ACC 100 Study Guide - Final Guide: Current Asset, Perpetual Inventory

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11 Apr 2016

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Document Summary

Knowing the cost of inventory is extremely important for decision making. Businesses might be able to increase their sales price when inventory costs increase but, depending on compeiion in the market place, they might not be able to do this without losing sales. In that case understanding the cost of inventory allows business owners to consider such things as changing suppliers, using diferent shipping companies, or reducing other operaing expenses to allow for similar proitability in the business overall. Business owners might also try to negoiate beter pricing from exising suppliers. Without detailed informaion about inventory costs it would be diicult for merchandisers to run their businesses so that they can make the proit they want. In chapter 5 inventory purchases were added to the inventory account, a current asset account on the balance sheet. Each purchase was added as a total amount for the whole purchase, which gave no informaion about the per unit cost of inventory.

Related Questions

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The major advantage of extending credit sales is that it willincrease sales revenue. This is because customers who can't producecash today are still able to buy the good or service of theirchoice.

Extending credit sales is usually a good idea for businesses,but there are a few important factors to consider. First, thebusiness needs sufficient cash flow to account for Cost of GoodsSold (inventory). Customers' payments may delayed, but suppliersstill have to get paid on time. Thus, the business has to be keenlyaware of its cash levels.

This is especially true for businesses that sell large durablegoods at low volumes, like airplane engines. If a customer isunable to pay its debt, this bad debt may have a big affect on cashlevels available for suppliers and investment in otheractivities.

The most important factor to consider when deciding whether tooffer credit sales is the anticipated bad debt expense. This is thepercentage of credit sales that are not ultimately paid. Thebusiness will be forced to eventually write this off against theaccount receivables balance (credit). This may lead to a lowercredit rating. A smaller account receivable balance, which isconsidered liquid, is not good if you wish to borrow against thatbalance (secured borrowing).

Ultimately, a business has to decide whether 1) the increase insales revenue will be greater than the bad debt expense arisingfrom extending credit to customers; and 2) whether the increase insales revenue is sufficient to account for reduced and/or delayedcash flows.

It therefore goes without saying that the credit worthiness ofcustomers should be evaluated before deciding to lend. Backgroundchecks and credit scores should be reviewed. The goal of course tominimize any future bad debt expense.

Summer is approaching and Steven and Sue Mahan have finally decided that their idea of a successful Southwestern furniture, art, and jewelry trading company has come of age. They know that summer is a popular tourist time in New Mexico and could be the best time to start this new business. The Mahans have had a long-time interest in Southwestern art and furniture. Steven graduated from college with an economics degree about 15 years ago and received his MBA in finance a few years later. He has been working in Dallas, TX, as the controller of a major wholesale distributor company for many years. His wife, Sue, who will be a full partner in the business, spent the first 10 years of her career in retail sales. Over the last several years, she has assumed more administrative duties for the group she works with.

Steven and Sue know they bring the expertise and skill to run a successful business, but to ensure success they have been researching the market for over five year's. They also know that they must be very careful and thoroughly research the business and industry they are pursuing. They have traveled extensively to New Mexico and have spent a good deal of time getting to know the local artists (primarily ski bums). They have found that there is a great demand for Southwestern furniture in Texas and the Southwest,

The Mahans have decided to open a shop called Southwest Trading Company in Taos, NM, and act as both a retailer and supplier to furniture and art outlets in Texas. Steven's extensive contacts with businesses in Dallas and Houston have given him the orders needed to make the business a success as soon as they begin shipping the goods. Sue has already begun marketing the Southwestern products. Southwest Trading Company's arrangements with the local craftspeople will allow very aggressive pricing of the goods to retail establishments in Texas. This aggressive pricing has been well received and tentative orders are already in place.

Steven has found an ideal location in Taos that is currently available. The owner is askÂing $275,000 for the space but Southwest Trading has a contract, contingent on financing, for $250,000. Steven and Sue have gotten bids on remodeling and should be able to renoÂvate the space for about $45,000. Although they will purchase the building, the land is leased on a transferable lease with 65 years remaining. The Mahans have decided to invest $235,000, which represents most of their savings, into the venture. Sue's sister is also interested in the possibilities that the company exhibits and is lending Southwest $90,000. Repayment on the note to Sue's sister is not expected to begin for five years. They have estimated that they will need $130,000 in inventory to start the business and they will buy the inventory in cash to build goodwill with the local craftspeople. They also estimate that they will need $20,000 in cash to conduct day-to-day operations and bill payment.

Wanting to use a local bank, Steven has approached Cary Farmer, the senior loan officer at Santa Fe National Bank in Santa Fe, NM, for financing. Steven's background in finance has allowed him to put together the following assumptions for their preliminary business plan. Steven believes that all renovations to the building and inventory can be in place by the end of June 2008.

Sales are expected to be a bit lower the first year (July through December, 2008), since only six months will be included in the first fiscal year. Sales are expected to gtow significantly in the first full year, 2009, with growth leveling oft in the third and fourth years. Sales are expected to be $275,000, $675,000, $800,000, and $900,000 in 2008, 2009, 2010 and 2011, respectively. Sales are expected to level off after 2011.

Based on tentative agreements and orders, it is expected that cost of goods sold will average about 63 percent of sales.

General and administrative expenses are expected to be $70,000 for the six months in 2008, increase to $100,000 in 2009, and level off at $120,000 from 2010 forward. The land lease expenses and interest expenses are included in operational expenses.

Selling expenses are expected to be about 12 percent of sales and Sue is expecting to undertake extensive marketing and promotion efforts throughout Texas after the busiÂness is opened. It is expected that these additional promotional expenses will be about $30,000 in 2008 only.

The company will use 10-year straight-line depreciation of the building and improvements.

Southwest's effective tax rate is expected to be 34 percent.

Since they expect a good deal of business to be paid by credit card and to ship goods to Texas on credit, they expect to carry about 48 days of accounts receivable. They also expect that, because of the type of business they are entering, they will turn their inventory over about three times a year.

On the basis of the negotiations they have had with their craftspeople, suppliers, and other wholesale distributors, they estimate that they can count on about 28 days of accounts payable to help finance the business.

In preparing to go to the bank for the necessary loan, the Mahans want to prepare proÂjected financial statements showing that Southwest Trading Company can make a profit and pay back the loan. They also want to know more precisely how much they will need to borrow from the bank to open the doors for business. The Mahans plan to prepare five years of balance sheet, income statement, and cash budget data for the bank. They must also develop an opening balance sheet as of the day they plan to open the doors, June 30, 2008. These pro forma financial statements will aid them, and the hank officer, in answerÂing many questions including the following:

How much financing will be needed to open the doors of the business in July 2008?

Five years of pro forma balance sheet and income statement data must be prepared to determine if additional financing is needed, and if so, how much. Steven's finance background tells him that the estimated financing needed each year will be an accountÂing plug figure to ensure that the balance sheet balances. If projected assets exceed liabilities and equity, the difference will be the bank's borrowing needs. If liabilities and equity exceed projected assets purchases, these funds will be used to pay off debt or increase cash or marketable securities.

Because this is a start-up business, it is even more important to identify what the loan proceeds will be used for, what the primary source of repayment is, and when the total loan proceeds will be repaid. Using the pro forma projections, the primary source of repayment and when the loan will be repaid can be determined.

A cash budget or cash-based income statement needs to be prepared because Steven knows the only thing that matters to the bank is cash.

Finally, Steven needs to prepare a collateral schedule. He knows that the banker does not want the collateral but will need all he can get if the business is not as successful as expected.

Prepare a list of questions to which you would need the answers. Be sure to explain the specifics of the questions as they relate to this case.

What types of loan covenants would you require?

Identify the bank's largest risks in making this loan.

How would you structure the loan to protect the bank?

What is your recommendation concerning the loan request?

Conduct the analysis suggested by the above questions. What is your recommendation concerning the loan request?

salmonoyster595

Please answer only "Discussion Question" at theend.

Western States Stationery Case

Western States Stationery was founded in the late 1800s in theSan Francisco area as a one-man operation producing notepaper andcards for sale in the cityâs general stores. By 2004 it had grownto a large paper products corporation with sales more than $2billion.

One division of the company produces specialty paper products,such as writing paper, envelopes, note cards and greeting cards.Another division manufactures and prints business forms. By 2002 itwas one of the top 5 firms in the business forms industry.

For some period, the companyâs sales growth had been relativelyflat and profit margins had been difficult to maintain. Competitionamong suppliers was much more intense than in prior years. In 2002management decided it would venture into business forms inventorymanagement services. This was an area that management thoughtoffered several advantages. These services were thought to beâvalue addedâ allowing the firm to differentiate itself fromothers. Differentiation implied higher margins and the potential tofurther bind customers to Western, reducing the threat they mightswitch to an alternative supplier. Finally, the concept wasrelatively new, with little competition from large firms, therebyoffering high sales growth potential. Western embarked on acampaign to enroll its corporate clients in a program it calledTotal Forms Control (TFC).

By 2004, sales from TFC were about $60 million. Western hadestablished TFC as a separate operation within the business formsdivision. The services provided under TFC included warehousing anddistribution of forms (including inventory financing) as well asinventory control and forms usage reporting. TFC used asophisticated computer system network, which enabled them tomonitor a clientâs forms inventory, forms usage and orderingactivity.

As part of its distribution services, TFC also offeredâpick-packâ services where workers opened full cartons to pick theexact number of forms requested by the clients. TFCâs operatingphilosophy was that a well-run warehousing and distribution networkwas vital to any forms management program ---âwe know what you needâ¦ the right product at the right place at theright time.â

For a small number of clients TFC also offered "desk topdelivery," where TFC personnel would distribute the forms toindividual offices within the customerâs company (otherwise formswere usually delivered only to a receiving dock area). As acomprehensive forms management provider, Western's product linealso had to be comprehensive. Their product line includedeverything from stock computer printout paper and fax paper tocustom designed forms tailored by Western's design consultants tomeet the exact business needs of the client.

TFC also had the ability to custom design its forms managementservices to meet the needs of each of its clients. TFC clientsranged from small businesses, which desired only basic inventorycontrol, to those who had comprehensive forms managementprograms.

CURRENT COST ACCOUNTING SYSTEM

Western operated its forms manufacturing and TFC activities asseparate profit centers. Western manufactured business forms in 13locations. The transfer of product from manufacturing operations toTFC was at arm's length with the transfer price set at fair marketvalue. Although the company encouraged internal sourcing forcustomer orders, TFC salespeople had the option of outsourcingproduct.

Clients who participated in the forms management program kept aninventory of forms at one of Western's 10 distribution centers. Theforms were distributed to the client as they were needed. Theclient was charged a service fee to cover the cost of warehousingand distribution based on a percentage of the cost of sales of theproduct for that month, regardless of the specific level of serviceprovided to that client. The standard charges were as follows:

â¢ Warehousing/Distribution, 20.5% ofproduct cost

â¢ Inventory financing, 4.7% of productcost

â¢ Trucking to the customer, 7% ofproduct cost

If a TFC client made use of any of the distribution services,they were typically charged a price for the forms which was highenough to allow for an additional 20.5% of product cost to coverwarehousing and distribution expenses (everything from storage andrequisition handling up to and including desk top delivery), plus4.7% to cover the cost of capital tied up in inventory, and 7% tocover trucking costs. These percentages were determined based onactual 2002 financial data so that on an aggregate basis, in total,all expenses were covered (see Exhibit 1). Sales prices weregenerally determined by applying a 20% mark-up on the combined costof the product (business forms) and the 32.2% charge for TFCservices. To some degree, prices charged on customer accounts couldvary from the standard formula, based on what the sales departmentthought customers would pay.

UNDERSTANDING CUSTOMER PROFITABILITY

With TFC profitability suffering in October 2002, GeneralManager John Malone began to question the appropriateness of thedistribution charges: "The Business Forms Division used to earn a20% Return on Investment (ROI). But returns have been dropping forseveral years. TFC is projected to earn an ROI of only 6% for 2004.Something tells me that we are not managing this business verywell! It seems to me that the charges for services needs closerscrutiny."

John looked through his records and found two accounts ofsimilar size, accounts A and B, which were handled by differentsalespeople. Accounts A and B had essentially the same annual

sales of about $79,000 with the cost of the product being$50,000. Under the current system, these accounts carried the sameservice charges, but John noticed that these accounts were similaronly in the value of the product being sold; they were verydifferent on the level of service they required from Western.Malone double-checked his records and confirmed that the twoaccounts had indeed generated identical sales revenues (see Exhibit2).

In the past year, customer A had submitted 364 requisitions forproduct with a total of 910 lines (all of them "pick-pack") whilecustomer B had submitted 790 requisitions with a total of 2500lines (all of them "pick-pack"). Customer A kept an average of 350cartons of inventory at the distribution center while customer Bkept 700 on average. Customer B's average monthly inventory balancewas $50,000 ($7,000 of which had been sitting around for a wholeyear) while that of customer A was only $15,000. In addition,customer B had requested desk top delivery 26 times during the pastyear, while customer A did not request desk top delivery at all.John had support staff research the truck operating costsassociated with these customers. Mileage to and from each customerwas estimated and multiplied by an estimated cost per mile. Becauseof the greater activity on customer B's account, a shipment wentout three times a week at an annual trucking cost of $7,500 whileCustomer A required only one shipment a week at an annual truckingcost of $2,250.

With corporate breathing down his neck, John Malone turned toTFC Controller Melissa Dunhill and Director of Operations TimCunningham for help. As a first step, they could provide John withthe following information:

The total expenses for the distribution centers in 2002 wereestimated as follows (in 000's):

Rent	$1,504
Depreciation	$208
Utilities	$200
Salaried payroll	$945
Fringe benefitsâsalaried	$164
Taxes/Insurance	$110
Postage & supplies	$96
Hourly payroll â admin	$476
Fringes â hourly admin	$69
Variable warehouse payroll	$1,599
Warehouse fringes	$336
Total	$5,707

John said, "How am I going to use this information to solve myproblem?" "Well," Tim said, "if we can figure out, without goingoverboard of course, what exactly goes on in the distributioncenters, maybe we can take these financial numbers and assign themto the activities. If we can do that, we'll have a much better ideaof what it costs to serve our various clients." Tim knew that twoprimary activities took place in the distribution centers â thewarehousing of forms and the distribution of those forms inresponse to a customer requisition. He decided to talk to somepeople in the field to get more specific information.

DISTRIBUTION CENTER: ACTIVITY ANALYSIS

John and Tim visited Western's Kansas City, MO distributionfacility. Site manager Wilbur Smith confirmed, "All we do is storethe cartons and process the requisitions. I'll tell you, the amountof warehouse space we need just depends on the number of cartons.If we got into some flexible lease programs and changed aisleconfigurations, we could probably adjust our space requirements ifthe number of cartons we stored was to change. The other thing thatbothers me is that we've got some inventory that's been sittinghere forever.

The team then interviewed warehouse supervisor, Rick Fosmire, "Idon't care if I get a hundred requisitions with one line each orone requisition with a hundred lines on it, my guys still have togo pick a hundred items off the shelves. And those darned"pick-pack" requests. Almost everything is "pick-pack" nowadays. Noone seems to order a whole carton of 500 items anymore. Do you knowhow much more labor it requires to pick through those cartons? Andon top of that, this desk top delivery is a time drain for my guys.It's not like my guys don't have enough to do."

John and Tim returned to Denver with a better idea of whathappens in a distribution center. From what they observed, theybroke the distribution center down into 5 primary value-addedactivities: storage, requisition handling, basic warehouse stockselection, "pick-pack" activity, and desk top delivery.

They turned to Melissa for help assigning costs to activities.Melissa spent considerable time talking to each of the sitemanagers and warehouse supervisors. A consistent picture emerged.The majority (85%) of facility costs related to storage of businessforms. The remainder (15%) was necessary to handle theadministration of requisition processing. Warehouse workers wereinterviewed to determine where they spent their time. The basicprocess of finding and selecting items required half of their time(50%) - this includes finding and selecting either full box ordersor âpick-packâ orders. If the order also required âpick-packâ thisnearly doubled the required time as the workers opened cartons,counted items, etc. Thus, workers estimated that they spent 40% oftheir time dealing with âpick-packâ over and above basic formsselection. Preparing and handling desk top delivery shipments tookup the rest of their time (10%). Based on the above information,Melissa assigned costs to these activities as follows ($'000's).(See Exhibit 3 for calculations):

Storage	$1,625
Requisition Handling	$2,147
Basic Warehouse Stock
Selection	$967
Pick-Pack Activity	$774
Desk Top Delivery	$194
Total	$5,707

Tim then estimated the following for 2004 based upon historicalinformation and current trends:

On average, the 10 distribution centers scattered across thecountry will have combined inventories of approximately 350,000cartons (most cartons were of standard size).

TFC will process about 310,000 requisitions for 2004.

Requisitions will average 2.5 lines of different stationerymaterial requested and pulled.

About 90% of the lines will require an additional "pick-pack"activity (as opposed to shipping an entire carton).

They were still uncomfortable with the way inventory financingand trucking costs were charged out. John checked with the financedepartment and learned that Western obtained financing at the primerate (currently 8%) plus 2%. He thought they could just pass thatalong. "Our new computer system is coming on line soon which willtrack mileage we log to deliver shipments to each customer," saidTim, "so, using a per mile cost we can just charge the client forwhat it actually costs us." They all agreed that this soundedfair.

They were almost finished. "What about desk top delivery?" Timsaid. I think we should charge extra for it, but I don't want thisto get too complicated."

John said, "How much extra time does it take your guys onaverage to prepare a desk top delivery and then run around thecustomerâs company?"

"I'd say about an hour and a half to two hours."

"Alright. At $12 per hour, that's about $24 each time.

"Sounds OK to me. That ties pretty well to the $194,000 overallassignment, since we will process somewhere around 8,500 'desk top'requests this year."

The above information was used to derive activity / cost drivers(See Exhibit 4).

The entire management team, including Doug Kingsley, FinanceDirector of the Business Forms Division, felt that there had to bea better way of charging out distribution services and that thesolution would help TFC become more profitable. They now had a muchbetter understanding of the drivers of costs involved indistribution services. As the four headed off in Doug's SUV for theBroncosâ first home game, they tried to figure out how to use thisinformation to find a workable alternative.

SERVICES BASED PRICING (SBP)

"It would not be easy getting the sales force on board with anactivityâbased pricing program," John said. "Some of them getpretty stuck in their ways and don't like change. Some accountswould see increases because of the additional distribution chargesunder a Services Based Pricing (SBP) scheme. These salespeoplewouldn't be very happy. On the other hand, some salespeople may seetheir margins increase." Overcoming these organizational problemswould be only the tip of the iceberg.

Kingsley, as well as many of the senior managers at corporate,continued to be very concerned with TFC profitability. Whileeveryone thought TFC now had a better understanding of its costdrivers, they were not convinced that overall profitability wouldimprove without significant changes in marketing. They were stillwondering how to use their new activity based costing (ABC)analysis to improve the profitability of TFC. So they decided to doadditional analysis on their customer base.

The accounting department had maintained a database, whichshowed all activity against individual accounts and calculated acontribution from that account. Although TFC maintained 1100separate accounts, a large portion of the business came from veryfew accounts. The top 40 accounts represented 48% of the company'snet sales volume (see Exhibit 5).

As a way of understanding customer profitability, TFC managementreworked the information in the database as if the accounts hadbeen charged service fees based on actual usage, leaving net salesand product cost the same as before. They recalculated contributionbased on these figures. They ranked the accounts according toprofit contribution. Exhibit 6 shows the top 20 accounts for themonth of August and Exhibit 7 shows the bottom 20.

The team looked at all accounts where the revised contributionwas below 20% and determined that if these accounts were managed toa 20% contribution, the profit improvement would be $4.3 millionannually. Of those, the top 40 accounts (ranked by the contributionopportunity if improved to a 20% contribution) represented 70% ofthe $4.3 million opportunity.

Another way of summarizing the range of profitability across the1,100 customers is shown in Exhibit 8. This was a new way oflooking at account management which combined the effects of bothvolume and contribution margin. Since such a large piece of theopportunity rested with these few accounts, management determinedthat it might be possible to significantly improve profitability byconcentrating on individual account management. The team felt theywere on the right track for improving account profitability andwondered what should be the next step. They also wondered whatother issues might be important for improving the overallprofitability of TFC. Management called the ABC based pricingsystem SBP and was seriously considering adopting it for all TFCcustomers.

Case Questions to Consider

How did Total Forms Control (TFC) fit into Westernâs strategy?Was it performing up to expectations?

How did the existing accounting system handle the costs ofservices that TFC provided? Did this suit TFCâs needs?

Using the information in the case calculate ABC based servicescosts per unit of activity for the TFC business. Using these newactivity costs calculate distribution services and gross profit forcustomer A and customer B. What inferences do you draw about theprofitability of these two customers?

What does TFCâs analysis of individual customer accounts(exhibits 5-8) suggest about TFCâs overall customer profitability?What might managers do based on this information?

What are likely to be some of the issues in adopting ServiceBased Pricing (menu) pricing? Do you think that TFC shouldimplement the SBP pricing system?

Do you have any additional comments or recommendationsconcerning the Total Forms Control (TFC) business?

EXHIBIT 1
Calculation of Service Fee Charges
(Current Method)
('000's)
2002 Product Sales at Cost		$24,059
2002 Warehousing/Distribution Expense		$4,932
	...% of Product Cost	20.5%
2002 Average Inventory Balance		$10,873
2002 Average Cost of Capital		10.40%
Total Cost of Inventory Financing		$1,131
	...% Product Cost	4.70%
2002 Total Truck Operating Costs		$1,684
	...% Product Cost	7.00%

EXHIBIT 2
Actual Service Fee Charges
(Current Method)
	Customer A	Customer B
Product Cost	50000	50000
Warehousing/Distribution (20.5%)	10250	10250
Inventory Financing (4.7%)	2350	2350
Trucking (7%)	3500	3500
Total Service Fees	16100	16100
Markâup (20%)	13220	13220
Net Sales	79320	79320

EXHIBIT 3
Breakdown of Expenses by Activity
('000's)
	Total Expenses	Share of Expenses
Storage
Rent	$1,504x 85%	$1,278
Depreciation	$208 x 85%	$177
Utilities	$200 x 85%	$170
Total		$1,625

Requisition Handling
Rent	$1,504 x 15%	$226
Depreciation	$208 x 15%	$31
Utilities	$200 x 15%	$30
Salaries + Fringes	$1,109	$1,109
Taxes/Insurance	$110	$110
Postage & supplies	$96	$96
Hourly Payroll + Fringes	$545	$545
Total		$2,147

Warehouse Activities
Variable Warehouse Pay + Fringes	$1,935	$1,935

Basic Warehouse Stock Selection (50%)		$967
"Pick-Pack" Activity (40%)		$774
Desk Top Delivery (10%)		$194
Total		$1,935

EXHIBIT 4
TFC Activities and Cost Drivers
Activities / Cost Driver		Cost Driver in units
Storage / Cartons in inventory	(cartons)	350,000
Requisition handling / Requisitions	(requisitioning)	310,000
Basic Warehouse Stock Selection / Carton lines	(carton lines)	775,000
"Pick-Pack" / âPick-Packâ lines	(Pick-Pack" lines)	700,000
Desk Top delivery / Desk Top deliveries	(Desk Top deliveries)	8500
Inventory financing / Inventory value		Not available or given elsewhere
Trucking / Mileage		Not available or given elsewhere

EXHIBIT 5
TFC Net Sales, 2003
Annual	No. of	% of TFC
Sales/Account	Accounts	Net Sales
>$300,000	40	48%
>$150,000	53	19%
>$75,000	86	15%
>$30,000	143	11%
>$O	778	7%
Total	1100	100%

EXHIBIT 6
Top 20 TFC Accounts for August, 2004
(Ranked by Contribution $)
Account	Actual Net Sales	Product Cost	ABC Based Service Costs	Revised Contribution

1	76,904	49,620	2,862	24,422
2	130,582	74,396	34,578	21,608
3	72,956	48,216	3,456	21,284
4	64,903	37,981	6,574	20,348
5	45,088	26,098	1,309	17,681
6	104,689	62,340	25,356	16,993
7	52,890	32,083	4,386	16,421
8	38,902	23,087	1,245	14,570
9	87,130	54,923	17,685	14,522
10	67,935	42,012	12,290	13,633
11	58,290	32,074	12,834	13,382
12	84,589	54,023	17,528	13,038
13	36,587	22,657	1,345	12,585
14	47,890	32,'545	3,657	11,688
15	56,294	27,801	16,923	11,570
16	61,056	38,924	11,034	11,098
17	56,902	32,789	13,904	10,209
18	45,893	29,570	6,904	9,419
19	62,954	41,034	13,746	8,174
20	26,699	16,830	2,236	7,633
Total	1,279,133	779,003	209,852	290,278

EXHIBIT 7
Bottom 20 TFC Accounts for August, 2004
(Ranked by Contribution $)
Account	Actual Net Sales	Product Cost	ABC Based Service Costs	Revised Contribution
1081	3,657	2,356	2,325	â1,024
1082	38,467	26,301	13,740	â1,574
1083	5,926	3,840	4,214	â2,128
1084	163	89	2,390	â2,316
1085	3,256	2,006	3,590	â2,340
1086	82,086	61,224	23,756	â2,894
1087	29,320	20,647	11,843	â3,170
1088	467	302	4,086	â3,921
1089	17,935	11,087	10,872	â4,024
1090	17,649	12,903	8,903	â4,157
1091	638	420	5,109	â4,891
1092	16,104	9,102	12,134	â5,132
1093	289	178	5,698	â5,587
1094	23,965	17,345	16,523	â9,903
1095	38,065	23,391	27,623	â12,949
1096	32,898	23,054	22,985	â13,141
1097	129,367	73,128	69,527	â13,288
1098	74,569	50,745	45,698	â21,874
1099	88,345	64,930	53,867	â30,452
1100	113,976	82,987	72,589	â41,600
Total	717,142	486,035	417,472	â186,365

Exhibit 8

Current Operation Profit for 2004

The most profitable 5% of customers (55) contribute 80%

The next most profitable 45% of customers (145) contribute 220%.Profit could be 300% of the current level if we dropped theremaining 50% of customers (550)!

48% of customers (528) reduce profit by 140%.

2% of customers (22) reduce profit by 60%.

DISCUSSION QUESTIONS:

Discuss the following concepts only in the context of thisproblem.

1. Alternative Cost Driver Classification Schemes

2. ABC Implementation Issues

3. ABC and Customer Profitability Analysis

4. Activity Based Management

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ACC 100 Study Guide - Final Guide: Current Asset, Perpetual Inventory

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