Supermart Food Stores (SFS) has experienced net operating losses in its frozen food products line in the last few periods. Management believes that the store can improve its profitability if SFS discontinues frozen foods. The operating results from the most recent period are:

SFS estimates that store support expenses are approximately 20 percent of revenues.

The controller says that not every sales dollar requires or uses the same amount of store support activities. A preliminary analysis reveals store support activities for these three product lines are:

The controller estimates activity-cost rates for each activity as follows:

Order processing .........$ 80 per purchase order

Receiving ........... 110 per delivery

Shelf-stocking .......... 15 per hour

Customer support ........0.20 per item

Required

1. Prepare a product-line profitability report for SFS under the current costing system.

2. Prepare a product-line profitability report for SFS using the ABC information the controller provides.

3. What new insights does the ABC system in requirement 2 provide to SFSmanagers?

Transcribed Image Text:

Activity (cost driver) Order processing (number of purchase orders) Receiving (number of deliveries) Shelf-stocking (number of hours per delivery) Customer support (items sold) Frozen Food Baked Goods Fresh Produce 10 10 90 120 70 0.5 40,000 30,000 86,000