Supermart Food Stores (SFS) has experienced net operating losses in its frozen f

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. Ihe operating results from the most recent period are Frozen Food Baked Goods Fresh Produce $419,000 323,000 $ 241,000 390,000 Sales Cost of goods sold 223,000 315,000 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) Order processing (number of purchase orders) Receiving (number of deliveries) Shelf-stocking (number of hours per delivery) Customer support (total units sold) Frozen Food Baked Goods Fresh Produce 65 70 0.3 32,000 104 257 24,000 64,000 The controller estimates activity-cost rates for each activity as follows Order processing Receiving Shelf-stocking Customer support $ 99 per purchase order 110 per delivery 18.00 per hour 0.25 per item Required 1. Prepare a product-line profitability report for SFS under the current costing system. (Loss amounts should be indicated by a minus sign. Round operating margin (loss) to 2 decimal places (i.e 2134 should be entered as 21.34% Frozen Food Baked Goods Fresh Produce Operating income (loss) Operating margin (loss)

Explanation / Answer

1. Product-line Profitability Report under the Current Costing System :

2. Product-line Profitability Report using ABC :

Frozen Food Baked Goods Fresh Produce Sales $ 241,000 $ 390,000 $ 419,000 Cost of Goods Sold 223,000 315,000 323,000 Gross Margin $ 18,000 $ 75,000 $ 96,000 Store Suport Expenses ( 14 % of Sales) 33,740 54,600 58,660 Operating Income ( Loss) - 15,740 20,400 37,340 Operating Margin ( Loss ) - 6.53 % 5.23 % 8.91 %

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