Reference no: EM132502532
Herlocker Supermarkets (HS) is a regional supermarket chain operating in the Pacific Northwest. HS's management has recently become concerned because its Eugene, Oregon store is barely breaking even.
HS has decided to develop Activity-Based Cost (ABC) information about the profitability of the three product lines carried in the Eugene store: soft drinks, fresh produce, and packaged foods in order to assess the long-run viability of different products and how they contribute to overall profit.
HS has collected the following 2019 data about Gross Margin (Revenue less Cost of goods sold) and various support activities for each product line:
|
|
Soft Drinks
|
Fresh
Produce
|
Packaged
Food
|
Total
|
|
Revenues
|
$ 357,000
|
S 1,062,500
|
$ 533,750
|
$ 1,953,250
|
|
Cost of goods sold
|
$ 295,000
|
$ 807,500
|
$ 423,500
|
5 1,526,000
|
|
Number of bottles returned
|
65,000
|
-
|
-
|
65,000
|
|
Number of purchase orders placed
|
144
|
372
|
164
|
680
|
|
Number of deliveries received
|
130
|
1,020
|
360
|
1,510
|
|
|
224
|
2,460
|
1,256
|
3,940
|
|
Hours of shelf-stocking time
|
|
Items sold
|
52,100
|
495,500
|
132,400
|
680,000
|
HS has also produced the following information about the support costs of running the store for 2019, arranged into various activity cost pools, and the best available cost driver (or allocation base):
|
Activity
|
Description of Activity
|
Support Costs
|
Allocation Base
|
|
Bottle return
|
Returning of empty bottles to store
|
$ 6.500
|
Direct tracing to soft drink line
|
|
Shelf-stocking
|
Stocking of merchandise on store shelves and ongoing restocking
|
$ 75,120
|
Hours of shelf- stocking time
|
|
Delivery
|
Physical delivery and receipt of merchandise
|
$ 120,200
|
Number of deliveries received
|
|
Customer support
|
Assistance provided to customers, including checkout and bagging
|
$ 148,900
|
Number of items sold
|
|
Ordering
|
Placing of orders for purchases
|
$ 68,400
|
Number of purchase orders placed
|
|
|
Total Support Costs
|
$ 419,120
|
|
Question 1.) HS has always allocated store support costs (that is, the $419,120 of costs in the table above) to product lines on the basis of the proportion of cost of goods sold for each product line. Using this approach to allocating support cost, calculate operating income (or loss) both in dollars of profit (or loss) and as a percentage of revenue for each product line.
Question 2.) What strategy does this traditional system of accounting for store support costs suggest to increase the profitability of the Eugene store?
Question 3.) Now suppose HS allocates the $419,120 of store support costs to product lines using an ABC system based on the activity cost and cost driver information provided above. Calculate the ABC operating income (or loss) both in total and as a percentage of revenue for each product line.
Question 4.) What strategy does this ABC system suggest to increase the profitability of the Eugene store?
Question 5.) What is driving the differences in profitability between the profitability you calculated using the traditional system to the profitability you calculated using the ABC system?