Question

Jason Ackerman is the management accountant for Central Restaurant Supply ​(CRS. Beth Donaldson, the CRS sales​ manager, and Jason are meeting to discuss the profitability of one of the​ customers, Mama Leone's Leone's Pizza. Jason hands Beth the following analysis of Mama Leone's activity during the last​ quarter, taken from Central ​activity-based costing​ system:

Sales $23,400

Cost of goods sold (all variable) 14,025

Order processing (25 orders processed at $300 per order) 7,500

Delivery (2,500 miles driven at $0.75 per mile) 1,875

Rush orders (3 rush orders at $165 per rush order) 495

Sales calls (3 sales calls at $150 per call) 450

Operating income $ (945)

Beth looks at the report and​ remarks, "I'm glad to see all my hard work is paying off with Mama Leone's. Sales have gone up 10 % over the previous​ quarter!"

Jason ​replies, "Increased sales are​ great, but​ I'm worried about Mama Leone's ​margin, Beth. We were showing a profit with Mama Leone's at the lower sales​ level, but now​ we're showing a loss. Gross margin percentage this quarter was 40 %​, down five percentage points from the prior quarter.​ I'm afraid that corporate will push hard to drop them as a customer if things​ don't turn​ around."

​"That's crazy," Beth responds.​ "A lot of that overhead for things like order​ processing, deliveries, and sales calls would just be allocated to other customers if we dropped Mama Leone's. This report makes it look like​ we're losing money on Mama Leone's when​ we're not. In any​ case, I am sure you can do something to make its profitability look closer to what we think it is. No one doubts that Mama Leone's is a very good​ customer."

Requirements

Assume that Beth is partly correct in her assessment of the report. Upon further​ investigation, it is determined that 10 % of the order processing costs and 20 % of the delivery costs would not be avoidable if CRS were to drop Mama Leone's. Would CRS benefit from dropping Mama Leone's​? Show your calculations.

Beth​'s bonus is based on meeting sales targets. Based on the preceding information regarding gross margin​ percentage, what might Beth have done last quarter to meet her target and receive her​ bonus? How might CRS revise its bonus system to address​ this?

Should Jason rework the​ numbers? How should he respond to Beth​'s comments about making Mama Leone's look more​ profitable?

Answer 1

Refer to the below images for the above asked questions, in a detailed way of solution with explanation.