Question

Studemeir Paint & Floors (SPF) has experienced net operating losses in its Other Flooring Products line during the last few periods. SPF’s management team thinks that the store will improve its profitability if it discontinues the Other Flooring Products line. The operating results from the most recent period are:

	Paint and Paint Supplies			Carpet			Other Flooring Products
Sales	$	322,600		$	217,900		$	168,900
Cost of goods sold		167,000			155,000			136,250

SPF estimates that store support expenses are approximately 24% of revenues.

Harish Rana, SPF’s controller, states that while every sale has one purchase order, not every sales dollar requires or uses the same amount of store support activities. He conducts a preliminary investigation and his results and analysis are as follows:

Activity (cost driver)	Paint and Paint Supplies			Carpet			Other Flooring Products
Order processing (number of purchase orders)		510			160			107
Receiving (number of deliveries)		51			122			65
Customer support (hours required per sale)		0.30			6.0			0.68

Harish estimates activity-cost rates for each activity as follows:

Order processing	$	135	per purchase order
Receiving		170	per delivery
Customer support		21	per hour

Required:

1. Prepare a product-line profitability report for SPF under the current costing system.

2. Prepare a product-line profitability report for SPF using the ABC information the controller provides.

Answer 1

Question 1

Current Costing System

Particulars	Paint and Paint Supplies	Carpet	Other Flooring Products	Total
Sales Revenue	322,600	217,900	168,900	709,400
Less: Cost of Goods Sold	(167,000)	(155,000)	(136,250)	(458,250)
Gross Margin	155,600	62,900	32,650	251,150
Less: Stores Support Expenses	(77,424)	(52,296)	(40,536)	(170,256)
Net Operating	78,176	10,604	(7,886)	80,894
Income / (Loss)

Particulars	Paint and Paint Supplies	Carpet	Other Flooring Products	Total
Sales Revenue	322,600	217,900	168,900	709,400
* Store Support Expenses %	24%	24%	24%	24%
Support Support Expenses	77,424	52,296	40,536	170,256

Question 2

Using Activity Based Costing

Particulars	Paint and Paint Supplies	Carpet	Other Flooring Products	Total
Sales Revenue	322,600	217,900	168,900	709,400
Less: Cost of Goods Sold	(167,000)	(155,000)	(136,250)	(458,250)
Gross Margin	155,600	62,900	32,650	251,150
Less: Stores Support Expenses	(77,526.30)	(42,466)	(25,509.28)	(145,501.58)
Operating Income / (Loss)	78.073.70	20,434	7,140.72	105,648.42

	A	B	C =A*B	D	E =A*D	F	G = A*F
Particulars	Activity Allocation Rate	Activity for Paint and Paint Supplies	Total Overhead	Activity for Carpet	Total Overhead	Activity for Other Flooring Products	Total Overhead
Order Processing	135	510	68,850	160	21,600	107	14,445
Receiving	170	51	8,670	122	20,740	65	11,050
Customer Support	21	0.30	6.30	6	126	0.68	14.28
Total			77,526.30		42,466		25,509.28