Henderson Company has three product lines: baked goods, milk andfruit juice, and frozen foods. Company has experienced netoperating losses in its Milk & Fruit Juice line during the lastfew periods. Company management thinks that the store will improveits profitability if it discontinued the Milk & Fruit Juiceline. For product line profitability analysis purposes, currentlycompany is allocating operating expenses as a percentage of salesdollars which approximately is 30% of sales dollar.
SalesRevenues $89,250 $99,000 $76,500
Cost of goodssold $54,000 $72,000 $51,000
Operating costs (30% of salesrevenues) $26,775 $29,700 $22,950
ProfitMargin $8,475 ($2,700) $2,550
Profit MarginRatio 9.5% -2.7% 3.3%
However, Rose, the new accountant whois a graduate of CSU, believes that not every sales dollar requiresor uses the same amount of store support activities. She believesthat company should look for other means for the allocation ofstore operating costs among the product lines â such as ABC. Basedon her preliminary investigation and analysis, she could identifyfour store support operating activities and breakdown total storeoperating activities by these activities as follows:
Activity-area usage (cost allocationbase) Annual ActivityCosts Cost Driver
Ordering (purchase orders)$12,600 number of purchase orders
Delivery (deliveries)$22,475 number of deliveries Shelf-stocking(hours) Shelf-stocking hours $20,200
Customer support (items sold)$24,150 number of units sold
Total $79,425
Rose also has compiled the followingannual data on usage of store support activities by each productline:
Activity-area usage (cost allocationbase)
Baked Goods Milk&Fruit JuiceFrozen Products
Ordering (purchase orders)25 20 15
Delivery(deliveries) 90 35 30
Shelf-stocking(hours) 190 174 40
Customer support (itemssold) 13,500 18,450 8,300
. In the spaceprovided on Answers Sheet, complete the product-line profitabilityreport for
Henderson using ABC for the allocationof store support operating costs among the three products.
1. In the spaceprovided on Answers Sheet, complete the product-line profitabilityreport for
Henderson using ABC for the allocationof store support operating costs among the three products.
2. What new insightsdoes the ABC system provide to Henderson Company managers?Explain.
26. Profitability Analysis
Baked Goods
Milk and Fruit Juice
Frozen Products
Sales Revenues
$89,250
$99,000
$76,500
Cost of goods sold
$54,000
$72,000
$51,000
Henderson Company has three product lines: baked goods, milk andfruit juice, and frozen foods. Company has experienced netoperating losses in its Milk & Fruit Juice line during the lastfew periods. Company management thinks that the store will improveits profitability if it discontinued the Milk & Fruit Juiceline. For product line profitability analysis purposes, currentlycompany is allocating operating expenses as a percentage of salesdollars which approximately is 30% of sales dollar.
SalesRevenues $89,250 $99,000 $76,500
Cost of goodssold $54,000 $72,000 $51,000
Operating costs (30% of salesrevenues) $26,775 $29,700 $22,950
ProfitMargin $8,475 ($2,700) $2,550
Profit MarginRatio 9.5% -2.7% 3.3%
However, Rose, the new accountant whois a graduate of CSU, believes that not every sales dollar requiresor uses the same amount of store support activities. She believesthat company should look for other means for the allocation ofstore operating costs among the product lines â such as ABC. Basedon her preliminary investigation and analysis, she could identifyfour store support operating activities and breakdown total storeoperating activities by these activities as follows:
Activity-area usage (cost allocationbase) Annual ActivityCosts Cost Driver
Ordering (purchase orders)$12,600 number of purchase orders
Delivery (deliveries)$22,475 number of deliveries Shelf-stocking(hours) Shelf-stocking hours $20,200
Customer support (items sold)$24,150 number of units sold
Total $79,425
Rose also has compiled the followingannual data on usage of store support activities by each productline:
Activity-area usage (cost allocationbase)
Baked Goods Milk&Fruit JuiceFrozen Products
Ordering (purchase orders)25 20 15
Delivery(deliveries) 90 35 30
Shelf-stocking(hours) 190 174 40
Customer support (itemssold) 13,500 18,450 8,300
. In the spaceprovided on Answers Sheet, complete the product-line profitabilityreport for
Henderson using ABC for the allocationof store support operating costs among the three products.
1. In the spaceprovided on Answers Sheet, complete the product-line profitabilityreport for
Henderson using ABC for the allocationof store support operating costs among the three products.
2. What new insightsdoes the ABC system provide to Henderson Company managers?Explain.
26. Profitability Analysis | Baked Goods | Milk and Fruit Juice | Frozen Products |
Sales Revenues | $89,250 | $99,000 | $76,500 |
Cost of goods sold | $54,000 | $72,000 | $51,000 |
