QUESTION TWO [25] A major company sells a range of electrical, clothing and homeware products through a chain of department stores. The main administration functions are provided from the company's head office. Each department store has its own warehouse which receives goods that are delivered from a central distribution centre. The company currently measures profitability by product group for each store using an absorption costing system. All overhead costs are charged to product groups based on sales revenue. Overhead costs account for approximately one-third of total costs and the directors are concerned about the arbitrary nature of the current method used to charge these costs to product groups. A consultant has been appointed to analyse the activities that are undertaken in the department stores and to establish an activity based costing system. The consultant has identified the following data for the latest period for each of the product groups for the X Town store: Product Group Electrical Homeware Sales revenue Clothing R4 400 000 R2 800 000 R3 300 000 R2 300 000 R1 100 000 R600 000 104 52 26 50 20 10 Cost of sales Number of deliveries Number of pallets per delivery Number of inventory items Number of customers Number of requisitions 14 000 6 000 20 000 2 100 000 1 050 000 350 000 522 243 135 The consultant has also obtained the following information about the support activities: Activity Cost driver Overheads R 1 100 000 Customer service Warehouse receiving Warehouse issuing In-store merchandising Central administration Number of customers Number of pallets delivered Number of requisitions Number of inventory items Sales revenue 700 000 300 000 400 000 316 000 Required: 2.1 Calculate the total profit for each of the product groups: 2.1.1 Using the current absorption costing system. (7) 2.1.2 Using the proposed activity-based costing system. (12) Explain how the information obtained from the activity-based costing system might be used by the management of the company. (6) 2.2