Question

In: Accounting

Hector Gonzales runs the floral art company, which supplies floral arrangements to three large supermarket chains...

Hector Gonzales runs the floral art company, which supplies floral arrangements to three large supermarket chains throughout Australia. Management has become concerned about the rising costs associated with the process and dispatch of orders. An activity analysis of the indirect costs identified the following customer related cost.

                                                                                                       Use of cost drivers

                                                                                                                Supermarket customers

Activity cost pool

Cost driver

Estimated indirect costs

Total expected use of cost driver**

1

2

3

Orders processing

Number of orders

$200 000

450

300

100

50

Returns processing

Number of returns

$50 000

100

50

25

25

Delivery

Number deliveries

$100 000

700

400

200

100

Rush orders

Number of rush orders

$70 000

50

10

20

20

Sales visits

Number of visits

$20 000

100

50

25

25

  1. Assign the activity costs to ach of the three customers
  2. Calculate the contribution for each customer if the sales pattern for each as follows:

Supermarket customer            Sales revenue**

  1. $350,000
  2. S160,000
  3. $210,000

**Selling price is marked up 50% on direct cost of flowers

Hints: conduct a customer profitability analysis based on the above customer related indirect costs.

  1. What conclusion can we draw from the customer profit analysis? Advise the management of the Floral Art Company as to whether any changes should be made in its relationships with customers. Advise Hector as to how he should go about executing these changes.

Solutions

Expert Solution

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Hector Gonzales
Calculation of ABC rates A B C=A/B
Activity cost pool Cost Driver Cost Activity usages ABC rates
Orders Processing Number of orders                      200,000.00               450.00            444.44
Returns Processing Number of returns                        50,000.00               100.00            500.00
Delivery Number of deliveries                      100,000.00               700.00            142.86
Rush Orders Number of rush orders                        70,000.00                 50.00        1,400.00
Sales Visits Number of visits                        20,000.00               100.00            200.00
Total Cost
Cost Allocation See C D E=C*D
Customer 1 Cost Driver Activity rates Activity used Cost assigned
Orders Processing Number of orders                             444.44               300.00    133,333.33
Returns Processing Number of returns                             500.00                 50.00      25,000.00
Delivery Number of deliveries                             142.86               400.00      57,142.86
Rush Orders Number of rush orders                          1,400.00                 10.00      14,000.00
Sales Visits Number of visits                             200.00                 50.00      10,000.00
See C F G=F*C
Customer 2 Cost Driver Activity rates Activity used Cost assigned
Orders Processing Number of orders                             444.44               100.00      44,444.44
Returns Processing Number of returns                             500.00                 25.00      12,500.00
Delivery Number of deliveries                             142.86               200.00      28,571.43
Rush Orders Number of rush orders                          1,400.00                 20.00      28,000.00
Sales Visits Number of visits                             200.00                 25.00         5,000.00
See C H I=H*C
Customer 3 Cost Driver Activity rates Activity used Cost assigned
Orders Processing Number of orders                             444.44                 50.00      22,222.22
Returns Processing Number of returns                             500.00                 25.00      12,500.00
Delivery Number of deliveries                             142.86               100.00      14,285.71
Rush Orders Number of rush orders                          1,400.00                 20.00      28,000.00
Sales Visits Number of visits                             200.00                 25.00         5,000.00
Customer profitability analysis Customer 1 Customer 2 Customer 3 Note
Sales                       350,000.00                      160,000.00       210,000.00 J
Less: Direct costs                       233,333.33                      106,666.67       140,000.00 K=J/150%
Gross margin                       116,666.67                        53,333.33         70,000.00
Less: Customer costs
Orders Processing                       133,333.33                        44,444.44         22,222.22
Returns Processing                          25,000.00                        12,500.00         12,500.00
Delivery                          57,142.86                        28,571.43         14,285.71
Rush Orders                          14,000.00                        28,000.00         28,000.00
Sales Visits                          10,000.00                          5,000.00            5,000.00
Customer margin                     (122,809.52)                      (65,182.54)       (12,007.94)
Conclusion
There is a loss in selling to each of the customer.
Advise
The gross margin from every customer is positive. So Hector should try to reduce indirect costs.

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