Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 65

Product-Line Profitability, ABC 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:

	Frozen Food	Baked Goods	Fresh Produce
Sales	$120,000	$90,000	$158,125
Cost of goods sold	105,000	67,000	110,000

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:

Activity (cost driver)	Frozen Food	Baked Goods	Fresh Produce
Order processing (number of purchase orders)	10	55	90
Receiving (number of deliveries)	10	70	120
Shelf-stocking (number of hours per delivery)	2	0.5	4
Customer support (items sold)	30,000	40,000	86,000

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 SFS managers?

Step 1 of 3

1.?Product-line profitability under the current costing system
	Frozen Food	Baked Goods	Fresh Produce
Sales	$120,000	$90,000	$158,125
Cost of goods sold	105,000	67,000	110,000
Gross margin	$15,000	$23,000	$48,125
Store support (20% of Sales)	24,000	18,000	31,625
Operating income	($9,000)	$5,000	$16,500
Operating margin (OI/S)	-7.50%	5.56%	10.43%