Henderson Company has three product lines: baked goods, milk and fruit juice, an

Question

Henderson Company has three product lines: baked goods, milk and fruit juice, and frozen foods. Company has experienced net operating losses in its Milk & Fruit Juice line during the last few periods. Company management thinks that the store will improve its profitability if it discontinued the Milk & Fruit Juice line. For product line profitability analysis purposes, currently company is allocating operating expenses as a percentage of sales dollars which approximately is 30% of sales dollar.

Sales Revenues                                                   $89,250           $99,000        $76,500

Cost of goods sold                                              $54,000           $72,000        $51,000

Operating costs (30% of sales revenues)            $26,775           $29,700        $22,950

Profit Margin                                                        $8,475          ($2,700)          $2,550

Profit Margin Ratio                                                 9.5%              -2.7%             3.3%

However, Rose, the new accountant who is a graduate of CSU, believes that not every sales dollar requires or uses the same amount of store support activities. She believes that company should look for other means for the allocation of store operating costs among the product lines – such as ABC. Based on her preliminary investigation and analysis, she could identify four store support operating activities and breakdown total store operating activities by these activities as follows:

Activity-area usage (cost allocation base)      Annual Activity Costs     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 following annual data on usage of store support activities by each product line:

Activity-area usage (cost allocation base)

Baked Goods Milk&Fruit Juice Frozen Products

Ordering (purchase orders) 25                     20                 15

Delivery (deliveries)                                               90                     35                 30

Shelf-stocking (hours)                                          190                   174                 40

Customer support (items sold)                         13,500              18,450            8,300

. In the space provided on Answers Sheet, complete the product-line profitability report for

Henderson using ABC for the allocation of store support operating costs among the three products.

1. In the space provided on Answers Sheet, complete the product-line profitability report for

Henderson using ABC for the allocation of store support operating costs among the three products.

2. What new insights does 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

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

Explanation / Answer

Statement Showing Product Line Profitability Report Using ABC Cost Drivers Baked Goods Milk and Frruit Juice Frozen Prodcuts Total Sales Revenues $89,250 $99,000 $76,500 $264,750 Less: Cost Of Goods Sold $54,000 $72,000 $51,000 $177,000 Gross Profit (a) $35,250 $27,000 $25,500 $87,750 Less: Operation Expenses: Ordering Purchase Order $5,250 $4,200 $3,150 $12,600 ($12600/(25+20+15)X25) ($12600/(25+20+15)X20) ($12600/(25+20+15)X15) Delivery Deliveries $13,050 $5,075 $4,350 $22,475 ($22475/(90+35+30)X90 ($22475/(90+35+30)X35 ($22475/(90+35+30)X30 Self-stocking Hours $9,500 $8,700 $2,000 $20,200 ($20200(190+174+40)X190 ($20200(190+174+40)X174 ($20200(190+174+40)X40 Customer Support Items Sold $8,100 $11,070 $4,980 $24,150 ($24150/(13500+18450+8300)X13500 ($24150/(13500+18450+8300)X18450 ($24150/(13500+18450+8300)X8300 Total Operating Expenses $35,900 $29,045 $14,480 $79,425 Operating Income (b) -$650 -$2,045 $11,020 $8,325 Profit Margin Ratio (a-b) -0.73% -2.07% 14.41% 11.61% b) Profit margin ration of Frozen Product is on very higher side on comparison with other product where negative profit margin shown. Hence, Frozen Products is more profitable under ABC system

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