Twin Cities Sports (TCS) is a distributor of sports footwear and equipment. TCS distributes many products to retail accounts but classifies products into just two product groups—footwear and equipment.

● Footwear items arrive at TCS in cases and are shipped to customers in these cases.

● TCS receives equipment in bulk shipments. TCS must unpack these products and then repack them to meet small order quantities for specific equipment. Examples include weight-training equipment and golf clubs and bags.

TCS has two types of customers:

1. Specialty stores: stores that order low volumes, the majority being footwear

2. Department stores: stores that order large volumes of both footwear and equipment

TCS’s management has set a strategic goal to improve both product and customer profitability.

A related sub goal that supports this strategy is to identify profitable products and customers using an accurate cost-accounting system.

TCS currently uses a simple cost-accounting system to calculate both product and customer profitability. The only direct costs are the purchase costs of footwear and equipment products. TCS allocates indirect costs to the product groups using a single indirect cost pool for all indirect costs with “pounds of product” as the cost-allocation base. Cost and operating data accumulated for the most recent year are in Exhibit 12-22.

1. Prepare a schedule that shows the gross margin of each product group.

2. Prepare a schedule that shows the gross margin of each customer type.

3. Based on your answers to numbers 1 and 2, recommend a strategy to improve customer profitability.

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Exhibit 12-22 Product Data Equipment 2,000 120 31.25 pounds 800 Footwear Annual demand in cases Average purchase cost per case Average weight per purchased case Average sales price per case 2,800 18.75 pounds $460 Customer Data Stores Footwear demand in cases Equipment demand in Total annual demand in cases Orders Specialty Stores 1,200 400 1,600 160 Department 1,600 1,600 3,200 cases 70 Other Data A single cost pool consists of resources needed to perform receiving, storing, picking, packing, shipping, orde is $1,380,000. The cost-allocation base used to allocate this pool to the two product groups is pounds of product sold. r processing, and customer service activities. The annual cost of these resources