the gross profit and overall profitability of Gillespies and of Claridge, separately. Which customer is the more desirable customer for Qing Qing?

2 d) Provide one reasonable suggestion to management to make the less desirable of the two customers more profitable. Explain how this can be presented to the customer in a way that will reduce the probability the customer will change to another supplier.