Question

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 Foods Baked Goods Fresh Produce
Sales $ 220,000 $ 349,000 $ 387,000
Cost of goods sold 204,000 282,000 298,000


SFS estimates that store support expenses, in total, are approximately 14% 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 Foods Baked Goods Fresh Produce
Order processing (number of purchase orders) 9 50 101
Receiving (number of deliveries) 10 73 238
Shelf-stocking (number of hours per delivery) 6 0.5 7
Customer support (total units sold) 29,000 32,000 64,000


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



Order processing $ 106 per purchase order
Receiving 119 per delivery
Shelf-stocking 18.00 per hour
Customer support 0.29 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.

Answer 1

1. Product-line Profitability Report under the Current Costing System:
Frozen Foods: Sales - $220,000; Cost of Goods Sold - $204,000; Gross Profit - $16,000; Store Support Expenses (14% of Sales) - $30,800; Net Operating Loss - ($14,800).
Baked Goods: Sales - $349,000; Cost of Goods Sold - $282,000; Gross Profit - $67,000; Store Support Expenses (14% of Sales) - $48,860; Net Operating Income - $18,140.
Fresh Produce: Sales - $387,000; Cost of Goods Sold - $298,000; Gross Profit - $89,000; Store Support Expenses (14% of Sales) - $54,180; Net Operating Income - $34,820.

2. Product-line Profitability Report under Activity-Based Costing System:
Frozen Foods: Sales - $220,000; Cost of Goods Sold - $204,000; Gross Profit - $16,000; Activity Costs (Order Processing - $506; Receiving - $1,190; Shelf-Stocking - $120; Customer Support - $2,860); Total Activity Costs - $4,676; Net Operating Income - $11,324.
Baked Goods: Sales - $349,000; Cost of Goods Sold - $282,000; Gross Profit - $67,000; Activity Costs (Order Processing - $5,050; Receiving - $7,807; Shelf-Stocking - $0; Customer Support - $9,280); Total Activity Costs - $22,137; Net Operating Income - $44,863.
Fresh Produce: Sales - $387,000; Cost of Goods Sold - $298,000; Gross Profit - $89,000; Activity Costs (Order Processing - $10,566; Receiving - $28,418; Shelf-Stocking - $1,666; Customer Support - $18,240); Total Activity Costs - $58,890; Net Operating Income - $30,110.