QUESTION ONE: Background Discount Drugstores Ltd (DDL) is considering extending its Wellington store and wants to assess the profitability of its three current product lines: Cosmetics & Haircare, Pharmacy, and Vitamins & Supplements. Details of last year's trading are as follows: Cosmetics & Haircare Pharmacy Vitamins & Supplemer ($) ($) (S) Sales 414,720 840,240 483,960 Cost of Sales 300,000 450,000 250,000 Total store upport costs (all costs other than Cost of Sales) were $360,000 and are currently allocated to product lines in proportion to their Cost of Sales to arrive at operating income and product line margins. Alexa Fleming, DDL's CEO, is concerned about the margins generated by this method: "I can't believe that Cosmetics & Haircare have such low margins! Most of our suppliers for these products send merchandisers to keep our shelves stocked, minimising our involvement in those processes, and they have minimal customer interaction compared with Pharmacy and Vitamins and Supplements, where customers want help and advice. Is there a problem with our costing system?" To address the CEO's concerns, DDL is investigating whether to implement Activity-Based Costing (ABC) to trace store costs more accurately to product lines and has engaged you as a consultant to advise them. Alexa explains to you that the decision on implementing ABC is critical because of the plans to extend the store - management need to decide the best way to use the additional shelf space the extension will provide. She also tells you that DDL wants to expand into offering health-related services to its customers, such as one-to-one nutritional advice and smoking cessation programmes, and she asks for your advice on the relevance of ABC to such operations. Further information You have conducted an activity analysis and determined the following cost pools, drivers, and transactions: Activity Cost Hierarchy Total Cost Pool No. of transactions Ordering Batch-level $62,400 624 purchase orders $100 per Delivery Batch-level $50,400 630 deliveries 1,728 stocking Shelf-stacking Unit-level $43,200 hours Burden rates purchase order $80 per delivery $25 per stocking- hour Customer support Unit-level $92,160 20,480 assists $4.50 per assist Other Organisation-level $111,840 N/A N/A